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World Bank forecasts slower growth for developing countries

by Gumisai Mutume

Washington, 10 Apr 2001 (IPS) - - As the pace of growth in the world economy dips, developing countries are expected to grow by 4.2% this year, a percentage point less than last year, the World Bank says.

In its annual report, ‘Global Development Finance 2001’, the Bank points to a slowdown in global economic performance, largely fuelled by the slowing US economy. It forecasts global gross domestic product to bottom out at 2.2% this year, down from its decade-high advance of 4% last year.

Among developing and transition economies, growth will be highest in East Asia and the Pacific, with a 5.5% advance and slowest in Europe and Central Asia, with an average 2.3% rise.

The report notes that prospects for recovery will depend on the performance of the three industrial economies - the United States, Japan and Europe.

“The period of slower output growth is expected to be relatively short-lived,” notes the report, released Tuesday.

This is due to an expected rapid recovery in high technology sectors, lower interest rates, tax reduction and some softening in the oil price, which should see a rebound in growth in industrial countries to 3% over the 2001-2003 period, the report says.

The second half of last year saw the beginning of the cyclical slowdown of the global economy fuelled by pessimism in financial markets, especially in the United States.

The pace of growth in industrialised countries is expected to fall from 3.6% last year to 1.6% this year as a result of the slowdown.

“The short-term growth outlook has deteriorated sharply in recent times,” says Hans Timmer, one of the report’s authors. “We are seeing a sharpening of the slowdown beyond what we may call a soft landing in the US ... but early recovery is still possible.”

Talk of possible recession continues in the United States, which would have serious consequences for its trading partners in developing countries.

Another bad indicator, the report says, is that Japanese growth has reverted to “an anaemic pace” - from 2.1% in earlier growth forecasts, to the current 0.6%.

What this means is that developing countries specialising in information and communication technology products such as Malaysia, the Philippines, Republic of Korea, Taiwan and Thailand will experience a sharp decline in their export earnings.

“The slowdown could also see a weakening of the dollar, which could benefit countries pegged to the dollar, such as Argentina,” says Timmer. “It may also benefit non-oil commodity exporters, especially in Africa.”

Sub-Saharan Africa, whose economies are more closely linked to the economies of Europe, is expected to post slightly higher growth from 2.7% last year to 3% this year, and subsequently, to maintain the growth momentum.

The picture continues to be negative in the area of foreign direct investment (FDI) in the majority of developing countries. An increasing share of FDI continues to flow towards industrialised countries.

The share of industrialised country’s FDI flows rose from 65% in 1994 to 84% last year and rapid economic growth in the United States over the last decade saw that country’s share of FDI grow from 18% in 1995 to an estimated 26%, reflecting in part, high interest returns in the markets of industrialised countries.

“Private flows tend to stay away from countries with inhospitable business conditions and favour those best able to use them for positive growth,” says World Bank chief economist, Nicholas Stern.

FDI to developing countries rose dramatically during most of the 1990s, from $35 billion in 1991 to $185 billion by 1999. But they have begun falling; last year, FDI to developing countries was $178 billion.

Some 74% of this went to 10 developing countries. These are China, Brazil, Mexico, Argentina, Malaysia, Poland, Chile, the Republic of Korea, Thailand and Venezuela - in descending order.

“Sub-Saharan Africa has had particular difficulty in attracting FDI, reflecting insufficient market size, poor infrastructure, political uncertainty, corruption and restrictive policies towards foreign investment,” notes the report.

The report also points to a modest growth in official development aid, mainly due to stepped-up Japanese aid to regional countries affected by the East Asian financial crisis of the late 1990s. Japanese aid was $15 billion in 1999, growing by $4.7 billion of the 1998 figure.

Overall, official development aid increased modestly to $42 billion last year.  This is still $5 billion less than it was in 1995, the report says. On average, donor countries provided aid equal to 0.24% of their gross national product in 1999, down from 0.35% in 1989-92.

Under a United Nations initiative, developed countries have pledged to provide 0.7% of their GNP annually to developing countries as official development aid, as part of a strategy to cut poverty by half by 2015.

Ashoka Mody, lead author of the report, says, had industrialised countries maintained the 0.35% rate, “the rise in aid could have generated an extra $20 billion and gone a long way in achieving the international development goals”.

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