December 3, 1998
Report Forecasts Lowest Growth Since Eighties' Debt Crisis
Developing countries will be hardest hit by the economic and social costs of global slowdown in 1998-2000, with their per capita growth expected to
slow to 0.4 percent in 1998, compared with 3.2 percent last year, according to a World
Bank report released on December 2.
The 1998-99 edition of Global
Economic Prospects and the Developing
Countries, predicts that about 37 developing and
transition countries, including Brazil, Indonesia, and Russia, are likely to have negative
per capita growth this year. These countries account for 42 percent of total GDP for the
developing world and more than a quarter of its population. By contrast, in 1997, per
capita income fell in only 21 countries
accounting for 10 percent of the developing world's
GDP and seven percent of its population.
Although 1999 is likely to be another
year of slow growth in developing countries, their situation could improve in 2000, and
following years, when their per capita growth
could return to the 3.5 percent pace of recent
years (excluding transition economies).
Global Economic Prospects
1998-99 attributes much of the slowdown in
developing economies to the unprecedented depth and severity of the recession in the
crisis countries of East Asia and its contagion effect on the rest of the world. With
output projected to decline sharply in the region this year, and to stabilize in 1999, the
report says that the Asian crisis already ranks
with the Latin American debt crisis of the 1980s
in terms of its impact on countries during its first 12 months.
"What many expected to be no more than
a slight blip has instead become a
destabilizing factor in the global economy," says
Joseph Stiglitz, World Bank Senior Vice President and Chief Economist. "While 1998
and 1999 will be very difficult years for developing countries, in the longer term
(2001-2007), growth in developing countries could
still reach the record setting rates that we saw
in 1991-97. But this will only happen if policies to prevent a deeper global slump are
implemented quickly and developing countries strengthen their financial sectors."
Developing countries have been hurt
by Japan's deepening home-grown recession, as well as by a series of shocks related to
the Asian crisis. These include the collapse of the Russian ruble, falling commodity
prices, a slowdown in world import demand, and
risk aversion in financial markets. El
Niño-related phenomena brought severe flooding
and drought to many parts of Africa, Asia, and Latin America, devastating crops, water
supplies, and rural infrastructure.
These shocks have made domestic
demand contract this year in countries representing some 25 percent of world
demand: large parts of developing East Asia,
Japan, Russia, and the Middle East. In countries producing 70 percent of world
output—mainly the United States and
Europe—this demand is either cooling, or in the case
of Latin America, slowing sharply.
Powerful policy steps taken recently
are likely to foster world economic recovery in the medium-term. These include:
While these policy steps are vital,
the short-term outlook for developing countries remains precarious, especially as
financing available to emerging markets has
declined sharply since mid-August. In addition to presenting the most likely "baseline"
forecast, the report outlines a low-case scenario which explores the consequence of
spreading financial contagion in emerging markets, a deeper recession in Japan, and large
stock market corrections in the United States and Europe. In the low-case scenario, the world
economy experiences a severe recession
in 1999, and per capita growth in developing countries as a group (excluding
transition economies) declines for the first time
since 1981-82.
"Looking forward, the primary role of
fiscal and, where possible, monetary policy now is to shore up demand, expand the
social safety net, and re-capitalize financial systems," says Uri Dadush, Director of
the World Bank's Development Prospects Group, which produces the report.
"Restructuring corporations lies at the heart
of a sustained recovery and continuing financial support from the international
community is vital."
Accordingly, the World Bank is
adopting a twin-track approach which, first,
focuses on restructuring financial and corporate sectors; and second, on social
protection for the poor and other vulnerable
groups during crises.
Global Economic
Prospects says that the conventional response to the East Asia
crisis also failed to recognize its profound social cost and, in particular, along
with drought and soaring prices for staple foods in some countries, its disproportionate
impact on the poor.
Priority actions to protect the poor in a
crisis—which are central to World Bank social lending to East Asia—should include
ensuring food supplies through direct transfers and subsidies, generating income
for the poor through cash grants and public works, preserving people's physical
well-being through basic health care and education services, and increasing training
and job search assistance for the unemployed.
For more information, call Phillip Hay, (202) 473-1796,
fax 522-2632, or e-mail phay@worldbank.org.
Stock No. 14123. $24.95 To
order copies, call 703-661-1580, fax (703) 661-1501, or
e-mail books@worldbank.org. Order on-line at
http://www.worldbank.org/html/extpb/gep9899.htm#Order.
