The global economy is likely to shrink for the first time since World War II, with growth at least five percentage point below potential
and likely to have long-term implications for developing countries, the World Bank has said.
The Bank's projections show that developing countries face a financing shortfall of $270 to $700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty.
As many 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty. To date, the most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining, and manufacturing.
Cambodia, for example, has lost 30,000 jobs in the garment industry, its only significant export industry. More than half a million jobs have been lost in the last three months of 2008 in India, including in gems and jewellery, autos and textiles, it says. In a paper for next Saturday's meeting of the Group of 20 finance ministers and central bank governors, the World Bank says that international financial institutions cannot by themselves currently cover the shortfall -- that includes public and private debt and trade deficits -- for these 129 countries, even at the lower end of the range.
A solution will require governments, multilateral institutions, and the private sector. Only one quarter of vulnerable developing countries have the ability to finance measures to blunt the economic downturn, such as job-creation or safety net programs.
"We need to react in real time to a growing crisis that is hurting people in developing countries," says World Bank Group President Robert B. Zoellick.
"This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis. We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest," he adds.
The Bank forecasts show that global industrial production by the middle of 2009 could be as much as 15 percent lower than levels in 2008. World trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia.
The financial crisis will have long-term implications for developing countries, the World Bank says, adding that debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public.
Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future, it opines.
