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From the World Bank
Global Development Finance
2009
Charting a Global Recovery. Review, Analysis and Outlook.
Overview
ALMOST TWO YEARS AFTER PROBlems
in the U.S. mortgage market set in
motion the biggest financial crisis since the
Great Depression, global financial markets remain
unsettled, and prospects for capital flows to the
developing world are dim. The intensification of
the financial crisis in September 2008 dramatically
altered the world economic outlook. Global output
is now expected to shrink by 2.9 percent
in 2009, the first contraction since World War II.
International trade is likely to experience the
sharpest drop since that time. Unemployment, already
soaring in industrial countries, will follow a
similar path in the export-dependent economies of
East Asia, as high-income countries reel from an
unprecedented asset-market bust, and global investors
retreat from emerging markets.
The implications of these unfolding events for
investment flows to developing countries have
already been dramatic: total private capital flows in
2008 dropped to $707 billion (4.4 percent of total
developing-country GDP), reversing the strong upward
surge that began in 2003 and reached a pinnacle
of $1.2 trillion in 2007 (8.6 percent of GDP). For
2009 the most likely scenario is that as global equity
markets regain momentum and credit markets heal,
net private flows to developing countries will remain
positive—barely. But they will drop to $363 billion,
approximately the level of 2004 and a decline of
5 percentage points of GDP from 2007...
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Complete
report as one file (4.5 MB)
Table
of Contents, Foreword, Acknowledgements &
Abbreviations (84 KB)
Chapter 1
: Prospects for
the Global Economy
THE FINANCIAL CRISIS THAT ERUPTED
in September 2008—following more than a
year of financial turmoil—has become a
global crisis for the real economy. Economic activity
in high-income and developing countries alike fell
abruptly in the final quarter of 2008 and in the first
quarter of 2009. Unemployment is on the rise, and
poverty is set to increase in developing economies,
bringing with it a substantial deterioration in conditions
for the world’s poor and most vulnerable.
The outbreak of the financial crisis provoked
a broad liquidation of investments, substantial loss
in wealth worldwide, a tightening of lending conditions,
and a widespread increase in uncertainty.
Higher borrowing costs and tighter credit conditions,
coupled with the increase in uncertainty
provoked a global flight to quality, caused firms to
cut back on investment expenditures, and households
to delay purchases of big-ticket items. This
rapid increase in precautionary saving led to a
sharp decline in global investment, production,
trade, and gross domestic product (GDP) during
the fourth quarter of 2008, a trend that continued
in the first quarter of 2009. The sharpest declines
in economic activity were concentrated among
countries specialized in the production of durable
and investment goods and in countries with serious
pre-existing macroeconomic vulnerabilities.
This suddenly very weak international environment
accelerated the fall in commodity prices
that began in mid-2008. By end-May 2009, oil
prices were down 60 percent from their peak and
non-oil commodity prices, including internationally
traded food commodities, were off 35 percent.
Chapter 2
: Private Capital
Flows in a Time of Global Financial Turmoil
The growing integration of developing
country
economies into the global economy, and the
increasing importance of their firms and households
in international finance over the past decade, have
brought enormous economic and financial benefits
(World Bank 2007). But the same developments
have also widened the scope for economic turmoil
when global conditions deteriorate. Indeed, the
broad reach of the current crisis can be traced
through the dense web of trade and financial linkages
among countries. Developing countries are
much more dependent on private capital flows
today than during the 1990s. Almost one-quarter
of their total domestic capital formation was
funded, in the years immediately preceding the
crisis, by foreign capital. For the past three years,
more than one-third of developing countries received
private capital flows in excess of 6 percent
of their GDP. In several countries of Eastern
Europe—notably Bulgaria, Kazakhstan, Latvia,
Romania, and Ukraine—the levels were 20 percent
or more. The downside of that greater dependence
is that a withdrawal of capital flows has a broader
and deeper impact.
Chapter 3
: Charting a
Course Ahead
THE GLOBAL ECONOMY FACES A
crisis of staggering proportions that has
reduced confidence in the prospects for
growth and depressed economic activity almost
everywhere in the world. While recent data indicate
that the fall in global production and trade
may be slowing, prospects remain uncertain and
the potential for a further downturn is not negligible.
For developing countries, the breadth and severity
of the crisis have underscored the risks of globalization.
Over the past 15 years, many of those countries
had opened to the world, revamping their
macroeconomic policies and their framework for
private investment. With expanding opportunities
for trade and strong inflows of capital, those improvements
made possible a long run of rapid economic
growth, accompanied in many places by impressive
reductions in poverty. Unfortunately, the
channels of integration with the world economy
have operated in reverse during the current crisis, as
a falloff in demand for developing countries’ goods
and services and reduced access to international
capital markets have sparked a sharp decline in
growth and in capital flows to developing countries.
Appendix
: Regional
Outlooks
Note: The latest country forecast for China (as of
June 18, 2009) is available in the China
Quarterly Update.
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