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Thursday, September 24, 1998 Published at 22:07 GMT 23:07 UK

Business: The Economy

World Bank sees record lending

James Wolfensohn: "Financial and social policy must be combined"

It is not only the International Monetary Fund that has been funding rescue packages around the world in the last 12 turbulent months.

The Asian crisis has resulted in the World Bank lending a record amount of money in the last financial year.

The organisation's annual report shows that more than $21bn were committed in new loans - of which nearly a quarter went to South Korea.

The Bank says what started as a financial crisis in southeast Asia ended with 20m people in Thailand and Indonesia being thrown back into poverty.

So in its technical assistance programmes, the Bank is doing more to strengthen the financial systems of many countries and lending more for poverty alleviation.

Some 40% of its loans in the past financial year were directed to that end: education and social safety nets being the main channels.

World Bank President James Wolfensohn says the crisis proves that financial and social policy must go hand in hand.

In its assessment of regional economies, the Bank reported:

East Asia

The World Bank says it has pledged $16bn to the countries of East Asia in addition to its regular lending programme to overcome the effects of the region's financial crisis.

[ image: Financial turmoil resulted in protests in Indonesia]
Financial turmoil resulted in protests in Indonesia
The money was designed to help governments restructure their financial sectors and provide social safety nets in the face of mounting unemployment, declining income and public spending, and rising prices for basic goods.

The Bank says the main causes of the crisis included:

  • A failure to contain a boom in demand and bank lending which caused trade deficits and stock market or property bubbles

  • A rigid exchange rate regime and lax financial supervision

  • The report also blamed state-directed lending, nepotism and limits on direct foreign investment in industry

Two conflicting developments are shaping the region's economic outlook: trade is now in surplus which will encourage foreign investment and build the basis for recovery.

But sharp cuts in investment threaten the prospects for early economic recovery.

It says that restoring investor confidence is critical.

South Asia

The Bank said South Asia continued to make satisfactory progress in the last financial year, unscathed by the financial and economic crisis in neighbouring East Asia.

The region grew by more than 5% in the last financial year and foreign investment rose - but still accounts for less than 4% of total foreign investment in developing countries.

But uncertainty about the region's prospects has increased following the nuclear tests by India and Pakistan in May.


The Bank says policies of stabilisation and liberalisation are beginning to pay off in the former communist countries.

It expects economic growth to resume in Russia in the current year after zero growth in the last financial year (to June 1998).

It says the challenge for most countries includes:

  • Improving the ways government money is spent

  • Improving corporate governance through increased competition, better financial supervision and better shareholder protection.

  • On the social side, the bank wants to see pensions and welfare payments better targeted.

In central Europe, it says most countries have experienced several years of economic growth, but this has often been associated with bigger trade deficits.

It says they have to learn one lesson from East Asia - the importance of good supervisory frameworks to prevent the collapse of the financial system.

The Bank says that Bulgaria's adoption of a currency board and a reform programme in 1997 put an end to seven years of instability and crisis.

Latin America

The Bank says the economies of Latin America and the Caribbean grew by 5% in the last financial year (to June 1998).

But it expects the rate to fall to 3% in the current year because of the effects of the East Asian crisis.

The region has suffered a loss in exports, damage by El Nino and the lower oil prices which have struck a number of oil-exporting countries.

The crisis has also led to a sharp cut in foreign investment inflows: the most severe effects were felt in Brazil.

The World Bank says that the main need in development policies is to reduce poverty.


The continent enjoyed its third year of increasing per capita income in the last financial year (to June 1998).

Nearly 40 countries registered positive growth, 21 of them by more than 5%.

But the Bank says that despite cautious optimism, Africa's growth must be boosted if poverty is to be reduced for large numbers of people.

This will need what the Bank calls a "deepening" of economic reforms.

Among the most serious obstacles are the spread of the AIDS virus, the high level of dependence on foreign aid, the rapid rise in domestic debt in some countries and the potentially dampening effect of the East Asia crisis.

The Bank says that even where some countries do show impressive growth figures, as in Angola, these do not translate into stability or improved living standards.

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