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ECONOMY: Zoellick Seeks New Trade Fund Amid Grim Outlook

Jim Lobe

WASHINGTON, Mar 31 2009 (IPS) - For the first time since the Great Depression, global economic production will decline in 2009, according to the latest estimates by the World Bank, which also predicted a tough and uncertain 2010.

Most of this year’s negative growth will take place in the world’s industrialised nations whose gross domestic product (GDP) is expected to fall three percent, according to the Bank’s latest edition of “Global Economic Prospects” (GEP) released here Tuesday.

But developing countries will also be hit hard, with their overall growth rate falling from nearly six percent last year to just over two percent in 2009.

Moreover, if India and China, where 2009 growth rates are projected at 6.5 percent and 4.0 percent, respectively, are excluded from the analysis, per capita growth in the developing world will actually decline, according to the GEP. Globally, an estimated 53 million more people would be forced to subsist on less than the equivalent of 1.25 dollars a day due to the ongoing crisis, the Bank said.

“In London, Washington, and Paris, people talk of bonuses or no bonuses [for corporate executives],” declared the Bank’s president, Robert Zoellick at a press event in London that coincided with the GEP’s release Tuesday. “In parts of Africa, South Asia, and Latin America, the struggle is for food or no food.”

Zoellick, who was speaking on the eve of the Group of 20 Summit, called for the leaders who will assemble in the British capital Thursday to allocate 0.7 percent of the stimulus packages they adopt to deal with the current financial crisis to a “Vulnerability Fund” for developing countries to help cushion the crisis’ impact on those nations that are least able to cope.

He also called for the G20 to endorse the creation of a new 50-billion-dollar “Global Trade Liquidity Programme,” an international effort to coax private banks, as well as public entities, to provide more credit for trade with and between developing countries at a moment when many governments are adopting protectionist measures.

“G20 backing will help us gain more momentum, thereby increasing support,” he said.

His appeal echoed in part a communiqué released Monday by the Group of 24 (G24), which represents the views of developing-country finance ministers and central bankers on the governing boards of the International Monetary Fund (IMF) and the Bank.

“We remain extremely concerned by the threat of protectionism, especially the increased recourse to subsidies, and call on G20 leaders to strongly resist protectionist measures in trade, investment, finance, and labor services,” they said. They also welcomed recent steps by the IMF to increase its lending under less-stringent conditions and called for the Bank to follow suit.

The latest GEP is considerably more pessimistic and uncertain than the previous edition, released last November, which predicted a 4.4 percent growth rate for all developing countries in 2009. That the bank now thinks the actual rate will be less than half of its November estimate testifies to the speed with which the financial crisis, which exploded with the mid-September collapse of the Lehman Brothers investment bank in New York City, has reverberated both geographically and into the real economy.

“The financial crisis is having dramatic, instantaneous effects on production and trade in virtually every country,” said Hans Timmer, who directs heads the Global Trends division of the Bank’s Development Prospects Group.

Global industrial production has already fallen 15 percent since the onset of the crisis, while trade in goods and services is expected to fall 6.1 percent in 2009, according to Timmer, who called both declines “unprecedented” since World War II.

While economies specialised in capital goods production – notably Japan, Germany and Taiwan, among others – have been especially hard hit, countries whose economies are dependent on commodity exports, which include many of world’s poorest nations, have also suffered significantly and are unlikely to recover quickly.

The price of oil is likely to remain more than 50 percent of 2008 levels – averaging around 47 dollars per barrel – through 2009, while the decline in non-oil commodity prices is projected at more than 30 percent compared last year.

Economic contraction among developing countries will be particularly severe in Europe and Central Asia (ECA) where growth rates are projected to fall from 4.2 percent last year to minus two percent in 2009. Latin America and the Caribbean (LAC) will also suffer negative 0.6 percent growth this year – after growing 4.2 percent in 2008 – with Mexico (minus two percent) and Argentina (minus 1.9 percent) among the worst affected, according to the report.

By contrast, the Middle East and North Africa will be the least affected by the downturn, dropping just 0.3 points from earlier projects of 3.3 percent growth in 2009.

In Sub-Saharan Africa, GDP growth this year is expected to halve from nearly five percent in 2008 to 2.4 percent, which will not keep pace with population growth. “If the global economy continues to deteriorate, the pressure on African countries is going to be huge,” said Justin Yifu Lin, the Bank’s chief economist and senior vice president for development economics.

The report projected that the global economy will return to positive growth of 2.3 percent in 2010, but Lin stressed that such a recovery remained “uncertain” and that, in any event, the knock-on effects of the crisis are likely to be felt at least through next year.

“Even if global growth turns positive again in 2010, output levels will remain depressed, fiscal pressures will mount, and unemployment levels will rise further in virtually every country well into 2011,” Timmer said. “This is actually a very weak recovery given the depth of the fall in 2009,” he added.

The decline in trade and commodity prices, as well as the sharp decline in foreign private investment in the developing world, will translate into major fiscal challenges for many developing-country governments which, in the absence of international support through the Vulnerability Fund and other instruments, will have little choice but to slash their already cash-strapped budgets, according to Timmer.

In a report released earlier this month, the bank warned that developing countries will face a financing gap of between 270 billion dollars and 700 billion dollars as a result of the current credit squeeze.

If those kinds of resources are forthcoming, said Lin, they should be used for three major purposes, including strengthening safety nets for the most vulnerable populations; investing in infrastructure to eliminate bottlenecks in getting goods to market; and helping small- and medium-sized businesses that are often the biggest source of jobs in developing economies.