During my trip to Russia — I'm here to talk to government officials, civil society leaders, students, and attend the Group of 20 meetings — one of the major themes has been how an upper middle income country can boost shared prosperity among its citizens. How can Russia make sure that its growth includes women, young people and others, and how can it benefit future generations? Watch the video for more.
As Russia begins hosting the G20, I thought readers might be interested in my Reuters interview earlier this week making the case for proactive monetary and fiscal policy coordination. There has been a lot of talk of currency wars. I believe that what we are witnessing now are best described as currency skirmishes. The trouble is that a skirmish can easily segue into a war. That is what makes it imperative for nations to have conversations and coordination on monetary and fiscal policies. Skilled interventions are needed on multiple fronts, from managing government debt levels to financing long-term investment in developing countries. My hope is that leaders in Moscow will be attentive to these and might also turn their minds to interventions for the poor, whether they live in far corners of Russia’s great expanse, the townships of South Africa, the favelas of Brazil or the rural hinterlands of China and India.
This is the central message of a report World Bank staff prepared as an input to the G20 Los Cabos summit held from June 18-19. The summit comes at a precarious time for the world economy. The Euro Area is facing a relapse into recession, with potentially large losses of output with global repercussions if current risks to stability and growth are not addressed forcefully. Recovery in other advanced economies is weak and faltering. Growth is also slowing in emerging economies that have been the drivers of global growth in recent years. Against this background, the Bank report, entitled Restoring and Sustaining Growth, conveys the following main messages:
These are some of the views and reports relevant to our readers that caught our attention this week.
Tech Crunch
How The Future of Mobile Lies in the Developing World
“In less than three decades, the mobile phone has gone from being a status symbol to being a ubiquitous technology that facilitates almost every interaction in our daily lives. One month after the world’s population topped 7 billion in October 2011, the GSM Association announced that mobile SIM cards had reached 6 billion. A 2009 study in India illustrated that every 10 percent increase in mobile penetration leads to a 1.2 percent increase in GDP.
Yet patterns of mobile phone use in developing countries are vastly different from what you see on the streets of New York, San Francisco, and Berlin. This is a market underserved by technologists and startups. This is where the majority of future growth lies, and Silicon Valley has yet to realize the huge economic opportunities for network operators, handset developers, and mobile startups. Where are these opportunities?” READ MORE
 |
| Photo: Istcokphoto.com |
In the wake of the 2008 global financial crisis, many observers thought that the G-20 had a chance to succeed in the development arena where the G-8 foundered. Expectations were high that the G-20’s wider legitimacy and fresh remit would result in breakthrough solutions to knotty problems, from health pandemics to global warming. Yet the reality was that the G-20 Working Group on Development was pragmatic and selected a somewhat narrower range of priorities to focus on and many of the issues were ones that grew out of regional or national priorities. That is how the real world works—by consensus and stakeholder collaboration.
At the book launch for Postcrisis Growth and Development: A Development Agenda for the G-20, Moisés Naím and Arvind Subramanian, both astute observers of trends in globalization, expressed disappointment that the G-20 development agenda didn't devote more energy to big ‘global public goods’ issues. Moreover, they noted a failure to grapple with the biggest risks facing the development community, such as illicit financial flows or climate change.
The Seoul G20 summit in November ended with some homework for the World Bank. We were asked to work with the ILO, OECD and UNESCO to develop internationally comparable indicators of skills that can help countries in their efforts to better match education and job training to market needs. The G20 was right to make this a priority.
In this post-financial crisis period, jobs play an important role in recovery. Making sure that people have the right skills to get these jobs is the other side. Developing countries, especially, know that skills development is necessary if they are going to attract investment that will create decent jobs and raise productivity.
.jpg) |
| Photo: istockphoto.com |
Muchos observadores predicen que la cumbre del Grupo de los Veinte (G-20) que se lleva a cabo esta semana en Seúl será recordada principalmente como un baile de alta diplomacia destinado a persuadir a sus miembros para que se abstengan de una devaluación competitiva de sus monedas y regulen los desequilibrios excesivos en cuenta corriente.
Si la mayoría de los titulares de Seúl se refieren a disputas sobre divisas y a quién pertenece el déficit o superávit más perjudicial, entonces los líderes se habrán malgastado la oportunidad de llegar al fondo de la cuestión.
En efecto, ese resultado sería un revés para los países en desarrollo y afectaría posiblemente la legitimidad del G-20 como agente de inclusión de la cooperación económica y financiera en la economía mundial.
 |
| Photo: www.istockphoto.com |
(Also available in Spanish)
Many observers predict that this week’s G-20 Summit in Seoul will be remembered mainly as a dance of high diplomacy aimed at persuading members to refrain from competitive devaluation of currencies and to reign in excessive current account imbalances.
If most headlines from Seoul are about spats over currencies and whose deficit or surplus is most harmful, then leaders will have missed the Seoul of the Matter.
Indeed, such an outcome would be a setback for developing countries and could potentially erode the legitimacy of the G-20 as an inclusive broker of financial and economic cooperation in the global economy.
Editor's Note: Professor Franklin Allen came to the World Bank on October 27 to give an FPD Chief Economist Talk on the topic of Reforming Global Finance: What is the G20 Missing? Please see the FPD Chief Economist Talk page to download a copy of his presentation and watch a video of his Talk.
The recent financial crisis clearly had more than one cause. My view is that the most important one was a bubble in real estate prices, not only in the US but also in a number of other countries such as Spain and Ireland. It was the bursting of this bubble that has led to so many problems in the world economy. A significant part of this is a direct effect on the real economy rather than an effect transmitted through the financial system. For example, Spain had one of the best regulated banking systems and its banks did much better than in other countries. Yet with a doubling of its unemployment rate to 20 percent, its real economy has been devastated. In contrast countries like Germany that did not have a real estate bubble but had much larger drops in GDP have not suffered nearly as much. Germany's unemployment rate is now lower than at the start of the crisis.
 |
| Port of Rades, Tunisia. Photo: © Dana Smillie / World Bank |
As the G20 looks to establish itself as a permanent fixture in the multilateral policy dialogue, it should consider the global aid-for-trade agenda a top priority. The Summit in Seoul next month presents a unique opportunity to take concrete action in new directions on aid for trade.
The G20 originated – in part – as a global financial crisis management forum, and expanded out of the G8, in the wake of the 2008 world economic crisis. The Group has gained momentum and is solidifying its unique position as the most influential decision making group on global economic stability and growth. As it looks to solidify its transition as a global “steering committee” to sustain sound global growth what better policy issue to champion than one that is high profile, critical to both developed and developing countries, and in need of more effective global coordination -- than aid for trade?
| Last weekend the G-20 convened in Canada, and while recognizing that countries need to adjust fiscal accounts at different speeds, the high-income economies agreed to halve their fiscal deficits by 2013 and stabilize debt-to-GDP ratios by 2016. Planned budget cuts across the OECD through 2011 could amount to $560bn, or 1.4% of GDP. Monetary authorities in high-income countries are expected to hold-off on policy interest-rate hikes, given fiscal-consolidation efforts. But, developing-country rates are expected to continue to rise as recovery takes hold. As a consequence, rising interest rate differentials are likely to prompt a rise in carry trade activity and associated capital flows. An upswing in Euribor rates since May reflects heightened risk-aversion, concerns about European bank-exposures to bad debt, and an increase in funding demand as €442bn in ECB emergency-loans came due today. These concerns—combined with mounting evidence of a coming slowdown in global growth in 2H-2010—contributed to a sell-off in global equity markets, with the World MSCI down 4.3% in the last week (as of July 1). | |
| The G-20 appears to have reached consensus on a “growth friendly” approach to budget cuts. IMF suggestions that “one shoe does not fit all” and the U.S. Administration’s view that recovery is too fragile for “traditional” budget cuts, received some support from the Europeans. Greece, Ireland, Portugal and Spain have announced measures to reduce budget shortfalls by some $82bn, or 4.5% of their GDP through 2011. Larger countries of Europe are also moving toward deficit reduction, with cuts amounting to $75bn. These range from 1.8% of GDP for Italy, 1.6% for the U.K. and 1% for France through 2011. The measures are targeted to achieve sustainable public sector debt-levels, and in turn hoped to stave off worse consequences from ongoing fiscal problems. |  |
| Large interest-rate differentials between developing- and high-income countries are likely to remain or widen, increasing carry-trade opportunities. While central banks in a handful of high-income countries (including Australia, Canada, and Norway) have recently raised short-term policy rates—many high-income countries are expected to refrain from raising rates until private sector activity has gained firmer footing, especially with plans to tighten fiscal policy. As monetary policy continues to tighten in developing countries, incentives to undertake carry-trades may intensify with investors borrowing short-term at lower interest rates in high-income countries to invest in higher-returning instruments in emerging markets—potentially generating unwanted and disruptive capital flows. |  |
| Euro interbank offer rates (Euribor) have risen since May and continued to increase today, as €442bn in ECB emergency loans came due. Funding pressures associated with the repayment (€199bn has been paid off) may have contributed to the recent climb in Euribor. However, a generalized increase in risk aversion, and specific fears about the solvency of some European banks may also have been at play. Of the €243bn of ECB debt that was rolled over, €111bn was put into six-day loans—suggesting that debtor banks still hope to repay this debt in the days to come using private-sector funding. How successful they are in doing so will be a key indicator of banking-sector health. As repayment-related demand eases, Euribor rates should begin to decline. |  |
Download the Prospects Weekly as PDF here.
| After declining 30% between September 2008 and March 2009 (values), global trade is growing very rapidly. And, while there was an uptick in trade protectionist measures in 2009, thus far it has been relatively muted. New estimates suggest that net FDI flows to developing countries declined 35% in 2009, posting the sharpest contraction in over 20 years. Nevertheless, FDI flows were more resilient than private bank-lending that plunged 134% in the year. Mirroring the recovery in global activity, global oil demand turned positive in Q4-2009, led by robust demand in China. Oil market conditions have continued to tighten on falling stocks and rising demand, buoying crude prices. | |
| Protectionism remains largely muted, according to a recent WTO/UNCTAD/OECD report—although the number of restrictive trade measures reported since October 2008 sharply exceeds liberalization measures by nearly 10:1 (374 vs. 39). The relatively modest rise in protectionist measures reflects the reaction to the rapid and sharp plunge in trade activity with the onset of the crisis. Given the current rebound in trade—with global exports rising by 21% (y/y) in value and volume terms in January 2010—much worsening of protectionism is not expected. Notably, initiation of antidumping investigations by G20 countries contracted 21% in 2009, although given lags between initiation and imposition of trade remedies, a backlog of investigations could raise the number of barriers imposed in 2010. |
 |
| While global net FDI inflows posted a rebound since their trough in Q1-2009, they contracted an estimated 40% overall in 2009. FDI flows to developing countries (LMICs) fell by estimated 35% in 2009, and even China recorded a record 30% drop in FDI flows to an estimated $95bn. In 2010, net FDI flows to LMICs are expected to grow 30%, with Asia continuing to receive the lion’s share. In coming years, private capital flows to LMICs are projected to continue to recover to levels witnessed during the late-1990s and early-2000s, but not to levels witnessed during the per-crisis boom—as capital is expected to be less abundant and more expensive, due to the reversal of nontraditional central bank easing and increased financing needs in high-income countries, balance sheet consolidation, and tighter regulations. |  |
| Global oil demand turned positive in Q4-2009 after falling for five consecutive quarters, buoying oil prices. While OECD demand remains negative, the pace of decline has moderated and is projected to turn positive in Q2-2010. Among non-OECD countries, demand growth has been concentrated in China, with Q4-2009 up a resounding 17% (y/y). This reflects a level shift (not a change in trend growth), as more than half of this increase is tied to capacity expansion of Chinese petrochemical feedstock and should moderate in the future. Continued tightening of market conditions has supported higher crude oil prices (World Bank average), which have traded between $70-80/bbl for over five months. And, the futures curve has flattened, suggesting that markets see price stability moving forward. |  |
Download the Prospects Weekly as PDF here.
The joint World Bank-IMF advisory body, known as the Development Committee, committed to the G20’s call for more resources for the Bank to help developing countries respond to the global economic crisis.
Concluding its first day of talks on the Bank’s work and impact at the 2009 annual meetings, the committee expressed support for a general capital increase, a multibillion multilateral food trust fund, and a new crisis facility for the world’s 79 poorest countries.
The Development Committee also agreed to “voice” reform to ensure developing countries get a bigger say in how the institution is run—an increase of at least 3 percentage points in voting power, in addition to the 1.46 percent already agreed. This would give them a share next year of at least 47 percent.
In a statement issued Monday, the Development Committee set a definite decision point for shareholders for Spring 2010 on IBRD and IFC capital needs and “committed to ensure that the World Bank Group has sufficient resources to meet future development challenges.”
The committee noted the Bank’s “vigorous response” to the crisis, including a tripling of IBRD commitments to $33 billion this year and IDA reaching a historic level of $14 billion. They also said that IFC, which has invested $10.5 billion and mobilized an additional $4 billion through new initiatives, “combined strong innovation with effective resource mobilization.”
Global attention is mounting about this year's Annual Meetings of the Bank and the Fund in Turkey. From Egypt, where I am on MIGA business on my way to Turkey, the discussion is around whether the meetings will advance the G20 communiqué in terms of substance and specific implementation measures.
I spent two days earlier in the week with global private equity investors. Their anxiety mostly revolves around how financial sector regulation will evolve over the coming months. They feel the cold wind of oversight, and the discussion revolves around two competing plans for financial regulation, one emanating from Brussels and the other from Washington. But everyone accepts that an overhaul of financial sector regulation is the unfinished business from last year's financial crisis, even though views differ on the extent and content of the changes needed. My own concerns are whether the world's piecemeal international governance system will enable a coherent global regulatory structure to emerge from the wreckage of last year's financial meltdown.
In Istanbul I'm looking forward to taking the temperature of the financial world. I hope and expect the meetings to be more subdued than in past years, because we have some serious business to do; and many players who were around at the Singapore meetings are no longer with us (Lehman, Bear Stearns, Merrill, AIG...).
It's a new world.
Given that Asia is now widely seen as leading the world out of the crisis, it is fitting that the role of Asia was more prominently recognized in the global economic system in the recent G20 meeting held in Pittsburgh. Since we last looked in July, the outlook for the emerging markets of East Asia has continued to brighten. The latest regional forecasts come from the Asian Development Bank in its Asian Development Outlook (pdf) published last week. It points to “the rapid turnaround in [Asia’s] largest, less export-dependent economies” and predicts that “the regional economy is now poised to achieve a V-shaped rebound.” These are very positive words indeed! As the graph below shows, the ADB has in fact upgraded its growth forecasts for a number of economies for 2009.
Although the signs are pointing upwards, performance is still mixed in a number of key areas.
