World Bank Chief Economist Justin Lin convened an open roundtable this week—the first of its kind—made up of all the Bank’s regional chief economists to discuss global economic prospects. There has been rising uncertainty in emerging economies, which until recently had not only remained somewhat insulated from the financial crisis in the developed world, but enjoyed continued growth. This changed in August, when these economies saw aggregate spreads increase by 70 basis points over the course of a month. Equity markets in developing countries have also started to fall in tandem with those in high-income countries.
According to Lin, while attention is on high-income countries, it is important to keep watch on vulnerabilities in developing countries where the probability of downside risks is increasing.
The possible impacts vary greatly from region to region and across countries within regions. East Asia is arguably in the strongest shape. Latin America countries have enjoyed a great deal of progress, but in recent weeks concerns have risen. A new report, Latin America and the Caribbean’s Long-Term Growth: Made in China?, argues that the region’s relationship with China has been a source of stability but trade connections alone will not drive growth. Policies are needed to harness opportunities.
While Africa weathered the last global recession well, the volume of its exports to Europe means its economies will feel the impact of a northern slowdown in growth. Prudent policy in recent years meant that many countries had some fiscal space with which to manage the last crisis. Since that has been diminished, another external shock could mean fiscal cuts with more painful repercussions.
The Middle East and North Africa may face its second shock this year, with growth forecasts already lowered by the “Arab Spring,” but political uncertainty in the region poses a greater threat than external financial instability. According to Middle East and North Africa Economic Development and Prospects: Investing for Growth and Jobs, growth in the MENA region will depend on governance and transparency to revive investment. The report also makes a strong case for private investment in services and manufacturing as engines of job creation and income growth in the region.
South Asia’s economies can be thought of as India and everyone else, with India the most integrated into the global economy. But overall, the region has the lowest revenue mobilization and the highest fiscal deficits and debts. Very vulnerable, of course, are Europe’s trading partners in the East and Central Europe. Although a region that also includes Central Asia also does not lend itself to generalities.
Lin suggests developing countries “prepare in case the downside risk turns into reality.” He described four policy directions, though emphasis would depend on country circumstances. These include identifying new drivers of growth, making sure that the banking sector is stable, countercyclical fiscal measures, and rebalancing exposure to external capital flows.
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