[R-G] Global hopes pinned on developing world

[Anthony Fenton]

Global hopes pinned on developing world
By Abid Aslam
http://www.atimes.com/atimes/Global_Economy/JA11Dj01.html

WASHINGTON - The world is entering its second straight year of a  
United States-led economic slowdown but resilient developing  
economies are cushioning the effects, the World Bank said on  
Wednesday in a report portending pain for the poorest. The global  
lender said it expects the world economy to grow by 3.3% this year,  
down from 3.6% in 2007 and 3.9% the previous year.

Developing countries are expected to post 7.1% growth, slightly off  
their 2007 performance of 7.4% but still a continuation of a four- 
year streak of record expansion. By contrast, the bank anticipated a  
lackluster 2.2% from high-income countries and 1.9% from the US  
economy, the world's biggest.

These predictions could prove rosy if the United States ends up  
taking other economies - including developing ones - down with it,  
the bank said in its Global Economic Prospects report for 2008. A  
weaker US dollar, the specter of recession, and rising financial- 
market volatility could cast a shadow over this soft-landing scenario  
for the global economy, it said.

These risks would cut export revenues and capital inflows for  
developing countries and reduce the value of their dollar investments  
abroad. If this happened, developing countries might have to draw  
down the reserves and other buffers they have built up in recent years.

"Overall, we expect developing-country growth to moderate only  
somewhat over the next two years. However, a much sharper United  
States slowdown is a real risk that could weaken medium-term  
prospects in developing countries," said Uri Dadush, the bank's  
director of development prospects.

Although Dadush spoke of the "real risk" of a US recession, some here  
already have declared it underway.

Merrill Lynch, in a report last week, said the US government's latest  
jobs data confirmed the country already was in the first month of a  
recession. Last week's government employment report, which rocked  
stock markets around the world, said the jobless rate rose further in  
December to reach 5%.

Other investment banks disagreed with Merrill's assessment but the  
brokerage house chided its detractors and the larger commentariat.  
"To say that the backdrop is 'recession like' is akin to an  
obstetrician telling a woman that she is 'sort of pregnant'," the  
Merrill report said.

The World Bank, in its report, assumed that turmoil in international  
markets - unleashed by rash US mortgage lenders, ravenous  
speculators, clueless ratings agencies, and ineffective financial  
regulators - would persist into late 2008. However, the bank  
anticipated the costs of this to large financial institutions would  
remain manageable. It also expected falling housing prices in the US  
would not have a calamitous impact on consumer demand.

In any case, it seems developing countries are taking up any slack.

"Looking at trade, strong import demand across the developing  
countries is helping to sustain global growth. As a result, and given  
a cheaper US dollar, American exports are expanding rapidly," said  
Hans Timmer, a report co-author. "This is helping shrink the US  
current account deficit and is contributing to a decline in global  
imbalances."

The report said prudent macroeconomic management and technological  
progress have helped to increase developing countries' total factor  
productivity and real income growth over the past 15 years. As a  
result, poverty would fall further over the next decade.

Many commodity exporters have benefited from robust developing- 
country growth, which has contributed to high prices for oil, metals  
and other items. Rising grain prices, however, are hurting real  
incomes among the urban poor, the bank said. It blamed the problem in  
part on high oil, energy and fertilizer prices.

The price of a barrel of light sweet crude oil exceeded US$100 last  
week on the New York Mercantile Exchange, breaking a psychological  
barrier but not setting a new record in real terms as the sum, once  
adjusted for inflation, amounted to less than the peak price in 1980.  
No one denies that prices remain near historic highs, however. The  
report expected this year's cost of a barrel of crude to average  
$84.10, up from $71.20 last year, before coming down to $78.40 in 2009.

The bank also attributed rising food prices to increased grain  
production for biofuels. It saw little prospect that food would  
become more affordable.

"Agricultural prices are expected to remain nearly flat at high  
levels in 2008, as biofuels production continues to ramp up in  
response to consumption mandates and production subsidies, drawing  
resources from other crops," the report said.

(Inter Press Service)