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Last Updated: Wednesday, 9 January 2008, 00:01 GMT
China boom 'cushions world slump'
By Steve Schifferes
Economics reporter, BBC News

Traders on floor of New York Stock Exchange
So far developing countries have escaped financial turmoil
Global economic growth will slow in 2008 as the credit crunch hits the richest nations, the World Bank says.

But the "resilience" of developing countries will cushion the slowdown, with China still booming, it adds.

Overall, the Bank projects annual world economic growth to slow to 3.3% in 2008, compared with 3.6% in 2007.

Yet it warns that developing country growth, projected at 7.1% this year, could still be derailed by further financial turmoil or over-heating.

Risks remain

The World Bank's Global Economic Prospects is the first economic forecast to look specifically at how the credit crunch has affected developing countries.

A sharper US slowdown is a real risk that could weaken medium-term prospects in developing countries
Uri Dadush, World Bank

It follows other international organisations like the IMF and the OECD in suggesting a relatively benign scenario, with swift action by central banks limiting the damage caused by the credit crunch to the US economy.

It expects US growth to slow sharply to 1% in the first half of 2008, but recover quickly by 2009. Overall, the industrialised countries are expected to grow by 2.2% this year, down around 0.5% compared with the previous year.

In contrast, China is expected to grow by more than 10% over the next two years, with India not far behind.

Chinese shoppers
China's economy is expected to continue to boom

Overall, the two biggest emerging market countries give a strong boost to total growth in developing nations.

Without their contribution, developing country growth would be a much more modest 5.5%, and substantially less on a per capita basis, Professor Jim Rollo of Sussex University pointed out.

He warned that the World Bank might be too optimistic about the ability of policy markers to respond to the highly uncertain economic situation.

Decoupled economies?

The World says that so far developing countries have been relatively insulated from the turmoil in world financial markets.

KB Home
A further slump in the US housing market could hit growth

The stock markets in many developing countries, after an initial slump in August, have continued their long boom.

And in the bond markets, the interest rates on bonds issued by developing countries have only risen modestly (by less than 1%), compared to a sharp increase in interest rates in corporate bonds in industrial countries.

But it warns that a bigger slowdown in the US, for example a housing market crash that pushed the American economy into outright recession, would have a bigger impact on developing countries.

"A sharper US slowdown is a real risk that could weaken medium-term prospects in developing countries," says the World Bank's Uri Dadush.

The Bank says that middle income countries such as Brazil would be most affected, both by a reduction in their trade and a fall in foreign investment.

However, the Bank points out that less than 20% of China's exports now go to the US, so that even a US slowdown would not substantially slow its rate of growth.

The Bank says there is also a risk on the "upside", with the economic boom leading to accelerating inflation and an over-valued stock market in China and other emerging markets.

Commodity boom

In the past few years, oil prices have risen fourfold, while the price of grains and other internationally traded foodstuffs such as oils has doubled.

A woman walks through the market of Tamanrasset southern Algeria
African countries lag behind in technology transfer

The Bank points out that the commodity boom has had both positive and negative consequences for developing countries.

The increased price of commodities like oil and copper has boosted the income of the some of the world's poorest countries in Africa, such as Sudan and Angola.

However, the higher price of foodstuffs such as grains has also had a negative impact on the income of non-oil developing countries, with the urban poor especially hard-hit.

The Bank estimates that this has reduced growth by 0.5% in non-oil developing countries.

Poverty and technology

The report also looks at the long-term prospects of developing countries, and the importance of technology transfer.

It says that over the past 15 years, between 1990 and 2005, developing countries closed some of the technology gap between rich and poor countries.

But middle income countries still only have reached 50% of the technological level of rich countries, it estimates, while low income countries are at only 25%.

The Bank says that further technology transfer should allow developing countries to grow by 3.9% in per capita terms over the next decade, which should reduce poverty substantially.

It estimates that the numbers in global poverty (based on the $1 per day standard) will fall from 1.2 billion people in 1990 to 970 million in 2004 and 624 million in 2015.

However, 30% of people in sub-Saharan Africa will still be below that poverty line, compared with 10% in the developing world as a whole.

And it says that further technology transfer depends on improvements in the domestic conditions in developing countries, such as better education and technical literacy, more support for innovation, and greater efforts to diffuse technology to rural areas.

Foreign investment and transfers of money and skill from migrants who returned home have been the most important means of technology transfer so far, the Bank said.

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