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Wednesday, 11 April, 2001, 10:29 GMT 11:29 UK
Slowdown hits developing countries
Very little foreign investment goes to the poorest countries
Little foreign investment goes to the poorest countries
The slowdown in economic growth could have serious effects on developing countries, according to a new report from the World Bank.

In its latest economic forecast, the World Bank says that the world economy will only grow by 2.2% this year, compared to its previous forecast of 3.4%.

That is a sharp slowdown from the world growth rate of 4% in 2000.

World Growth Forecast 2001 (2000)
World 2.2% (4%)
United States 1.2% (5%)
Japan 0.6% (1.7%)
Eurozone 2.5% (3.5%)
East Asia 5.5% (7.5%)
Developing world 3.4% (4.8%)
source: World Bank
The source of the slowdown is in the US, where falling stock markets and high levels of debt are expected to reduce growth to 1.2% this year, compared to 5% last year.

But that will have a knock-on effect for many other countries, especially those who rely on exports to America.

The World Bank says that growth in the formerly dynamic East Asian economies will fall from 7.5% to 5.5%, with the growth in the five worst-affected countries (Korea, Malaysia, Indonesia, Thailand and the Philippines) dropping to 3.7%.

For developing countries as a whole, excluding China which is expected to maintain its growth rate, the World Bank expects growth of 3.4% in 2001, revised down from an estimated 4.4% last November.

Investment flows hit

The global slowdown is also expected to reduce the flow of investment to developing countries, which has been recovering after the Asian crisis of 1997-98.

The slowdown is hitting East Asia the hardest
The slowdown is hitting East Asia the hardest
Capital market flows to developing countries are still at only three-quarters of their 1997 level, with long-term inflows of funds down from $342bn in 1997 to $296bn in 2000.

The main increase in private lending to developing countries was to just five middle-income countries - Brazil, China, Turkey, South Korea, and South Africa - while financial flows to the rest of the developing world actually fell by $7bn.

Some have argued that the private lending is inherently unstable, and developing countries should rely more on their own efforts and government financial aid.

But official development assistance is down to $38bn in 2000, compared to $45bn in 2000.

Debt issue

Twenty two poor countries have received a deal on debt relief, which the World Bank says is worth $2.1bn a year.

But the campaigning group Drop the Debt says that the Bank and the International Monetary Fund could afford to cancel all the debt owed by these countries without damaging their financial resources.

It has commissioned a report by accountants Chantrey Vellacott that suggests that by moiblising its resources, the Bank and the Fund could increase debt relief by some $3bn a year "without having a detrimental effect on the ability of these organisations to carry out their objectives".

The World Bank has long argued that any further debt relief would be at the expense of its other lending to poor countries, and it fears that the debt relief campaign will become linked to efforts by right-wing critics in the US to reduce its overall role.

Nevertheless, at the G8 Summit in Genoa, Italy in July, there is likely to be pressure to extend the debt relief initiative to other poor countries.

Quick recovery?

The World Bank, which argues that foreign direct investment has brought long-term benefits to developing countries, is confident that financial flows will again increase once the economic recovery begins.

Chief economist Nick Stern says that "the trends (towards increased investment) that we saw in the 1990s will get stronger in the coming decade" as more countries open their markets.

But how quickly that happens may depend on how quickly the world economy resumes its strong growth.

The World Bank expects world growth to recover to 3.3% in 2002, with world trade growth increasing from 5.5% this year to 7.3% in 2002.

But that depends on the US economy also increasing its growth rate from 1.2% this year to 3.3% next year.

In the meantime, the stocks and bonds in developing countries could be in for a rocky ride.

The Bank points out that "a deterioration in US stock markets could temporarily trigger worsening conditions in emerging markets" although the long-term impact "would tend to increase the availability of capital to these markets" as world investors deserted the US.

See also:

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