World Bank Warning

World Bank warns of new danger zone

Increased risk seen from falling exports & worsening credit conditions

DEVELOPING countries are entering “a new danger zone” as the financial crisis spreads to their economies, a World Bank paper prepared for a Group of 20 meeting of finance ministers this weekend says.
The World Bank paper, to be presented to the meeting in Brazil, said developing countries face increased risks from falling exports, investment and worsening credit conditions. Developing countries like China and India once appeared sheltered from the crisis that began in the United States and spread quickly to Europe. But economists have now slashed their growth projections for almost every country in the developing world including China, Russia, Brazil and Mexico. This could reverse progress made in reducing poverty in many of these countries, the World Bank said, warning rich donor nations this was not the time to cut aid to the poor.
The Bank said countries that depend on exports, remittances sent home by migrant workers or foreign investment were most vulnerable to the economic downturn. It identified 20 developing nations whose economies have been hardest hit. Without naming them, it said seven were in Europe and Central Asia and eight in Latin America. In recent weeks, weakening global demand has pushed food and fuel prices sharply down, but the World Bank said prices were still high when compared to a few years ago, forcing governments to pay more to feed their people.
The World Bank said it will be hard for some governments to recoup losses from almost a year of very high prices. “Recent declines in food and fuel prices do not imply that pressures and problems have disappeared,” the Bank said. “For the very poor, reducing consumption from already very low levels, even for a short period, can have important long-term consequences.” In addition, the poor will now have to contend with the repercussions of slowing economic growth.
Commodity exporting countries that gained from higher prices now face lower incomes as those prices plummet. Meanwhile, investment in developing countries, the backbone of their economic growth, has dropped as a result of problems in the global credit market.
“There is a risk that investment in developing countries may be headed for a ‘perfect storm,’” the Bank said. Unless credit markets thaw quickly, the consequences for developing countries could be severe, even for sound domestic financial sectors that will find it difficult to borrow or may be unwilling to lend. Even poorer countries, which are not well integrated in the global financial system, will be affected by the drop in export demand, remittances and lower commodity prices, the Bank said.