World economy shrinks to 80-year low

[LahoreEstate]

WASHINGTON: The global economy will shrink in 2009, for the first time since World War II, with developing countries bearing much of the economic pain, the World Bank warned on Monday.

In a paper for next Saturday’s meeting of the Group of 20 finance ministers and central bank governors, the bank warned that global industrial production, by the middle of 2009, could be as much as 15 per cent lower than in 2008.

Based on those projections, world trade is on track to record its largest decline in 80 years, with the sharpest losses expected in Asia.

‘We need to react in real time to a growing crisis that is hurting people in developing countries,’ said World Bank President Robert Zoellick. ‘This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis.’

The paper said that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty.

Many of the world’s poorest countries are becoming ever more dependent on development assistance as their exports and fiscal revenues decline because of the crisis. Donors are already behind by around $39 billion on their commitments to increase aid.

The concern now is that aid flows will become more volatile as some countries cut their aid budgets.

Countries like Pakistan that depend heavily on remittances will also be hit hard. Remittance flows are estimated to have reached $305 billion in 2008, an increase of around 9 per cent from 2007, but with a sharp deceleration in the second half of 2008.

World Bank projections suggest that remittances to developing countries will fall in 2009 given the importance of the GCC countries as a source of remittances.

According to recent World Bank data, Vietnam, Pakistan and the Philippines are among the World’s most dependent on money transfers from workers abroad.

Pakistan is also vulnerable as one of those countries whose currencies were pegged to the US Dollar. Once central banks ran out of dollars to exchange for their own currencies, they lost their ability to influence the exchange rate. As a result, their currencies fell, turning already large debts into impossible debts.

The World Bank warned that developing countries face a credit shortfall of up to $700 billion. The bank said that international financial institutions cannot by themselves currently cover the shortfall for these 129 countries. A solution will require governments, multilateral institutions, and the private sector.

Zoellick called for investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.

Only one quarter of vulnerable developing countries have the ability to finance measures to blunt the economic downturn, such as job-creation or safety net programmes. The bank said only one in four vulnerable developing countries will be able to ease the impact of the economic downturn through job creation or ‘safety-net’ programmes.

The crisis is forcing some developed nations to cut their aid budgets just as the need for aid is growing in the developing world.

The World Bank pointed out that developing countries that can still access international financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.

The most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining and manufacturing.

More than half a million jobs have been lost in the last three months of 2008 in India, including in gems and jewelry, autos and textiles.

The World Bank noted that stimulus packages for the major economic powers will limit money for the developing world, hindering their economic growth.

http://www.dawn.com/wps/wcm/connect/Dawn...ar-low--za