FINANCE: Improving Outlook for Many Developing Countries

By Jim Lobe Reprint | | Print |

Jim Lobe

WASHINGTON, Apr 4 2000 (IPS) - Unexpectedly strong growth in industrial countries, a major rebound in global trade, and higher commodity prices will result in higher growth rates over the next three years in most developing countries, according to a new report released here Tuesday by the World Bank.

Developing countries as a whole should also see a rise in foreign investment through 2002, although not to the levels that prevailed in the mid-1990s, before the 1997-99 financial crisis, according to the report, “Global Development Finance 2000.’

But both renewed foreign investment and economic growth will be spread unevenly among developing countries, the report says, noting that sub-Saharan Africa, and especially the world’s 41 poorest nations, will not keep pace with faster-growing economies, particularly in Asia whose combined annual growth rate should run at around six percent.

“Developing countries are finally starting to recover from the worst impact of the global crisis, but this recovery is uneven,” according to Uri Dadush, director of the Bank’s Prospects Group that produced the report.

In addition, several “significant” risks could still cloud the picture, according to the 177-page study. These include a “hard landing” in the booming US economy, the failure of private domestic demand to re-energise the Japanese economy, a halt to ongoing reforms in the financial and corporate sectors in Asia, and instability in oil prices which could harm consumers and producers alike.

On the other hand, faster growth in Europe, which also is possible, would accelerate growth in developing countries and make it more sustainable as the US economy slows down, according to the report.

The new report was released on the eve of the spring meeting Apr. 12-17 here of the Bank and the International Monetary Fund (IMF). Delegates from more than 170 countries, along with thousands of protestors – many inspired by the turmoil which swept the aborted World Trade Organisation (WTO) meeting in Seattle last December – will converge here to address prospects for the global economy, debt relief, and reform of the international financial system.

The report is markedly more upbeat about developing country prospects over the next three years than its authors were just six months ago.

Average growth rates for all developing countries should reach 4.6 percent this year and then climb to 4.8 percent for 2001 and 2002. That compares with the 4.2 percent, 4.5 percent, and 4.8 percent, respectively, that the Bank predicted last November.

But not all developing countries will achieve these rates. Most of the gains will be made by those countries which rely more heavily on trade, are more diversified, and attract more foreign direct investment (FDI), the vast bulk of which during the 1990s went to only about a dozen poor countries worldwide.

Thus, several economies in East Asia, Eastern European countries which are now being considered for admission to the European Union (EU), Brazil and Mexico are especially well-placed to benefit. China and India, which together make up 46 percent of the total developing-country population and 55 percent of the poor, are also expected to enjoy fairly rapid growth over the next three years.

On the other hand, oil-exporting countries, due to their persistent debt problems and an anticipated if gradual fall in current high energy prices, and countries which depend mainly on the export of agricultural commodities – many of them in Africa and Latin America – are likely to lag behind, according to the report.

Thus, sub-Saharan Africa is expected to climb from its 2.5 percent growth rate in 1999 (roughly the same as its population growth) to 3.8 percent in 2002, as demand for African commodities in the West and in Asia increases. That rate will still be significantly less than the five percent many African countries exceeded in 1996-97.

Asian countries are expected to see their much higher growth rates moderate over the next three years from about 6.4 percent this year to 5.9 percent in 2002, while Europe and the Central Asian states of the former Soviet Union should accelerate their growth from one percent last year to 3.6 percent in 2002.

Average growth rates in the Middle East and North Africa should remain stable at about 3.6 percent over the next three years, while Latin America and the Caribbean, which recorded zero growth last year, should climb to 3.6 percent this year and 4.4 percent in 2002, according to the report.

One of the factors restraining growth in key emerging-market regions – notably Asia and Latin America – is continuing concerns by foreign investors in the wake of the 1997-99 crisis. Total capital flows to developing countries continued to fall in 1999, although, by the end of the year they appeared to stabilise, according to the report.

These flows should begin to recover moderately this year and should rise from 161 billion dollars in 1999 to around 185 billion dollars this year and to as much as 230 billion dollars in 2001. This would represent a recovery to 1995 levels, “but well below the levels experienced during the speculative bubble of 1996 and 1997, in the run-up to the outbreak of the financial crisis,” the report said.

On the other hand, the report found that foreign direct investment (FDI) in developing countries – which includes the construction of plants and factories, often by multi-national corporations – remained resilient throughout the crisis, rising from 131 billion dollars in 1996 to 192 billion dollars last year.

FDI, which amounted to only 35 billion dollars in 1991, is likely to rise further to 215 billion dollars next year, a trend that reflects “better growth prospects for developing countries and acceleration of world trade.” The report concluded that FDI flows have become developing countries’ single largest and most stable source of long-term development finance, although most of it is concentrated on only about two dozen countries.

Official aid, the biggest source of development finance during the Cold War, moved slightly higher to a little more than 50 billion dollars over the past two years after five years of steady decline. The report, however, says this could be a temporary shift in a long-term downward trend.

The enhanced Heavily Indebted Poor Countries (HIPC) initiative to provide debt relief to the world’s poorest nations should help in the aid picture, according to the report, which said, however, that assuring that donor nations commit themselves to providing more aid, as well as debt relief, will play a key role in the plan’s overall prospects for success.

The report also includes a historical analysis on boom-and-bust cycles in emerging markets the most recent of which was the 1997- 99 crisis. It notes that surges in capital flows to emerging markets over the past 150 years have typically been part of a larger process of rapid expansion of the global economy, often made possible by technological changes in communication and transportation.

All of the past episodes ended in “hard landings,” as much of Asia experienced during the latest crisis when short-term capital flows were abruptly withdrawn from the region and other countries affected by the crisis, according to the report.

It found that measures designed to protect against crises precipitated by short-term capital – including “Chilean-style” taxes on such borrowing, capital controls on the banking sector’s international exposure such as those employed by Malaysia, and arranging contingent credit lines – may be useful under very specific circumstances but do not provide a panacea for the problem.

All such safeguards impose costs on the domestic economy which nonetheless are likely to be far less, particularly on the poor, than those of a full-fledged crisis, according to the report.

It also takes issue with recent recommendations by the Basel-based Bank for International Settlements (BIS) that ratings by credit agencies be used to determine how much capital banks will be required to reserve to protect against the risks of lending to emerging markets.