38138 Global Economic OVERVIEW Prospects AND GLOBAL OUTLOOK Managing the Next Wave of Globalization 2007 Global Economic Prospects Overview and Global Outlook 2007 © 2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Acknowledgments v Overview vii Chapter 1 Prospects for the Global Economy 1 Summary of the medium-term outlook 1 Global growth surged to 3.9 percent in 2006 2 Regional outlooks 6 Financial markets 12 World trade 18 Commodity markets 20 Downside risks predominate 23 Notes 26 References 27 Appendix Regional Economic Prospects 29 East Asia and the Pacific regional prospects 29 Europe and Central Asia regional prospects 34 Latin America and the Caribbean regional prospects 41 Middle East and North Africa regional prospects 47 South Asia regional prospects 52 Sub-Saharan Africa regional prospects 56 Notes 64 Figures 1.1 Industrial production may be slowing 2 1.2 Regional growth trends 4 1.3 Inflation has increased moderately 13 1.4 Inflation is rising in high-income countries 13 1.5 Signs of overheating in some developing countries 13 1.6 Despite turbulence, financing conditions remain favorable 14 1.7 Private capital flows to developing countries remain strong 15 1.8 Ample liquidity keeps long-term interest rates low 15 1.9 Global demand shifts from the United States to Europe and developing countries 16 iii C O N T E N T S 1.10 A start to orderly adjustment? 16 1.11 Interest rate spreads support the dollar 17 1.12 Turbulence resulted in sharp depreciations for some developing countries 17 1.13 Rotation in global trade 18 1.14 China’s exports exceed those of the United States 19 1.15 Diverging trends in commodity prices 20 1.16 Oil prices continue to rise 21 1.17 Higher prices slow oil demand 22 1.18 A disappointing supply response 22 1.19 Spare production capacity remains low 22 1.20 After rising rapidly, housing price growth slows sharply 24 A.1 China’s import demand is a big support for regional exporters 30 A.2 Inflation is easing in East Asia and the Pacific 31 A.3 Current account deficits are large and are increasing 36 A.4 Inflationary pressures are building 37 A.5 Spring financial market turbulence was temporary 43 A.6 Among Latin American and Caribbean countries, Mexico is the most dependent on U.S. imports 44 A.7 Tourism and remittance flows offset trade shortfalls in 2005 49 A.8 Growth has slowed but is still strong 50 A.9 The external environment remains favorable for growth 50 A.10 Real interest rates remain close to zero or negative 54 A.11 Budget deficits 54 A.12 Regional growth remains stable 58 A.13 Oil and non-oil commodity price shock in Sub-Saharan Africa 59 A.14 Current account positions are deteriorating 64 Tables 1.1 The global outlook in summary 3 A.1 East Asia and the Pacific forecast summary 29 A.2 East Asia and the Pacific country forecasts 33 A.3 Europe and Central Asia forecast summary 35 A.4 Europe and Central Asia country forecasts 39 A.5 Latin America and the Caribbean forecast summary 41 A.6 Main Latin America and the Caribbean region stock market index returns 43 A.7 Latin America and the Caribbean country forecasts 45 A.8 Middle East and North Africa forecast summary 47 A.9 Middle East and North Africa country forecasts 51 A.10 South Asia forecast summary 53 A.11 South Asia country forecasts 56 A.12 Sub-Saharan Africa forecast summary 57 A.13 Sub-Saharan Africa country forecasts 61 iv Acknowledgments T HIS REPORT WAS produced by staff from the World Bank’s Development Prospects Group. Richard Newfarmer was the lead author and manager of the report. The principal author of chapter 1 was Andrew Burns. Chapter 2 was written by Dominique van der Mensbrugghe, with written contributions from Dilek Aykut and Sanket Mohapatra and with support from Sebnem Sahin. Chapter 3 was written by Maurizio Bussolo and Denis Medvedev, with the benefit of guidance from Francisco Ferreira and with support from Victor Sulla and Rafael De Hoyos. Chapter 4 was written by Julia Nielson, Paul Brenton, and Mombert Hoppe, with guidance from Gordon Betcherman. Chapter 5 was written by consultants Peter Sturm and William Shaw, with written contributions from Maureen Cropper and Philippe Ambrosi and with analytic work by Mombert Hoppe. The accompanying online publication, Prospects for the Global Economy (PGE), was produced by a team led by Andrew Burns and comprising Sarah Crow, Cristina Savescu, and Shuo Tan, with technical support from Gauresh Rajadhyaksha. The report was produced under the guidance of Uri Dadush and François Bourguignon. Several reviewers offered extensive advice and comment throughout the conceptualization and writing stages. These included Nancy Birdsall, Cornelis de Hann, Shahrokh Fardoust, Alan Gelb, Lidvard Gronnevet, Bernard Hoekman, Robert Holzmann, Eriko Hoshino, Kieran Kelleher, Jeffrey Lewis, William Maloney, Branko Milanovic, Moisés Naím, Ian Noble, Stefano Scarpetta, David Wheeler, and Roberto Zagha. Several people contributed substantively to the various chapters. In chapter 1, the Global Trends Team, under the leadership of Hans Timmer, was responsible for the projections, with contributions from John Baffes, Maurizio Bussolo, Betty Dow, Annette De Kleine, Donald Mitchell, Denis Medvedev, Mick Riordan, Cristina Savescu, and Shane Streifel. In chapter 2, the poverty numbers originated with Shaohua Chen and Martin Ravallion from the Development Research Group. In addition, Steven Kennedy and Bruce Ross Larsen edited the report. Dorota A. Nowak and Nigar Farhad Aliyeva managed the publication process for the Development Prospects Group, and Merrell Tuck managed the dissemination activities. Book production was coordinated by the World Bank Office of the Publisher. v Overview T HE INTENSE PACE of globalization has high-income countries? How will global inte- improved living standards worldwide gration, interacting with demography, techni- on an unprecedented scale—but not cal change, and other forces, affect the distri- for everyone. Some countries and some social bution of income and labor markets in rich groups have been left behind. Even in coun- and poor countries? How will it affect the tries that have benefited greatly from global- global environmental and health threats that ization, tensions in labor markets have cloud long-term growth prospects? simmered, at times boiling over into civil dis- Global Economic Prospects 2007 explores turbances. Meanwhile economic growth, the next wave of globalization. The organiz- while essential to improving living standards, ing vehicle for discussion is a set of growth sce- is damaging what many call the “global com- narios covering the years 2006 to 2030. The mons,” giving rise to concerns about the sus- objective of the scenario-based approach is to tainability of long-term growth. analyze the opportunities and stresses of inte- These pressures are likely to intensify in gration. The purpose is not to predict the fu- coming years. Why? Because as markets inte- ture but to bring into sharper relief the choices grate, competition among countries—and facing the world today. National policy their firms and workers—increases. Develop- makers must decide how best to respond to ing countries, once at the periphery of the globalization—because the growth and long- global economy, are now moving to center term competitiveness of their countries are at stage and are becoming serious competitors stake. And international policy makers must in the markets of high-income countries and devise ways for nations to work together to in each other’s markets. Concerns about ensure that growth can continue without competition from China and other low-wage becoming destabilizing. suppliers now pepper the headlines in rich and poor countries alike. The loss of white- collar jobs from global sourcing of services, often to India and other developing coun- Prospects for 2007 and 2008— tries, provides fodder for heated debate on bright, with a few dim spots talk shows and as the theme of several best- selling books.1 Will global integration—of trade, finance, T he medium-term outlook for the world economy remains fairly bright (chap- ter 1). While the pace of economic expansion technology, ideas, and people—continue into is slowing, developing economies are pro- the foreseeable future? If so, what will it jected to grow by 7.0 percent in 2006, more mean for developing countries and for today’s than twice as fast as high-income countries vii O V E R V I E W (3.1 percent), with all developing regions Disruptions in oil markets are always possible. growing by about 5 percent or more (figure 1). And the unwinding of the U.S. current account Looking forward, limited inflationary pres- deficit and its mirror surpluses in oil-exporting sures and high savings among oil exporters countries and East Asia could also be disruptive and in Europe (as Europeans prepare to meet if sudden movements in capital markets, per- the challenges of their aging societies) are ex- haps abetted by collective policy inaction, drive pected to keep long-term interest rates low. As the rebalancing. Even so, these risks appear a result, while growth in developing countries manageable, and the promising environment may slow somewhat over the next two years, for growth makes this an opportune time to it is expected to remain very robust—at more focus on long-term issues. than 6 percent in 2007 and 2008. Increases in supplies of key commodities, in combination Globalization’s next 25 years— with demand-side substitution and conserva- tion measures, should allow for some easing of incomes up, poverty down, three prices, including those for oil, but continuing big threats to growth strong global growth is expected to keep com- modity prices high by historical standards. Even though a tapering down of growth to a D emographic trends will be a major driver of future events. The Earth’s current pop- ulation of some 6.5 billion is expected to rise to sustainable but robust rate remains most likely, 8.0 billion by 2030, an average increase of this positive outlook is subject to significant 60 million annually. More than 97 percent risks. Efforts to temper the expansion in some of this growth will take place in developing of the fastest-growing developing countries countries. Both the European Union and Japan may not succeed, leading to stronger growth in are likely to experience a decline in population, the short term but a sharper slowdown later. and most of the increase in other rich countries A faster-than-expected weakening of housing will be due to migration. The largest country in markets in high-income countries could brake the world, China, will see its population con- the economy much more abruptly than tinue to grow, but at a slower pace than the rest expected, thus weakening global demand. of the developing world. With more rapid viii O V E R V I E W population growth, India will likely surpass China as the world’s most populous country sometime during this period. The global labor force will increase from just over 3 billion today to 4.1 billion in 2030, a rate of increase greater than that of population. Meanwhile the dependency ratio is likely to fall, providing a sustained boost to world growth. If this report’s central scenario materializes, global economic growth will be somewhat faster in 2006–30 than in 1980–2005. But growth in the global economy will be powered increasingly by developing countries, where per capita incomes will rise 3.1 percent a year on average, up from 2.1 percent over the ear- lier period. That rate of increase will produce average per capita incomes in the developing world of $11,000 in 2030, compared with $4,800 today,2 roughly the level of the Czech Republic and the Slovak Republic today. Average income in rich countries will also rise dramatically: the average income of the chil- dren of today’s baby boomer is likely to be nearly twice that of their parents. The output of the global economy will rise from $35 trillion in 2005 to $72 trillion (at con- stant market exchange rates and prices) in 2030, an average annual increase of about 3 percent— 2.5 percent for high-income countries and 4.2 percent for developing countries. Though the incomes of developing countries will still be less than one-quarter those in rich countries in 2030, they will continue to converge with those of wealthy countries (figure 2). This would imply that countries as diverse as China, Mexico, and Turkey would have average living standards roughly comparable to Spain today. This is good news for the world’s poor. The implications of sustained growth for reducing poverty around the world are nothing short of astounding. Despite population growth, the number of people living in dire poverty—below the $1-a-day poverty line—is likely to fall to Developing countries, once considered the 550 million from 1.1 billion today. Similarly, periphery of the global economy, will become the number of people living on less than $2 a main drivers. Overall, developing countries’ day should fall below 1.9 billion, 800 million share in global output will increase from fewer than today. The bottom line? Poverty will about one-fifth of the global economy to decline, despite continuing population growth. nearly one-third (figure 3). Their share of ix O V E R V I E W global purchasing power would surpass half. Today, six developing countries have populations greater than 100 million and an annual gross domestic product (GDP) of more than $100 billion. By 2030, under rea- sonable assumptions of economic growth, at least 10 countries will reach the twin 100s thresholds.3 Global integration is likely to enter a new phase. In virtually every growing economy the importance of trade—captured by the ratio of trade to GDP—will rise, continuing the trend of the past two decades. The growth in the trade ratio over the next 25 years will be powered by a new dynamism in services trade. Global trade in goods and services, growing faster than out- put, is likely to rise more than threefold to $27 trillion in 2030 (figures 4 and 5). Roughly half that increase will come from developing countries. This means that a growing share of global production of goods and services will be performed in those de- new opportunities. For example, agriculture veloping countries able to take advantage of now accounts for about 2 percent of the economic value added of most rich coun- tries; that share will shrink to boutique niches. A few resource-rich regions and countries, including Latin America and Australia, will be the source of 90 percent of the world’s sugar, 50 percent of its grain, and 40 percent of its dairy products. Whether countries exceed projections—or fall short—depends heavily on the policies they adopt over this long period. Several factors could alter this relatively sanguine outcome for better or worse. The central long-term scenario in this report is robust enough to resist periodic recessions, isolated regional conflicts, and even many of the destabilizing crises the world has experi- enced in the past 30 years. These threats are likely to affect particular regional or national economies more than the world economy, and if history is a guide, are likely to be of relatively short duration. Between 1980 and 2005 the world economy grew at a steady pace despite several major disruptions— including the Latin American debt crisis, the demise of the Soviet Union, the East Asia x O V E R V I E W crisis, two global downturns, and the tragedy scenario in this report (figure 6) is based on of September 11, 2001. These events had the assumption that countries perform only short-term effects on global growth and closer to their full potential over a longer a marginal impact on the steady advance of period of time. Predicated on maintaining globalization, even though regional ripples the solid growth rates of the last half- continued for years afterward. This suggests decade, the high-growth scenario sketched that the basic long-term trends discussed here would lead to incomes in 2030 that here, if not the assumed growth rates, are are some 45 percent higher than those pro- fairly impervious to all but the most severe jected under the central scenario and to and sustained shocks. declines in absolute poverty ($1 per day) At the same time, the possibility exists from about 20 percent of the world’s popu- that the world will be even better than en- lation today to less than 4 percent in 2030. visioned in the central scenario—thanks Two points emerge from the discussion of possibly to unanticipated technological im- scenarios (chapter 2). First, policy matters. provements, more innovation in business The right domestic and international policies, processes that allow for an acceleration of sustained over long periods, have the power to globalization, and widespread adoptions of raise incomes around the world, especially in good policies within countries. Indeed, certain countries. Second, whether the under- greater integration promotes knowledge lying growth rates are low or high, the dy- about policies that work. It also shortens namics underpinning any likely scenario will the duration of bad policies, as investment generate stresses that require policy attention capital and human resources can more read- today. The report analyzes in detail three main ily flee poorly performing nations. That dis- stresses in the global economy that could cipline is likely to become more effective as threaten growth: widening inequality, growing financial, merchandise, and technological tensions in labor markets, and new environ- markets continue to integrate. The upside mental pressures. xi O V E R V I E W Income inequality could widen— among and within countries T he benefits of globalization are likely to be uneven across regions and countries (chapter 3). Africa, because of underlying growth trends and the presence of many frag- ile states, is the region most likely to fall farther behind. But, it also has the most to gain from integration, because it can take advantage of technology and wage gaps to propel higher sustained growth. Of equal concern, strong forces in the global economy may tend to increase inequal- ity in many national economies. Even though a large segment of the developing world is likely to enter what can be called the “global middle class,” some social groups may be left behind or even marginalized in the growth process. Unskilled workers, in particular, may fall farther behind. Technological progress, by generating demand for greater skills, tends to widen the gap between the wages of skilled countries are classified as rich in a global con- and unskilled workers. Demographic patterns text, while many people viewed as wealthy that affect social dependency ratios (the ratio in developing countries are members of the of workers to youth and retirees) and educa- global middle class.) This large group will tional attainment are also important. participate actively in the global marketplace, Trade per se has been found generally to demand world-class products, and aspire to have no systematic effect across countries as a international standards of higher education. direct channel for wage-gap widening. How- That is, they would have the purchasing ever, in combination with technological change power to buy automobiles (perhaps second- and, to a lesser extent, foreign investment, hand), purchase many consumer durables, these globalization-related forces may combine and travel abroad. to increase inequality in many countries—at While still a minority in their own coun- the same time as they are raising average tries, the new members of the global middle incomes. class will place new and quite different de- mands on domestic political structures. Their A global middle class will emerge livelihoods and standards of consumption are By 2030, fully 1.2 billion people in develop- likely to be connected to the global market, ing countries—15 percent of the world so, as the studies reviewed in chapter 3 show, population—will belong to the global middle their political predilection may be more likely class, up from 400 million today. Families of to favor access to the international market, if four in that class earn between $16,000 and not greater openness itself. They also are more $68,000 in PPP dollars (figure 7). (Because likely to demand transparency in political and the definition used here is absolute and based corporate governance, certainty of contracts, on a global scale, most of those who consider and property rights—all hallmarks of an themselves middle class in high-income improving investment climate. xii O V E R V I E W Most who enter the middle class will do so potential. Most fundamental is a cessation of because they are able to move from agricul- crippling civil conflicts that have stunted de- ture into manufacturing and services or ac- velopment in several regions of Sub-Saharan quire valuable skills faster than their compa- Africa. In the high-case scenario explored in triots. For a given rate of growth, policies that chapter 2, Africa’s income could be twice as allow mobility across sectors and that provide high as projected in the central scenario (see broader access to education can accelerate figure 6). economic growth by creating the opportunity While developing countries are closing the and incentives for all citizens to develop their income gap with rich countries, as many as productive potential. two-thirds—more than 80 percent of the devel- oping world outside China—may experience a Africa and some groups within countries worsening of within-country inequality, thus may lag behind muting the poverty-reducing effects of growth Sub-Saharan Africa will have to make a strong and fanning social tensions that could derail effort, with the support of the international growth. Demography plays a role, as aging so- community, if it is to avoid being left behind cieties tend to become more unequal. But the (figure 8). Today, half of the poorest tenth of main driver is the widening difference in earn- the world population lives in Asia; by 2030 ing potential between skilled and unskilled Asia’s share in the lowest tenth will be reduced workers (figure 9). This is because investments to one-fifth under the central scenario. By con- in capital and technology create a more rapidly trast, Africa, now home to one-third of the growing demand for skilled workers. The sim- poorest people, is likely to see its share of ulations in this report suggest that the com- the lowest tenth double by 2030. To be sure, bined effects of all these forces—technology, the region has the potential for more rapid globalization, demography, and demand for growth, and sustained improvements in policy skilled labor—may widen income distribution and investment climate could bring out that in as many as two-thirds of all countries, xiii O V E R V I E W including many of the most populous develop- health. Finally, increasing the access of poor ing countries. countries to global markets (and thus raising Since in some countries, girls are deprived living standards) by completing the now- of schooling, women in these countries are suspended Doha Round of world trade nego- more likely to enter the labor market without tiations and lowering barriers unilaterally skills. This discrimination in effect foredooms could boost incomes in poor countries. Mea- them to be denied access to the opportunities sures to expand trade should be coupled with afforded by global integration, and means aid to overcome supply-side constraints that the widening skill premium is likely to affect now weigh down the trade of poor develop- them disproportionately. ing countries. Of these constraints, counter- Several policies can lead to more egalitar- productive domestic policies are often the ian countries and a more egalitarian world. most binding. Governments can create new opportunities for the poor through additional investments in education. Investments in girls’ education China, India, and global sourcing can be an important complement to reducing gender discrimination in the workplace. Ad- will put pressure on labor markets, ditional resources for education and other especially for the unskilled pro-poor investments are likely to become available from a tax base centered on a grow- ing middle-class. Moreover, increasing devel- R apid technological progress, burgeoning trade in goods, and growing international sourcing of services have come together to put opment assistance for lagging regions and the new pressures in labor markets, pressures that poorest countries—and making that assis- will only become more acute in the next tance more effective—is critical. Particularly 25 years (chapter 4). Globalization offers op- important are investments to overcome bot- portunities for export growth and access to a tlenecks in infrastructure, education, and wider range of cheaper imported products that xiv O V E R V I E W can fuel productivity growth and raise average living standards. But by creating a progres- sively more integrated global market for labor, it imposes adjustment costs on certain groups within countries, exerting downward pressure on some wages, decreasing job security, and making retraining and relocation necessary. Even though wages of unskilled workers in vir- tually all countries have risen as productivity has increased with globalization, the unskilled have received wage increases that are lower than those for skilled workers—and they have experienced greater difficulty in sustaining their employment. The projections in this report offer little reason to believe that this will change in the coming decades. Particularly challenging is the rise of China, India, and other developing countries as man- ufacturing powerhouses, and, with growing tradability of services, as suppliers of services to the global market. While the qualitative im- plications of increasing exports of manufac- tured products from China and India are the same as for the emergence of the Asian tigers countries of formerly nontradable service more than a decade ago, their sheer size raises activities imperils white-collar employment in the specter of intense export competition. Im- these activities in both high-income countries ports of high-income countries from all devel- and advanced developing countries. Services oping countries have rise from below 15 per- exports have grown by leaps and bounds in cent in the 1970s to nearly 40 today—but many developing countries (figure 11), creat- more important, their share is expected to rise ing opportunities for productivity gains in to more than 65 percent in 2030 (figure 10). both high-income and developing countries— This has already exposed workers in rich but have led to more rapid job turnover in countries to competition from low-wage formerly nontraded white-collar jobs. The countries, a pressure that will only intensify global sourcing of such relatively high-paying over the next 25 years. skilled jobs, in contrast to the displacement Many developing countries fear that ex- of low-skilled manufactures, has the potential ports from these large new players may to destroy the investments of white-collar swamp their domestic markets, squeeze them workers in firm-specific knowledge. out of the global export market, foreclose The analysis in this report suggests that avenues of diversification in manufactures as a three factors are likely to mitigate these effects road to higher growth, and soak up the pool in the medium and even the long term. of foreign direct investment (FDI). High- income countries worry that if the large • First, the growth of the Chinese, Indian, emerging economies can readily acquire and and other emerging markets offers enor- master the newest technologies, their exports mous offsetting opportunities for other may soon take over high-tech markets. developing and developed countries to Global sourcing of services exerts similar increase exports. As China and India pressures. The transfer to firms in developing increase their exports, they will have xv O V E R V I E W more flexible countries to progress faster in institutional development and for rich countries to continue to lead in productivity-enhancing innovation. The flow of service activities from rich to poor countries, which entails some trans- fer of know-how, will be slowed to the to increase imports of intermediate in- extent that institutional frameworks fail puts, energy, technology, and investment to protect the ownership of such assets goods. Driven by Chinese demand, Asia and thus discourage FDI. was the principal destination for acceler- ated export growth for Africa and Latin Despite this sanguine conclusion, the pol- America during the late 1990s and the icy response of countries will determine early years of this decade (figure 12). whether they will be among those able to take • Second, as exports and domestic living advantage of the new opportunities and im- standards rise in these emerging prove their living standards—or fall behind. economies, wages (and exchange rates) Policies to embrace, rather than resist, global rise as well, creating space for low- integration will lay the foundations for future income countries to move into low-skill growth and job creation. Openness to trade activities abandoned by producers in the and FDI will become ever more critical if the large emerging countries. Wages already poorest countries are to absorb technologies have risen in China faster than in many and know-how from abroad and seize the op- other developing countries, a trend portunities created by rising demand from, expected to continue (figure 13). and production shifts in, China and India. But • Third, developing the social institutions openness alone will not be sufficient to foster that support a dynamic market economy integration in the absence of an attractive in- in China and India will take time, vestment climate, with sound institutions and providing an opportunity for smaller, policies that allow resources (labor, capital, xvi O V E R V I E W and knowledge) to flow from low-return Environmental threats will sectors to high-return sectors. Developing demand much more multilateral knowledge-intensive activities as future dri- vers of growth will require investing in the collaboration institutions and policy frameworks that foster innovation and providing effective education and lifelong learning for all workers. T he gains from growth and globalization could be undermined by their environ- mental side effects. Because increases in pro- Even in the most propitious economic en- duction magnify cross-border pollution, while vironments, policies are needed to cushion improvements in technology make it possible the adjustment costs associated with rapidly to expand or intensify exploitation of scarce changing work force demands and involun- global resources, decisions at the national level tary dislocation. Projections indicate that re- are having a growing impact on other coun- turns to skilled labor will continue to in- tries. International institutions will thus be re- crease more quickly than those to unskilled quired to play a larger role in a wide spectrum labor, extending today’s natural wage-widen- of issues—all involving global public goods4— ing tendencies evident in many, if not most, where exclusive reliance on the decisions of in- countries, and underscoring the need for dividual governments or the private market public policies to support workers at the low can lead to adverse outcomes. As developing end of the scale. Together, both volatility and countries enlarge their role on the global stage, rising wage inequality argue for labor-market their integration as full partners in multilateral policies focused on protecting workers rather solutions to global problems will be essential. than protecting jobs. These trends also argue Mitigating climate change, containing in- for creating opportunities for low-income fectious diseases, and preserving marine fish- people through educational and infrastruc- eries are three prominent global public goods ture investments while eschewing subsidies that demonstrate the need for—and benefits to inefficient activities. of—international policy cooperation. xvii O V E R V I E W • Rising industrial output means that, implications for the welfare of future based on current trends with existing generations. technologies, annual emissions of green- • Technological progress and rising de- house gasses (GHGs) will increase mand have increased efforts to harvest roughly 50 percent by 2030 and will in- fish from the open seas, degrading ocean crease twofold by 2050 (figure 14). This environments and driving some valuable necessarily would sharply increase the species to near-extinction. Fish catches concentrations of GHGs in the atmos- already have leveled off (see figure 15). phere, with substantial risks of detri- mental effects on future productivity and—more generally—on human wel- fare around the globe. The problem is how best to provide energy necessary for growth, while at the same time re- ducing emissions toward levels that will eventually stabilize atmospheric concen- trations. Even in the next decade or two, scientists underscore the possibility— though still low probability—that global warming could cause natural disruptions severe enough to push growth rates perilously below historic trends. While decades will pass before the most severe effects of climate change will begin to be felt, the collec- tive response of today’s global leaders is almost certain to have far-reaching xviii O V E R V I E W Recent scientific calculations project adoption, action to reduce deforestation, and near-complete depletion by 2048 in the assistance to poor developing countries to absence of collective international ef- promote adaptation to permanent climatic forts to limit fishing to sustainable levels changes. (see Worm and others 2006). Long- Similarly, failure to contain an epidemic standing efforts to limit marine catches could suddenly brake global commerce, iso- to sustainable levels have met with only late some populations, and impose huge losses a few successes, as institutional weak- on affected developing countries. Unrestrained nesses, technical difficulties, and inap- marine fishing, while less potentially calami- propriate incentives, such as fishing sub- tous than climate change or a flu pandemic, sidies, impede sustainable management. could permanently degrade a critical global • The growing interaction of national food source and destroy irreplaceable deep- economies through trade and movements sea habitats and biodiversity. of people, while broadly beneficial, has Effective multilateral collaboration is increased the risk of spreading conta- needed to ensure that economic growth and gious diseases. HIV/AIDS (human im- poverty reduction proceed without causing ir- munodeficiency virus/acquired immune reparable harm to future generations. Devel- deficiency syndrome) is one example. oping countries are central to the manage- The severe acute respiratory syndrome ment of these risks. Though these countries (SARS) is another. The most prominent are relatively small contributors to global current threat is posed by the avian in- warming today, the projections in this report fluenza virus. imply that soon enough they will become large contributors; moreover, if no action is These examples of the side effects of taken, the standard of living that they could globalization—one long-term, one medium- otherwise expect may well be put at risk. Sim- term, and one immediate—pose risks to the ilarly, given the limited supply of medical progressive expansion of the global economy, facilities and nursing care in the developing and to developing countries in particular. world, a flu pandemic could have horrific Some of the more catastrophic climate-change consequences. In many developing countries scenarios, if they materialize, could undermine people depend on fish for an important share the development prospects of whole countries of their diet, and the poor would suffer if the and even regions through their effects on agri- price of fish, as well as substitutes, were to culture, water, and ecosystems. According skyrocket as supplies dwindled. to the United Kingdom government’s recent The three cases differ in the degree of comprehensive analysis, the Stern Review, agreement among policy makers—and, to less failure to address climate change could— degree, scientists—regarding the risks potentially—lead to huge reductions in wel- involved. There is a large international con- fare (cuts in per capita consumption of 5–20 sensus on the need to protect against the percent), while the cost of stemming the rise spread of (selected) contagious diseases, and in GHG concentrations at a reasonable level on the right methods of doing so. The poten- could be about 1 percent of annual GDP by tial for exhausting marine fisheries is well un- 2050 (U.K. 2006). These estimated costs of in- derstood, although disagreement remains on action are substantially higher than previous the amount of resources to commit, the limits estimates. The report concludes that an inter- on fishing to impose, and how to allocate national framework should include emissions access to fisheries. There is an international trading to encourage energy efficiency, techno- consensus that human activity is contribut- logical cooperation to ensure more rapid ing to climate change, and that industrial xix O V E R V I E W emissions are directly related to atmospheric workers—all the while promoting change, concentrations of GHGs, although the precise not fighting it. implications of different levels of GHG con- Deepening economic interdependence also centrations for climate change remain places a new burden on the collective actions of uncertain. While disagreements over the facts the international community. Several positive in each case have hampered efforts at interna- responses are clear. First, increasing the tional cooperation, they have not been the amount and effectiveness of development major impediment to progress. assistance through both multilateral and The greatest policy challenge in safeguard- bilateral institutions can ease the tendency ing the global commons involves strengthen- of globalization to produce uneven growth. ing international agreements and institutions. Second, liberalizing trade in the framework of The World Health Organization has ad- the World Trade Organization can create new dressed the threat of global pandemics effec- opportunities for poor countries and poor peo- tively. The basic legal framework is in place to ple. The most immediate task is to reactivate safeguard the sustainability of marine fishing, the Doha Round and conclude an agreement but is often inadequately enforced by weak that lowers trade barriers to the products the institutions. Even more work is required to world’s poor produce, especially agriculture establish the global institutions capable of re- and labor-intensive manufactures. And third, ducing the risks from climate change. Discus- deepening institutional mechanisms to deal sions aimed at replacing the Kyoto Protocol, with threats to the global commons can ensure which expires in 2012, with a more compre- that globalization is not undone by its own hensive and ambitious agreement are under- success—by providing forums in which dis- way within the framework of the United agreements about how to provide global public Nations Framework Convention on Climate goods in which all nations ultimately have an Change. Meanwhile, it may be useful to start interest can be resolved. Multilateral coopera- putting in place other vehicles, such as a tion will be even more important in the inte- global system for trading emission permits grating world of tomorrow than it is today. The and better means of monitoring emissions in way the international community, acting to- both high-income and developing countries, gether, manages the process of integration will so as to allow a rapid implementation of determine whether the world of 2030 will real- effective policies, once these are agreed. ize its potential. Achieving policy consensus is difficult, but it is now urgent. Notes 1. Several recent and provocative books deal with these themes or variations, and from quite different perspectives. See, for example, Dervis (2005), The world in 2030 Friedman (2005), Goldin and Reinert (2006), Mishkin A ll these developments are pieces of the new burden lying on the shoulders of na- tional policy makers: to manage globalization (2006), Stiglitz (2006), and Wolf (2004) as well as various issues of Foreign Policy. 2. This is measured in constant dollars adjusted or risk being run over by it. This requires for purchasing power parity. 3. Today the six countries are Brazil, China, India, government policies to ensure that the poor Indonesia, the Russian Federation, and, most recently, are incorporated into the growth process Mexico. By 2030, Bangladesh, Nigeria, Pakistan, the through pro-poor investments in education, Philippines, and Vietnam will reach both thresholds. infrastructure, and transfers. Similarly, it Already today the populations of Bangladesh, Nigeria, requires policies to support and invest in and Pakistan exceed 100 million. xx O V E R V I E W 4. Examples of global public goods, in addition Goldin, Ian, and Kenneth Reinert. 2006. Globalization to protecting the environment, include ensuring for Development: Trade, Finance, Aid, Migration, global security, keeping the trading system open and and Policy. Washington, DC: World Bank. nondiscriminatory, and maintaining global financial Mishkin, Frederic S. 2006. The Next Great Globaliza- stability. A useful overview of many of these can be tion. Princeton: Princeton University Press. found in Bhargava 2006. Stiglitz, Joseph. 2006. Making Globalization Work. New York: Norton. U.K. Government. 2006. Stern Review: Economics of References Climate Change. London: Government of the Bhargava, Vinay. 2006. Global Issues for Global United Kingdom. Citizens: An Introduction to Key Development Wolf, Martin. 2004. Why Globalization Works. New Challenges. Washington, DC: World Bank. Haven: Yale University Press. Dervis, Kemal. 2005. A Better Globalization: Legiti- Worm, Boris, E. Barbier, N. Beaumont, J. Duffy, C. macy, Governance and Reform. Washington, DC: Folke, B. Halpern, J. Jackson, H. Lotze, F. Center for Global Development. Micheli, S. Palumbi, E. Sala, K. Selkoe, J. Friedman, Thomas. 2005. The World Is Flat: A Brief Stachowicz, and R. Watson. 2006. “Impacts of History of the 21st Century. New York: Farrar, Biodiversity Loss on Ocean Ecosystem Services.” Straus and Giroux. Science 314 (5800): 787–90. xxi G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6 xxii T R A D E P O L I C I E S I N T H E 1 9 9 0 S A N D T H E P O O R E S T C O U N T R I E S xxiii 1 Prospects for the Global Economy Summary of the medium-term growth is projected to slow over the next two outlook years, it should remain robust at 6.1 percent in D espite high commodity prices, rising short-term interest rates, and a bout of fi- nancial market volatility, global growth accel- 2008. Mainly because of the continued expan- sion of developing economies, global growth will remain robust and this should keep com- erated in the first half of 2006. While there are modity prices high. Nevertheless, increases in indications that the pace of the expansion is supply, combined with demand-side substitu- already slowing, developing economies are tion and conservation measures, should allow projected to expand by 7 percent for the year for some easing of commodity prices, includ- as a whole, more than twice as fast as high- ing that of oil. income countries (3.1 percent), with all devel- This positive outlook is subject to signifi- oping regions growing by close to or more cant risks. Past episodes of fast growth and than 5 percent. favorable financial conditions have been fol- The very fast growth of developing coun- lowed by sharp and largely unanticipated re- tries over the past five years has been fueled versals. While stronger fundamentals in most by low interest rates and abundant global liq- developing countries reduce the likelihood uidity. This has led to rising commodity prices that a hard landing would be as severe as in and overheating in some high-income and the past, countries need to take particular developing countries. This, in turn, has pro- care to ensure that their fiscal, monetary, and voked a tightening of monetary policy that is structural policies are in order so as to mini- in part responsible for the slowdown that has mize the domestic consequences of external already begun. However, in most countries shocks—a point driven home by the financial strong productivity growth, due in part to the market turbulence observed in the spring of absorption of China and the former Eastern 2006, which affected most sharply those Bloc countries into the global economy, has countries whose fundamentals were most out checked inflationary pressures. of balance. Limited inflationary pressures and high A soft landing remains likely, but the savings among oil exporters and in Europe (as global economy has reached a turning point Europeans prepare to meet the challenges of and many factors could result in a more pro- their aging society) are expected to keep long- nounced slowdown. A faster-than-expected term interest rates low. Moreover, improved weakening of housing markets in high- fundamentals have boosted trend growth rates income countries could generate a much in many developing countries. Together these sharper downturn and even recession, with factors suggest that, while developing-country potentially significant effects for developing 1 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 countries. Much slower growth would likely cause commodity prices to weaken more than already projected, potentially placing many developing countries that have so far avoided current-account problems in difficulty. In ad- dition, demand is expanding unsustainably rapidly in many developing countries. Should efforts to contain growth in these countries fail, their economies could overheat, yielding initially stronger growth outcomes and addi- tional inflation, but a much sharper slow- down later on. An oil-sector supply shock could be similarly disruptive, driving up oil prices even further, while simultaneously slowing growth and weakening the prices of non-oil commodities. Finally, although global imbalances appear to be stabilizing, they re- main large. There is a continuing risk that they will be resolved in a more disruptive manner than is assumed in the baseline sce- nario outlined here. grew 5.5 percent (5 percent for small oil exporters), and all regions are expected to have grown by close to, or more than, 5 percent. Global growth surged to Most of the acceleration in global growth 3.9 percent in 2006 was concentrated in the first half of the year. D espite oil prices that topped $75 a barrel during the course of the year, world gross domestic product (GDP) growth is estimated World industrial production grew 6.7 percent in the first six months of 2006, compared with 4.3 percent in 2005 (figure 1.1). Among de- to have strengthened in 2006, coming in at veloping countries, rates of growth of indus- 3.9 percent, compared with 3.5 percent in trial production eased in the second and third 2005 (table 1.1). To a significant degree, this quarters, although this was partially offset by strong global performance reflects the very stronger growth among high-income coun- rapid expansion in developing economies, tries. Order books and business sector confi- which grew by 7 percent—more than twice as dence are strong in both Europe and Japan, fast as high-income countries (3.1 percent). suggesting that industrial activity should re- Overall, 38 percent of the increase in global main robust for the remainder of the year, output originated in developing countries, far while in the United States there are clear signs exceeding their 22 percent share in world GDP. that industrial production is slowing. As discussed in chapter 2, continued faster In the United States, the acceleration in in- growth among developing countries over the dustrial output was mirrored by GDP, which next two decades is expected to lift their share began 2006 expanding by a torrid 5.6 percent. of world output to about 31 percent in 2030. However, responding to higher short-term Very strong growth (10.4 percent) in China interest rates, residential investment spending played a significant role in the recent strength of has fallen sharply and a cooling housing mar- developing countries, contributing an expected ket has moderated consumer demand.1 As a 0.5 percentage points to global growth. Never- result, the economy slowed in the third quar- theless, the pickup was broadly based. Even ex- ter to a 1.6 percent annualized growth rate, cluding China and India, developing countries with most of the slowdown restricted to the 2 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y Table 1.1 The global outlook in summary Percentage change from previous year, except interest rates and oil price Estimate Forecast 1960–80 1980–2000 2004 2005 2006 2007 2008 2008–30 Global conditions World trade volume — 5.8 10.4 7.7 9.7 7.5 7.8 Consumer prices G-7 countriesa,b 1.8 2.2 2.5 2.1 1.7 United States 2.7 3.4 3.4 2.5 2.1 Commodity prices (US$) Non-oil commodities 17.5 13.4 20.6 Ϫ4.5 Ϫ8.4 Oil price (US$ per barrel)c 37.7 53.4 64.0 55.9 52.7 Oil price (percent change) 30.6 41.5 19.9 Ϫ12.7 Ϫ5.7 Manufactures unit export valued 6.9 0.8 2.4 3.8 0.4 Interest rates $, 6-month (percent) 1.6 3.6 5.4 5.7 5.0 €, 6-month (percent) 2.1 2.2 3.0 3.6 4.2 Real GDP growthe World 4.7 3.0 4.1 3.5 3.9 3.2 3.5 2.9 Memo item: World (PPP weights)f 5.2 4.7 5.1 4.5 4.6 High-income 4.5 2.9 3.3 2.7 3.1 2.4 2.8 2.4 OECD countries 3.2 2.6 3.0 2.3 2.7 Euro Area 1.7 1.4 2.4 1.9 1.9 Japan 2.7 2.6 2.9 2.4 2.5 United States 4.2 3.2 3.2 2.1 3.0 Non-OECD countries 6.4 5.8 5.3 4.7 4.8 Developing countries 6.2 3.4 7.2 6.6 7.0 6.4 6.1 4.0 East Asia and the Pacific 5.5 8.5 9.0 9.0 9.2 8.7 8.1 5.1 China 10.1 10.2 10.4 9.6 8.7 Indonesia 5.1 5.6 5.5 6.2 6.5 Thailand 6.2 4.5 4.5 4.6 5.0 Europe and Central Asia 10.7 0.6 7.2 6.0 6.4 5.7 5.5 2.7 Poland 5.3 3.4 5.4 5.1 5.2 Russian Federation 7.2 6.4 6.8 6.0 5.5 Turkey 8.9 7.4 6.0 5.0 5.0 Latin America and the Caribbean 5.5 2.2 6.0 4.5 5.0 4.2 4.0 3.0 Argentina 9.0 9.2 7.7 5.6 4.0 Brazil 4.9 2.3 3.5 3.4 3.8 Mexico 4.4 3.0 4.5 3.5 3.5 Middle East and North Africa 5.9 4.0 4.8 4.4 4.9 4.9 4.8 3.6 Algeria 5.2 5.3 3.0 4.5 4.3 Egypt, Arab Rep. of 4.2 4.9 5.8 5.6 5.8 Iran, Islamic Rep. of 5.1 4.4 5.8 5.0 4.7 South Asia 3.7 5.4 8.0 8.1 8.2 7.5 7.0 4.7 Bangladesh 6.3 6.2 6.7 6.2 6.5 India 8.5 8.5 8.7 7.7 7.2 Pakistan 6.4 7.8 6.6 7.0 6.5 Sub-Saharan Africa 4.4 2.2 5.2 5.5 5.3 5.3 5.4 3.3 Kenya 4.9 5.8 4.9 5.1 4.9 Nigeria 6.5 6.2 4.8 5.1 5.4 South Africa 4.5 4.9 4.6 3.9 4.3 Memorandum items Developing countries excluding transition countries 5.1 4.2 7.3 6.8 7.0 6.4 6.1 excluding China and India 6.6 2.3 6.1 5.1 5.5 4.9 4.9 Source: World Bank. Note: PPP ϭ purchasing power parity. a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. b. In local currency, aggregated using 2000 GDP weights. c. Simple average of Dubai, Brent, and West Texas Intermediate. d. Unit value index of manufactured exports from major economies, expressed in U.S. dollars. e. GDP in 2000 constant dollars; 2000 prices and market exchange rates. f. GDP measured at 2000 PPP weights. 3 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 housing sector. Importantly profits, non- estimated to have expanded by 2.9 percent in residential investment, and consumption re- 2006. A slowdown in exports contributed to main robust and inflation and unemployment weaker growth in the second quarter of the low. As a consequence, although growth is ex- year, but growth rebounded in the third quarter pected to remain subdued, it should not de- led by a surge in investment spending. As of cline in the fourth quarter and the strong first August, exports were up 11 percent from a year quarter means that output for the year as a earlier, partly reflecting a 25.6 percent increase whole is expected to increase 3.2 percent. in sales to China, where import volumes have In high-income Europe, following several strengthened markedly. years of weakness, growth also accelerated in Developing economies grew 7 percent in the first half of 2006. GDP expanded by 2006. Much stronger European and continued about 3.3 percent in the first two quarters of robust Japanese growth, combined with low the year, as private consumption and invest- real interest rates and interest rate spreads, ment spending took over from exports as the made for robust activity among the world’s main drivers of the recovery. Growth slowed developing economies, which are expected to to a 2 percent pace in the third quarter, with have expanded by 7 percent in 2006. This rep- growth in France having stalled as invest- resents the fourth consecutive year that their ment expenditures turned negative and ex- growth rates have exceeded 5 percent. ports weakened. However, both in France The expansion was particularly robust in and in the rest of Europe, consumer demand China and India, where output is estimated to remained robust and consumer and business have increased by 10.4 and 8.7 percent, res- surveys suggest that economic activity should pectively. But the strong performance was be robust in the fourth quarter, leading to an broadly based, with all developing regions estimated 2.5 percent increase in GDP for the growing by close to or by more than 5 percent year as a whole (2.4 percent for the Euro (figure 1.2). Despite further substantial in- Area). creases in the price of oil during the first half In Japan, the acceleration in output of the year, growth among the remaining oil- that began in 2005 has continued, with GDP importing developing countries actually 4 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y strengthened and is expected to come in at declines toward 3.5 percent of the labor force. 5 percent for the year as a whole. As a result, the current account surplus should decline to about 3 percent of GDP in 2008. Developing economies to outperform In most developing regions, high oil prices, high-income countries in 2007–08 rising interest rates, and the maturation of the High oil prices are expected to continue to business cycle are expected to restrain growth weigh on growth in industrialized countries. in 2007–08. As a group, however, low- and The slowdown that they and higher interest middle-income countries should again out- rates (working through residential investment perform high-income economies by a wide and household consumption) have already ini- margin—and this strong performance will tiated in the United States is projected to con- continue to be a critical driver of global tinue into the first half of 2007 before an ex- growth. Administrative restrictions on invest- pected relaxation of monetary policy permits ment and slower export growth are expected the economy to pick up. Overall, GDP in the to bring Chinese growth down to a more sus- United States is projected to increase 2.1 per- tainable 8.7 percent by 2008. Higher interest cent in 2007 and 3 percent in 2008. Weaker rates and some further fiscal tightening are ex- domestic demand is expected to be reflected in pected to slow the expansion in India to about slower import growth and should result in a 7.2 percent over the same period, helping to decline in the trade and current account unwind some of the inflationary tensions that deficits of the United States, with the latter have built up in that country. coming in around 5.5 percent of GDP in 2008. Prospects for the remaining oil importers Continued accommodative macroeconomic are varied. Many, particularly in Eastern and policy and pent-up investment demand follow- Central Europe, are overheating and have ing several years of very weak growth should entered a phase of policy tightening. These maintain the pace of the expansion in most countries are expected to decelerate. Others, European countries, without exacerbating including Brazil and Mexico, are projected to underlying inflationary pressures. However, a accelerate or enjoy high but stable growth planned 3 percent increase in the German rates as they continue to benefit from a favor- value-added tax (VAT) is projected to slow able external climate, including low long-term demand in that country in 2007, with knock- real interest rates and interest-rate spreads. on effects elsewhere in the continent. The Overall, developing-country oil importers, ex- higher VAT can also be expected to prompt cluding China and India, are projected to a one-time increase in inflation, although its enjoy broadly stable growth of about 4.8 per- effect should be attenuated by slower growth. cent in 2007–08. Overall, GDP in high-income Europe is pro- For oil exporters (and other large com- jected to slow to about 2.1 percent (1.9 percent modity exporters) strong revenue inflows for the Euro Area) in 2007 and 2008. should continue to fuel robust domestic de- In Japan, vigorous growth in developing mand growth despite lower prices and less East Asia, renewed consumer and business con- rapid increases in global demand for com- fidence, and reduced drag from consolidation modities, resulting in rapid growth of both are positive factors expected to maintain imports and the noncommodity sectors of growth at about 2.5 percent in 2007 and 2008. these economies. Overall, the pace of the ex- The recent return to positive inflation is pro- pansion in developing-country oil exporters jected to persist, allowing short-term interest is expected to decline from 6 percent this year rates to gradually rise to around 2 percent by to 4.9 percent in 2008, as capacity constraints the end of 2008. At the same time, domestic slow growth in the resource sector and a rising demand is expected to firm as unemployment share of demand is met by imports. 5 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Regional outlooks Malaysia and the Philippines is also expected More detailed descriptions of economic develop- to come in at around 5.5 percent, while in ments in developing regions, including regional fore- Thailand it is expected to reach only about 4.5 cast summaries and country-specific forecasts, are available online at http://www.worldbank.org/ percent, because, despite strong export growth, globaloutlook. Country-specific forecasts are reported consumption and investment have been de- in the appendix. pressed by high oil prices, rising interest rates, and continued political uncertainty. East Asia and the Pacific 2 High oil prices and rapid growth have An emerging growth pole. raised inflation in the region, prompting a The economies of the East Asia and Pacific general tightening of monetary policies during region continued to expand at robust rates in 2005. As a result, both headline and core in- 2006, with regional GDP growth expected to flation are now easing in most of the larger accelerate to 9.2 percent in 2006 from 9 percent economies in the region. Regional equity mar- the year before. In China, continued rapid in- kets were subject to the general correction vestment growth, in conjunction with an unex- affecting many emerging markets during pected surge in exports as new capacity came on May–June 2006. However, spreads on bonds stream, led to a 10.7 percent year-over-year in- remain low, and equity markets began recov- crease in GDP over the first three quarters. The ering in August, suggesting that the earlier overall contribution of the external sector to correction did not represent a reassessment of GDP growth was up because, even though im- the region’s economic fundamentals. port growth accelerated, increased output from Growth is expected to moderate only some- China’s import-competing sectors prevented what. In China, investment growth and do- import volumes from expanding as rapidly as mestic demand are projected to remain robust. exports. Investment spending has been spurred However, with investment at some 50 percent by growth in credit and the money supply as of GDP, more forceful policy action may be well as strong profits. Concerns about exces- needed to keep credit and investment growth in sive investment creating potential overcapacity check. Moreover, the country’s large and per- in specific sectors led the authorities to rein- sistent current account surplus suggests the force administrative measures aimed at con- need, over the longer term, to promote a more taining investment growth. consumption-oriented pattern of growth. In The expansion in the rest of the region re- Indonesia, the ongoing recovery in growth is mains robust. A rebound in global high-tech de- projected to continue, with GDP expanding by mand and stronger import demand from China 6.5 percent in 2008. prompted an acceleration in exports that began Economic pressures for the revaluation of in the second half of 2005 and continued into developing Asian currencies are likely to 2006. Vietnam’s growth is expected to reach 8 intensify. In addition to reducing global percent, backed by across-the-board strength in imbalances, revaluation would also reduce in- exports, domestic consumption, and invest- flationary pressures, improve domestic macro- ment. In Indonesia, growth slowed in the first economic management capabilities, steady six months of 2006 following a substantial re- asset markets, and improve living standards duction of fuel subsidies and monetary tighten- for local populations. ing in the latter part of 2005. Activity appears Finally, the region remains susceptible to to be picking up now, with monthly indicators outside risks, including a worsening of the suggesting a strong rebound in domestic con- avian influenza epidemic—either through sumption and investment in the third quarter. wider effects on domestic animals or because For the year as a whole, GDP is expected to in- transmission to (or between) humans becomes crease by about 5.5 percent. Growth in more efficient (World Bank 2006). 6 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y Europe and Central Asia investments, more volatile capital flows are Oil exporters and European Union integration also increasing, and a substantial portion of underpin strong growth. the FDI is going into the banking sector, where Economic activity in the Europe and Cen- it may be more volatile than in other sectors. tral Asia region is estimated to have increased While such flows are likely to remain strong, by 6.4 percent in 2006, up from 6 percent in motivated by investment opportunities associ- 2005. This acceleration comes despite slower ated with European Union (EU) integration, growth in Turkey, where a significant tighten- the real-side disequilibrium that these inflows ing of monetary policy following this spring’s are provoking may make these countries sen- financial market turbulence is projected to re- sitive to a change in investor sentiment. In- duce growth from 7.4 percent last year to deed, as events in the spring of 2006 high- 6 percent in 2006. lighted, countries with large current account Faster growth in Europe and low real inter- deficits are particularly vulnerable—especially est rates have helped to maintain growth at those with pegged exchange rates (Hungary high levels elsewhere in the region. Among the and Latvia) and currency boards (Bulgaria, largest economies, growth in the Russian Fed- Estonia, Lithuania)—because sharp reduc- eration is estimated to have picked up to tions in inflows may require very large and 6.8 percent in 2006, supported by high oil disruptive real-side adjustments. In Hungary, prices. Improved incomes and activity in the a budget deficit of close to 10 percent of GDP mining sector boosted growth in Ukraine to an poses further challenges. estimated 6 percent pace in 2006 versus Excess demand has also contributed to in- 2.6 percent in 2005, while rising wages and flationary pressures and a tightening of mone- falling unemployment increased growth in tary policy. Overheating remains a risk both Poland from 3.4 percent in 2005 to an there and in Azerbaijan, the Baltic states, estimated 5.4 percent in 2006. Elsewhere, Belarus, Bulgaria, the Czech Republic, rebounding demand in industrial Europe, cou- Kazakhstan, Romania, Russia, the Slovak pled with rapidly growing demand from re- Republic, Turkey, and Ukraine. Other factors gional oil exporters, notably Russia, bolstered contributing to the slower growth include a exports among smaller oil importers, whose slump in manufacturing activity (especially economies grew 6.1 percent, up from 5.8 per- mining) in Armenia, a marked deceleration of cent in 2005. Higher oil prices and the coming export growth in Latvia, and rising capacity on stream of oil projects lifted the GDP growth constraints combined with declining competi- among oil exporters to 7.3 percent. tiveness in Belarus. Growth is continuing at a The pace of demand growth in many coun- modest pace in the former Yugoslav Republic tries in the region continues to exceed supply of Macedonia (4 percent in 2006), where do- and, as a result, 13 countries have current- mestic demand is recovering slowly following account deficits in excess of 5 percent of GDP, a period of fiscal consolidation and violent and inflation is rising in 12. Strong capital in- conflict in 2001. flows, predominantly in the form of foreign Growth in the region is expected to slow direct investment (FDI), coupled with ex- somewhat over the next two years, coming in tremely rapid domestic credit expansion, are at about 5.5 percent in 2008. Slower growth at the root of excess demand in several coun- in industrialized Europe and higher short-term tries (the Baltic countries, Bulgaria, Hungary, interest rates are expected to cause regional Romania, the Republic of Serbia, and Turkey). export growth to decline for both oil im- Although FDI flows are less easily reversed porters and oil exporters. In the case of the than portfolio and equity investments and are latter, domestic demand growth is expected to more likely to be associated with physical ease but remain strong, because, although oil 7 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 revenues will decline, they will remain high. quarter, and although it slowed in the second Lower prices will contribute to the expected quarter, growth for the year as a whole is slowdown in oil exporters’ GDP growth from expected at 3.5 percent. 7.3 percent in 2006 to 6.2 percent in 2008. In In contrast, demand in Argentina and addition, it will also slow demand for exports República Bolivariana de Venezuela, which from regional oil importers, which, in combi- had been expanding at unsustainable rates, nation with weaker export demand from slowed. Nevertheless, demand in each country Germany and the United States in 2007, is remains very strong, and GDP is projected to expected to reduce their GDP growth to about expand by 7.7 and 8.5 percent, respectively, 5.2 percent in 2008. well beyond potential. Unsurprisingly in these The combination of rising inflation and el- conditions, inflation has picked up and now evated current account deficits poses a persis- exceeds 10 percent in both countries. In each tent challenge for regional policy makers. To case, this surge occurred despite price freezes the extent that the contractionary influence of in a number of sectors that are hurting sectoral higher interest rates continues to be offset by investment and supply (inflation of uncon- capital inflows, further fiscal tightening may trolled goods and services is running at 16 per- be unavoidable—even if it means pushing gov- cent in Argentina). The rapid expansion of de- ernment balances into surplus in some coun- mand in República Bolivariana de Venezuela tries. For many countries in the Common- has been fueled by ballooning government wealth of Independent States, future prospects transfers. The growth in supply has been con- will be dependent on continued strong de- centrated in the non-oil sector, as reductions in mand from Russia. Prospects for the poorer investment by the government’s oil company countries in the region will also depend on the and by private oil firms (discouraged by high extent to which these countries are able to taxes and royalties and antibusiness policies) strengthen domestic institutions so as to sus- have caused oil production to decline. tain high growth rates. Other countries in the region are also growing relatively rapidly. In Chile, a waning Latin America and the Caribbean investment boom and higher imports have Improved performance but still under- contributed to a slight slowing of growth in performing. 2006. In Central America, growth is expected Economic activity in Latin America and the to accelerate in most countries in 2006, Caribbean has picked up and GDP is esti- boosted by exports and investments associ- mated to have increased by 5 percent in 2006. ated with free trade agreements (Costa Rica, The faster growth reflects favorable interna- the Dominican Republic, El Salvador, tional financial conditions, strong commodity Guatemala, Honduras, and Nicaragua), strong prices, and a relaxation of monetary policy in remittance inflows, increased agricultural Brazil and Mexico, two of the region’s largest production due to better weather, and post- economies. hurricane investment spurts (El Salvador). In In Mexico, GDP accelerated sharply in the the Caribbean, growth in Jamaica and the first half of 2006, growing 5.5 and 4.7 percent Dominican Republic has picked up, reflecting (year-over-year) in the first two quarters as foreign investments in the tourism and mining lower interest rates boosted domestic demand sectors (Jamaica) and a growth rebound fol- and construction activity. Stronger sales of cars lowing the 2003 currency crisis (Dominican to the United States and oil exports also con- Republic). Uncertainty over the results of tributed. Brazil, too, benefited from a more re- elections in Nicaragua has hurt investor laxed monetary policy stance, although real in- confidence, partially offsetting the beneficial terest rates remain high at 11 percent. GDP effects of a relatively buoyant agricultural sec- accelerated to about 5.2 percent in the first tor and the writing off of $975 million in debt. 8 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y Electoral uncertainty and concerns about as imports and inflation rise rapidly. Unless the future path of U.S. interest-rate policy con- significant policy restraint is introduced in tributed to volatility in financial markets in the near future, these developments will re- the spring of 2006. The currencies of a num- sult in a deterioration of current account bal- ber of countries depreciated, following earlier ances, leading to an erosion of Argentina’s appreciations in some cases (Brazil and current account surplus to about 0.9 percent Colombia). Stock markets also underwent a of GDP and a much-reduced surplus of major correction. However, the improved fis- 7.6 percent in República Bolivariana de cal stance and reduced indebtedness of many Venezuela by 2008. The longer the two coun- countries meant that the region was not par- tries’ aggressively expansionary macroeco- ticularly affected by this episode. Risk premia, nomic policies keep demand growing in after rising somewhat, have once again de- excess of supply, the sharper and more dis- clined and currently are just 20 points above ruptive will be the recession required to their historical minimums. reestablish equilibrium. Prospects for countries in the region reflect a number of offsetting influences. The pro- Middle East and North Africa3 jected slowdown in global activity is expected Riding the oil boom. to moderate demand for commodities, result- High oil prices and strong oil demand ing in a modest decline in their prices and continue to be key drivers for the developing slower volume growth. As a result, while rev- economies of the Middle East and North enues from this sector will remain elevated, Africa.4 Overall, these countries’ GDP in- they will decline, as will their contribution to creased by an estimated 4.9 percent in 2006, the growth of domestic demand in commodity- the fastest pace in some four years. Among exporting countries. Overall, GDP among developing-country oil exporters, growth is commodity exporters (excluding República expected to reach 4.9 percent, up from last Bolivariana de Venezuela, see below) is pro- year’s 4.7 percent. jected to slow to about 3.8 percent in 2008. Reflecting strong investment and remittance Commodity importers also will feel the effect flows from high-income oil exporters and of slower global and U.S. growth. In the case the Euro Area, output among regional oil im- of Mexico, the anticipated cycle in the United porters has strengthened. For the year as a States is expected to be reflected in slower whole, output is expected to come in at 5 per- exports and growth. For most commodity im- cent. Strong Suez Canal revenues in the Arab porters the slowdown is expected to be less Republic of Egypt, better crops following a marked (from 4.6 to 4 percent, excluding drought in the Maghreb, hefty tourism receipts Mexico), in part because many countries have throughout the region, and a pickup in considerable spare capacity. European demand are additional factors ex- As indicated above, unsustainably rapid plaining this relative strength. An exception is growth in Argentina and República Bolivariana Lebanon, where the war and political uncer- de Venezuela, boosted by a dangerously ex- tainty weighed heavily on activity in the first pansionary fiscal and monetary policy, has three quarters. While reconstruction efforts are already strained capacity in these countries. In expected to give a fillip to growth toward the the baseline projection, this unsustainable de- end of the year and into 2007/08, Lebanese mand stimulus is expected to continue, with GDP is expected to contract by about 5.5 per- domestic demand increasing at double-digit cent in 2006. rates. The inability of domestic supply to keep Generous fuel subsidies are pervasive pace means that GDP will grow less quickly, throughout the region. For countries that do declining to 4 percent in Argentina and 5.5 in not benefit from large oil revenues, these sub- República Bolivariana de Venezuela in 2008, sidies have strained fiscal balances. Countries 9 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 such as Egypt, Jordan, Morocco, and Tunisia High oil prices are expected to continue saw fiscal deficits pick up within a range of feeding domestic demand in oil-producing 0.5 to 2 percent of GDP over the course of countries, causing imports to continue rising 2005, in part linked to oil subsidies. Since rapidly, even as growth of export revenue then, Jordan reduced subsidy expenditures by slows. Capacity constraints and strong import 59 percent in the second quarter. In Egypt, growth is projected to slow GDP growth these and other steps have helped reduce among developing oil-exporting countries to the consolidated government deficit from 4.7 percent in 2007 and 4.5 percent in 2008. 9.1 percent in fiscal year 2005 to 6.5 percent Their current account surpluses should decline in 2006. Nevertheless, such subsidies remain from 11 percent of GDP in 2005 to about important in the region and threaten the fis- 5.3 percent of GDP in 2008. In the oil-importing cal sustainability of some countries. They economies, growth is expected to gradually also impede adjustment, although their bal- pick up from 5 percent in 2006 to 5.3 percent ance of payments consequences have been in 2008, reflecting assumed improvements in mitigated by strong remittance and invest- crop conditions, stronger European growth ment flows. and continued robust investment and remit- Rising oil prices during the first eight tance inflows from regional oil exporters. months of 2006 bolstered revenues of the major exporting countries in the region. Oil- South Asia related revenues were up 33 percent in the Rapid growth is pushing against capacity Islamic Republic of Iran and 30 percent in constraints. Algeria, and many governments boosted Despite a tightening of both monetary and spending. Measures included substantial fiscal policy, real interest rates remain low, and investments to augment oil-sector capacity, in- growth in the South Asia region picked up to an frastructure projects, and other non-oil-sector estimated 8.2 percent in 2006. Direct and indi- investments in human and social capital, all rect subsidization of consumer energy prices of which should help boost future supply. have helped contain inflationary pressures but However, a significant share of the additional are keeping government deficits high and con- spending, such as substantial civil service tributing to strong domestic demand. wage increases in several countries and in- With the exception of Nepal, which is only creased spending on fuel subsidies, merely now emerging from political strife, growth stoke demand and may prove difficult to sus- throughout the region was strong in the first tain should oil prices decline further. half of the year. In India, GDP increased by The surge in oil revenue and government 9.3 percent in the first quarter, supported by spending among oil exporters has yet to gen- strong industrial and service-sector produc- erate substantial inflationary pressures. How- tion, while in Pakistan industrial production ever, inflation is up in a number of countries, was up 12 percent. Partly reflecting improved including Egypt, Jordan, Oman, and Tunisia. sales of textiles and clothing after the restric- In the Islamic Republic of Iran, although in- tions on Chinese exports were reintroduced, flation is declining, it still exceeds 10 percent. merchandise exports in the region increased Moreover, regional stock and housing mar- more than 30 percent in the first half of 2006 kets have appreciated enormously throughout (on a year-over-year basis). A good start to the the region. While local markets lost as much monsoon season suggests that agricultural as 25–33 percent of their value in the output (and incomes) will be strong also. May–June 2006 market correction, valua- Overall, regional GDP is projected to increase tions remain high, and there are concerns by 8.2 percent for the year, or 6.4 percent if about increased leverage in private sector bal- the two largest economies (India and Pakistan) ance sheets (IMF 2006). are excluded. In the Maldives a rebound in 10 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y tourism and post-tsunami reconstruction ef- GDP growth should moderate to about 7 per- forts are expected to contribute to a 19 per- cent by 2008. Owing to continued strong cent expansion in GDP, while a new hydro- growth, the region’s current account deficit is electric plant may help boost output in Bhutan projected to deteriorate further despite falling by 10 percent. oil and non-oil commodity prices. Notwithstanding robust export demand and a first-quarter current account surplus Sub-Saharan Africa in India, strong domestic demand is expected Another good year. to result in a small further deterioration of GDP in Sub-Saharan Africa expanded by an regional current account deficits in 2006, estimated 5.3 percent in 2006. Oil-exporting particularly in Pakistan, where increased gov- economies are expected to grow 6.9 percent ernment spending (tied to the Kashmir earth- in 2006, about the same as last year. Among oil quake and ongoing military expenditures) is importers (excluding South Africa), the expan- projected to push the current account deficit sion has been sustained, and growth is esti- to 3.9 percent of GDP. In contrast, strong re- mated to have increased 4.7 percent. mittance flows and robust exports are ex- South Africa, the region’s largest economy, pected to propel the current account of expanded at growth rates above its potential for Bangladesh toward balance. the third consecutive year. Household expendi- Rapid growth and the relatively expansion- ture has been exceptionally strong, benefiting ary stance of fiscal and monetary policies in from low nominal interest rates, rising real in- the region have provoked a rise in inflation. comes, and wealth effects. As a result, domestic Successive hikes in policy rates in India have demand and output growth in the manufactur- increased interest rates, but higher inflation ing and service sectors have been very strong. means that real rates were negative in August. Despite a large positive terms-of-trade shock as In Pakistan, tighter monetary policy brought metal prices soared, the external sector’s contri- inflation down to 6.2 percent in April, but it bution to growth was negative, owing to strong picked up again and was 8.1 percent in Octo- import growth fueled by robust household con- ber. Ample domestic and international liquid- sumption and the stronger rand. The surge in ity has also contributed to substantial in- imports caused the current account deficit to creases in local stock market valuations (up deteriorate to 6.2 percent of GDP in the first half about 45 percent in both India and Pakistan). of 2006, which contributed to the sharp depre- Throughout the region, higher international ciation of the rand during May–June. Overall, oil prices have yet to be fully passed through the rand has depreciated 20 percent on a trade- to consumers, placing a strain on government weighted basis since the beginning of the year, accounts and implying significant additional and this has contributed to inflationary pres- inflationary pressure in the pipeline. sures. Nevertheless, consumer confidence and Despite tighter monetary and fiscal policies demand remain at historically high levels. in India and Pakistan, and weaker export In Nigeria, the region’s second-largest demand from the United States, low real economy, attacks on oil infrastructure slowed interest rates, strong international capital growth, as oil production fell by 25 percent inflows, and high government deficits are during the first five months of 2006. It has expected to keep domestic demand expanding since picked up but remains down 6.5 percent rapidly. When added to the delayed pass- from a year ago. Nevertheless, the non-oil through of higher oil prices, this should main- economy is expanding rapidly (up 12.8 per- tain inflation pressures in the region and cent in the second quarter) and supplementary sustain rapid import growth. As a result, the budgetary spending is expected to bolster external sector is expected to make a significant growth, perhaps leading to a buildup in infla- negative contribution to growth, and regional tionary pressures. 11 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 The regional expansion is broadly based, Inflation is up in a number of countries be- with a third of the countries experiencing cause of higher international oil prices and sea- growth in excess of 5 percent. Among oil sonal and drought-induced increases in food exporters, growth was particularly strong in prices. In the case of South Africa these factors Angola (16.9 percent), Sudan (11.8 percent), have been exacerbated by excessive domestic and Mauritania (17.9 percent), which began oil demand. Inflation there is projected to exceed production in February. In addition to a strong 6 percent, above the upper limit set by the expansion in oil production, buoyant domestic Reserve Bank. In Nigeria, year-over-year infla- demand is projected to spur rapid growth in the tion remains high but is declining rapidly, non-oil sectors of most oil-exporting countries. owing in part to the appreciation of the naira. The aggregate stability and strength of GDP growth for the region as a whole is growth among the region’s oil importers re- projected to remain broadly stable, coming in flects divergent patterns. A number of coun- at about 5.4 percent in 2008, with weaker tries that recently emerged from conflict are growth in South Africa offsetting a pickup experiencing very strong growth rates among oil exporters and stable growth (Burundi, the Democratic Republic of Congo, among smaller oil importers. In South Africa, Liberia, and Sierra Leone). Elsewhere strong higher interest rates are projected to over- international metal and mineral prices are come strong mining and manufacturing generating revenue streams and prompting ad- growth in 2007, before the latter forces gen- ditional investments, which have contributed erate a recovery in 2008. In the baseline pro- to strong growth. However, drought-related jection, emerging electrical shortages due to crop failure, high fuel costs, and energy ra- insufficient generating capacity are expected tioning have resulted in weaker results for to constrain growth in Burundi, Kenya, East African oil-importing countries. In addi- Malawi, Rwanda, Tanzania, Uganda, and tion, although both the numbers and the in- Zambia, but improved rainfall in East and tensity of conflicts in Africa have subsided, the West Africa should help replenish hydroelec- risks associated with political turmoil remain tric dams, thereby improving electrical supply high and are undermining growth in Chad, and manufacturing output. An end to Côte d’Ivoire, the Democratic Republic of drought should also boost agricultural output Congo, Eritrea, Lesotho, the Seychelles, Somalia, and domestic incomes, although weaker agri- Swaziland, and Zimbabwe. cultural prices and high fertilizer prices may Current accounts have come under pres- negatively affect agricultural crops and could sure in several oil-importing economies in the represent a drag on growth. region, although higher commodity prices and increased official and private transfers have helped contain the deterioration. The most Financial markets notable decline in the current account came in Some signs of emerging inflationary South Africa, where an initial appreciation of pressures the rand boosted imports and dampened ex- High oil prices and the rapid pace of global ports, driving the current account deficit to growth have contributed to a gradual increase 6.2 percent of GDP in the first half of 2006. in median inflation among developing coun- Debt relief from Paris Club creditors under the tries, from about 1.7 percent in 2002 to Multilateral Debt Relief Initiative should re- 3.2 percent during the third quarter of 2006 duce debt-servicing cost by substantial mar- (figure 1.3). The acceleration was not consis- gins in several countries, which, in combina- tent across the globe. Inflation has been stable tion with the expected easing in oil prices, is or declining in half of the developing regions projected to provide some relief to current over the past year, falling to an average accounts over the projection period. level of 5.3 in the third quarter. In contrast, in 12 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y high-income countries it rose from 1.3 to 2.7 percent before falling to 1.4 percent in October as oil prices declined. Most of the increase appears to reflect the di- rect impact of higher oil prices. Until recently, core inflation in high-income countries has been relatively stable (figure 1.4). Core inflation in the United States was rising much of the year, but it has been easing recently and stood at 2.7 percent in October 2006. In many developing countries, inflation first picked up in response to higher oil prices, but it has since declined, re- flecting both solid productivity growth and the impact of more credible monetary policies that have helped anchor inflation expectations. However, developments in a number of low- and middle-income countries run counter to these general trends. In these countries, infla- rapid growth, high food prices following suc- tion is rising, reflecting the combined influence cessive droughts are playing a role. The con- of several years of above-trend growth and cern is that if an inflationary spiral develops, steep increases in global commodity prices because the credibility of monetary policy is (figure 1.5). Higher inflation would appear to not yet well entrenched, it could have serious reflect overheating in Argentina and several consequences for macroeconomic stability and countries in Europe and Central Asia, the affect the ability of those economies to sustain Middle East, North Africa, and South Asia. the strong growth of the past several years. Inflation has also picked up in Sub-Saharan In countries such as India, regional imbal- Africa. There, in addition to several years of ances in the distribution of growth contribute 13 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 to difficulties because inflationary pressures bonds and nonindexed bonds, which has re- and capacity constraints are concentrated in mained relatively stable at around 2.5 percent- rapidly growing cities and co-exist with con- age points. siderable slack elsewhere in the economy. More volatile financial conditions Rising short-term interest rates for developing countries Higher inflation throughout the developed Despite high short-term interest rates, finan- world has translated into rising short-term cial conditions for developing countries re- interest rates and the gradual removal of the main highly favorable. Several years of very monetary policy stimulus that has character- loose monetary policy, an ample supply of ized the past several years. Although policy global savings (due to aging populations in rates are increasing throughout the developed Europe and rapidly increasing incomes world, the process is most advanced in the among oil exporters), business-sector consoli- United States, while at relatively early stages dation in the United States and Asia, and in Europe and Japan. Many developing coun- high savings rates in the fastest-growing sec- tries also have acted to restrain credit expan- tors of the world economy have combined to sion and contain inflation. Policy rates have buoy global liquidity. This helps explain the risen sharply and appear to be slowing infla- low long-term bond yields and the search for tion in Bulgaria, Indonesia, Thailand, and yield that has boosted the flow of private Turkey. In others (Argentina, India, Pakistan) capital to developing countries. That flow, in the tightening cycle is less advanced and, as a combination with improved fundamentals, result, real interest rates remain low and in- has brought interest spreads down to histori- flation high. cally low levels.5 Long-term interest rates (see figure 1.8) re- However, conditions have become more main low and the yield curve flat, suggesting volatile (figure 1.6). The transition from a slow that markets are confident that the monetary and widely anticipated tightening of U.S. mon- authorities will be successful in containing etary policy toward a more data-driven ap- inflationary expectations—a contention sup- proach increased uncertainty in financial mar- ported by the spread between inflation-indexed kets during the second quarter of 2006. Initially, 14 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y the prospect that dollar-denominated returns some countries, particularly those with large would no longer be rising resulted in a surge of current account deficits (such as South Africa flows into emerging market stocks, commodity and Turkey) and relatively heavy debt bur- markets, and currencies. As values of these dens, the correction was more severe and is assets rose, the market reassessed long-term expected to result in much slower growth in prospects, resulting in a substantial correction. 2006 and 2007, as the real side of these For the most part, this volatility failed to economies adjusts to weaker financial inflows. disrupt growth, and net private capital flows to The combination of several years of low in- developing countries are expected to rival last terest rates has increased global liquidity sub- year’s record highs (figure 1.7). However, in stantially (see earlier versions of Global Eco- nomic Prospects and Global Development Finance). Despite the increase in short-term interest rates, the persistence of low long-term interest rates, due in part to high savings rates among oil-exporting countries, has kept global liquidity abundant. The OECD (2006) estimates that depending on the measure em- ployed, high-income liquidity exceeds histori- cal norms by between 15 and 17 percent (fig- ure 1.8). In the baseline, although interest rates are projected to rise somewhat, liquidity is projected to remain relatively abundant and continue to be a factor behind strong developing-country growth. Global imbalances are stabilizing The imbalances in global spending patterns that have characterized the world economy over the past five years began to show signs of 15 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 An important component of this story has been the slowing in U.S. domestic demand and the simultaneous increase in developing- country domestic demand (figure 1.9). This rotation of growth, plus the lagged effect of past depreciations, contributed to a 13 per- cent increase in the volume of U.S. exports in the first half of 2006, almost twice the growth rate for imports (7 percent). Nevertheless, the U.S. trade balance declined further, in part because of very high oil prices during the first eight months of the year. The subsequent decline in oil prices should reduce the value of U.S. imports, resulting in an improved trade balance during the fourth quarter. Because of this strong volume performance and declining oil prices, global imbalances are not expected to deteriorate significantly over the projection period—in stark contrast to the recent past, when they deteriorated sharply each year (figure 1.10). stabilizing in 2006. Weaker domestic demand in the United States, the acceleration of eco- nomic activity in Europe, and continued Exchange rates are broadly stable recovery in Japan helped to stabilize the U.S. Despite the substantial financial flows required current account deficit, which is expected to to finance the U.S. current account deficit, the come in at about $850 billion, roughly the dollar has remained broadly stable against major same share of GDP as in 2005. currencies during 2006—up about 2 percent 16 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y surpluses (China and several oil exporters) have resisted upward pressure on their curren- cies with respect to the dollar. The depreciation against the euro occurred despite a substantial premium currently being offered on both short- and long-term U.S. bonds (see figure 1.11). With U.S. monetary policy nearing or at the end of its tightening cycle, these differences are expected to nar- row. In the baseline forecast, this narrowing and slower growth in the United States are projected to cause the dollar to depreciate by a further 5 percent against the euro in each of 2007 and 2008, which should further facili- tate the unwinding of global imbalances. However, should downward pressures be more severe, the depreciation could be stronger or interest rates in the U.S. may have to rise further (see the section on risks). Currency developments for the remaining against the yen and depreciating by about 5 per- developing countries were dominated by the cent against the euro. In real-effective terms it reemergence of financial market volatility in has lost only 2 percent of its value. In part, this the first half of 2006 (figure 1.12). Downward relative strength is explained because many of pressure on the dollar toward the end of 2005 those countries running large current account and at the beginning of 2006 saw the currencies 17 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 of many developing countries appreciate and China increased by 10 and 30 percent, re- strongly. For many countries that appreciation spectively. Trade flows weakened in the sec- was reversed in May and June as investors re- ond quarter but show signs of picking up once assessed their positions. While disruptive, and again in the third quarter. provoking a sharp rise in interest rates in some Over the medium term, growth in mer- countries, the volatility was short-lived and in chandise trade volumes is projected to ease to most cases merely served to unwind earlier about 9 percent, in line with slower global appreciations that had been out of step with GDP growth. The recent relative strength of countries’ underlying fundamentals. U.S. export volumes is projected to persist (figure 1.13). Those volumes are projected to rise by more than 9 percent in 2007 and 2008 World trade as the cumulative effect of past and expected S tronger industrial activity was mirrored in world trade. Merchandise trade growth grew 11 percent during the first eight months future depreciations increase the international competitiveness of U.S. products. For develop- ing countries, weaker U.S. import demand of 2006, up from 6 percent the year before. should be partially compensated by stronger Most of the acceleration occurred in China, demand from Europe, but, overall, developing- Japan, and the United States and was concen- country export growth is projected to slow trated in the first quarter. Weaker U.S. con- from an estimated 12.2 percent in 2006 to sumption and investment demand, and grow- 10 percent in 2008, even as countries continue ing domestic demand in the developing world to increase their market share. combined with the lagged effects of past de- preciations to boost U.S. export volumes by Trade outlook—continued expansion an annualized rate of 13 percent in the first Developing-country trade reached a landmark half of 2006, compared with 7 percent in the in 2006. Following 25 years of solid growth, last half of 2005. Measured on the same basis the value of China’s exports overtook those and over the same period, exports in Japan of the United States, making China the world’s 18 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y second-largest exporter. Increasing exports in becoming privileged destinations for FDI, other developing countries, notably Brazil and both as an export platform for multinational India, have further increased the weight of companies and because they represent the developing countries in world trade (fig- fastest-growing market segment. ure 1.14). Over the long term, as these trends The extent to which other developing continue, the share of developing countries in countries will be able to take advantage of the world trade is projected to reach some 45 per- expected continued strong growth of China cent by 2030 (see chapter 2). and India (see chapter 2) will depend on their While the phenomenal success that China ability to expand exports. This requires has enjoyed in expanding its world market eliminating the anti-export bias in their incen- share since the introduction of market reforms tive framework, reducing costs of produced has increased competitive pressure on both services, and improving customs procedures developing and developed countries (see that undermine competitiveness. It also chapter 4), Chinese imports also have grown requires investments in transport systems to very rapidly (up 477 percent in value terms over reduce transit times (Newfarmer 2005) and in the past decade), and China is a growing desti- other forms of infrastructure, such as electri- nation for the exports of other developing coun- cal generators so as to facilitate the expansion tries (Dimaranan, Ianchovichina, and Martin of capacity. In addition, as discussed in chap- 2006). Sixty-three percent of China’s imports ter 4, countries need to reduce rigidities are intermediate goods, 31 percent in the form in product, labor, and financial markets so of parts and components. Overall, 79 percent of that firms can react with agility to new China’s imports are sourced from developing opportunities to expand the range of products countries. Partly as a result of China’s rapid they produce and sell. increase in imports, the value of other develop- On the multilateral front, the suspension of ing countries’ non-oil exports has risen by talks on the Doha Round in July 2006 poses 153 percent, and their global market share has significant challenges. Weakened confidence in increased by 2.3 percentage points. the multilateral system could lead to trade dis- In addition to these direct effects, the ex- putes, rising protectionist sentiment, and trade pansion of developing-country commerce diversion arising from proliferating bilateral means that these countries are increasingly and regional trade agreements. To capitalize on 19 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 progress already made in the Doha Round, gains in dollar terms, up 7 percent by the be- such as the offer to end agricultural export sub- ginning of November, but were broadly stable sidies by 2013, it is important that parties re- if expressed in euros. turn to the negotiating table with the necessary The biggest increases in metals prices were flexibility to conclude an ambitious deal. those of copper (up 64 percent), zinc (up 110 percent), and nickel (up 144 percent). High prices and continued strong demand Commodity markets have prompted significant destocking of S trong global growth, and especially the rapid expansion of output in developing countries, is largely responsible for the run-up copper and nickel in China—suggesting that prices may remain high even as supply disrup- tions ease. Nevertheless, stocks of other prod- in commodity prices over the past several years. ucts such as aluminum, lead, and tin have Improvements in technology and new discover- recovered, and their prices have eased or sta- ies are expected to preclude any major disrup- bilized, suggesting that a peak in the metals tions to growth over the long term (see chapter market may have been reached. 2), but increased demand for energy and other Financial sector activity also played a big natural resources may generate significant en- role in price developments during 2006. Re- vironmental pressures (see chapter 5). cent estimates suggest that more than $19 bil- lion flowed into retail commodity funds dur- Non-oil commodities ing the first eight months of the year, when Metals and minerals take off. prices were rising. More recently, these flows While oil-price increases have received the have reversed sharply. Outflows from ex- bulk of media attention, the rise in the price of change-trade commodities totaled $12 billion metals and minerals during the course of 2006 during the first two weeks of September, when has been much stronger (figure 1.15). Contin- prices were falling (Norman and Shen 2006). ued rapid growth in global output, speculative With global growth projected to slow some- demand, low stocks, and numerous supply what but remain strong, the overall metals and disruptions have pushed metals and minerals minerals index is expected to decline in 2007 prices up by some 48 percent since the begin- and 2008, but remain elevated. ning of 2006. Agricultural prices also posted Moderate gains in agricultural prices. Agricultural prices have risen an estimated 11 percent in 2006 compared with 2005, re- flecting a weaker dollar and the impact of higher energy and fertilizer prices. Other fac- tors, such as crop-specific supply shortfalls and droughts, low carryover stocks, and strong demand growth contributed to the price increases. Real agricultural prices have increased 35 percent since their cyclical lows in 2001.6 This increase is well below the in- creases in oils and metals, in part because agricultural demand is less sensitive than industrial demand to economic growth, and because agricultural supply responds more quickly to increased demand and prices. High energy prices have contributed directly to the surge in the price of some agricultural 20 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y commodities that are either used as energy cost-push factors and because higher energy crops (biofuels) or compete with synthetic prices make biofuel more economically viable, products made from petroleum. The price of generating an additional source of demand sugar, which is being diverted to ethanol pro- for products such as maize and sugar cane. duction for automotive fuel, more than dou- Already, 20 percent of the U.S. maize crop and bled from late 2004 until early 2006, while 50 percent of the Brazilian sugar cane crop are that of natural rubber (a substitute for synthet- used to produce ethanol. Should this trend ics produced from petroleum products) rose continue, demand for other commodities, 60 percent between December and June 2006. especially grains, will increase to substitute for The price of maize, which is used as the feed- crops used for biofuels. stock for ethanol production in the United States, is expected to rise 8 percent in 2006. Oil market High energy costs also have contributed to Rising supply and slow demand cause prices increasing agricultural prices by raising the to ease. cost of fertilizers. This prompts an increase in After showing signs of stabilizing in the fall the cost of production of agricultural goods, of 2005, the price of oil shot up once again in but also induces a reduction in yields because the first half of 2006 (figure 1.16). Prices have farmers use less fertilizer. As a result, energy- since declined and were below $60 in late and fertilizer-intensive crops such as grains are November—bringing the price of oil below expected to show reduced yields and higher the level at which it began the year. Expressed prices in 2006. These factors, plus low carry- in euros, the price has declined 7 percent since over stocks and poor harvests in several im- the beginning of the year and stands at about portant producing areas, are projected to push the same level as before the hurricanes of last wheat prices up 28 percent in 2006 and even summer and fall. higher next year before production increases High prices slowed the growth in demand enough to rebuild stocks. In the case of rice, for oil despite the acceleration in economic higher costs and reduced yields are expected activity in 2006. Oil demand increased by to boost prices by 8 percent. 0.5 million barrels per day (mbpd) in the three In contrast, prices of fats and oils are ex- quarters of 2006, compared with 3.2 mbpd pected to be 5 percent lower, because markets appear to be well supplied. Drought in Kenya is keeping tea prices high (up 14 percent from 2005). Robust coffee prices are expected to av- erage 18 percent higher in 2006, a continuation of the price increases that began in 2002. Timber prices are projected to increase 14 percent owing to strong demand, particularly from China, while international supplies remain limited be- cause of controlled logging and export quotas. Prospects for agricultural prices in 2007 are mixed, with grains and oilseeds higher, while beverages and raw materials prices will be lower. Overall, agricultural prices are ex- pected to decline by about 1 percent in 2007 and 2.8 percent in 2008 as higher prices begin to moderate demand and induce increased supply. Should oil prices rise further, agricul- tural prices could also strengthen because of 21 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 in 2004 (figure 1.17). Demand among OECD countries actually declined by about 0.5 mbpd, and although demand in develop- ing countries continued to increase by just under 1 mbpd, this was much slower than the increases recorded in 2003 and 2004. Econometric estimates suggest that had prices remain unchanged, oil demand would have increased by some 2–2.5 mbpd.7 Notwithstanding some three years of higher prices since the recent upward trend in oil prices began in early 2003, and the arrival on stream of new fields in Africa and elsewhere, aggregate non-OPEC (Organization of Petroleum Ex- porting Countries) oil supply was relatively slow to increase (figure 1.18).8 Most recently, there has been a pickup in deliveries from the former Soviet Union and other non-OPEC sources, with the result that supply rose by 0.8 mbpd during the first nine months of 2006. Despite the limited responsiveness of sup- the world vulnerable to a significant supply ply in the first half of 2006, growth of final oil shock (see the section on risks below). It is demand was even weaker, and as a result in- that vulnerability, plus concerns about future ventories and global spare capacity increased Middle East supplies, that provides the best somewhat (figure 1.19). However, spare explanation for the increase in oil prices capacity remains low (at just 3 mbpd), leaving observed during the spring and early summer. 22 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y Financial market speculation also likely economists at that time, the world plunged played a role, especially in the first half of into the Great Depression. Thus, while much 2006, when a weakening dollar coincided in the current environment is reassuring, a with a significant run-up in emerging-market note of caution is merited. assets (among them the prices of some com- The remainder of this chapter explores four modities), followed by a significant reversal in main risks to the outlook. May and June. An indication of the impor- tance that such forces may have played was Overheating could provoke the 30 percent fall in U.S. wholesale gasoline a sharper slowdown prices in August following the decision of The world economy and, in particular, devel- Goldman Sachs to reduce the share of gasoline oping countries have been expanding at near- in its commodity indexes. record rates over the past few years. So far, the Over the near term, limited spare capacity inflationary effects of fast growth have been and strong global growth suggest that oil largely confined to the markets for global prices will remain volatile. However, high goods, such as commodity markets. The prices should continue to moderate demand inflationary response at the national level has growth, while investments in new capacity al- been remarkably muted. Improved monetary ready in the works are projected to increase policy has succeeded in anchoring inflationary output by about 15 mbpd by 2010, implying a expectations at low levels, while competitive 3 mbpd annual increase—well above expected pressures induced by the entry into the global increases in demand of between 1.5 and 2 mbpd marketplace of the countries of the former annually. As a result, the price of oil is projected Soviet Bloc and China, with their relatively to decline modestly over the next two years, high skills and low wages (see chapter 4), have reaching an average level of $53 in 2008. boosted global productivity and kept the pric- ing power of firms in check. In the baseline pro- jection these factors are assumed to continue to Downside risks predominate hold sway, while tightening of monetary policy A number of factors suggest the soft-landing scenario outlined above as the most likely outcome. Tighter monetary policy in high- and slower growth in countries where signs of a pickup of inflation have emerged are as- sumed to prevent inflation from rising further. income and a number of developing countries However, long-term interest rates are pro- is slowing growth in those countries and jected to remain low and international finan- should alleviate inflationary tensions. Mean- cial conditions relatively loose. As a result, while, still-low long-term interest rates and global growth is expected to remain strong emerging-market spreads are expected to and further inflationary pressures may yet maintain favorable external conditions for de- emerge. In particular, given projected levels of veloping countries, allowing them to grow at global demand, further price hikes in com- a slower but still robust pace of 6 percent. modity markets cannot be ruled out. While the soft landing is the most likely Moreover, should measures to slow growth scenario, the global economy is at a turning in several key developing economies point following several years of very strong (Argentina, China, India, and many European growth—and such periods are fraught with and Central Asian economies) fail, as they risk. Indeed, as described in chapter 2, the last have to varying degrees in recent years, infla- century began under similarly auspicious tion in those countries could pick up. That circumstances, characterized by an extended could lead to a more marked slowdown later period of strong growth buoyed by technolog- on, either because of a much sharper tighten- ical change and ample liquidity. Rather than ing of policy or because of endogenous factors continuing forward as anticipated by leading such as a loss of external competitiveness. 23 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 A housing market crisis could growth observed in the second and third cause a recession quarters, which is projected to continue into Growth in the United States and several other the first half of 2007. high-income countries9 has been bolstered The risk is that the slowdown may be much over the past several years by rapidly rising more severe, either because house prices de- housing prices. In the United States, rising cline more sharply or because the indirect ef- housing prices increased household wealth by fects of the anticipated 9.3 percent decline in 14.6 percent of GDP between 2000 and mid- residential investment has wider impacts on 2006. The pickup in housing valuations was the rest of the economy. A much steeper slow- spurred by low interest rates and the intro- down following a sharp decline in housing duction of new interest-only variable-rate prices11 could accentuate the decline in resi- mortgages. Higher valuations in turn gener- dential investment, driving it down by as ated a boom in home-equity withdrawals, much as 20 percent from its level in mid-2006, which boosted consumer spending and resi- while the reversal in the trend to household dential investment. wealth could cut as much as 1 percent from As short-term interest rates rose, demand growth in personal consumption. On the plus for variable-rate mortgages dried up, and the side, Australia, the Netherlands, and the rate of increase of housing prices cooled sub- United Kingdom have all observed substantial stantially10 (figure 1.20). By the third quarter decelerations and even declines in housing of 2006, the contribution to growth of resi- prices without recession (see OECD 2006 for dential investment had swung from a strong more details). 0.5 percentage points in 2005 to a strongly Such a shock could prompt a recession in the negative Ϫ1.1 percentage points. That swing, United States, with growth slowing to as little as plus the end of the additional consumption –0.2 percent of GDP in 2007 and 2.7 percent in demand generated by home-equity with- 2008. Slower growth would weaken inflation- drawals, underlies the slowdown in U.S. ary pressure in the United States, allowing for lower interest rates in the course of 2007, help- ing to spur a recovery toward the end of 2008. Such a U.S. recession would affect develop- ing economies through three channels: reduced exports to the United States, lower commodity and oil prices owing to slower global growth, and more favorable financing conditions. The balance of these forces would vary across re- gions and countries. Regions with the tightest trade ties, such as Latin America and East Asia, would suffer the greatest negative im- pact. The combination of weaker domestic demand in the United States and less marked slowdowns elsewhere would help to reduce global imbalances. A disorderly unwinding of global imbalances remains possible The rotation of growth away from the United States and increased consumption demand in Europe and the developing world are welcome developments that mark the beginning of an 24 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y orderly adjustment of global imbalances. In countries, both because of its dampening ef- particular, they signal an end to a troubling fect on investment and potential output and trend of rapidly rising U.S. current account because a rapid adjustment would inevitably deficits. While relative stability should reduce result in greater short-term misallocations of financial market concerns, the financing of the resources. gap in the U.S. current account, at 6.5 percent In the baseline scenario, financial sector ad- of GDP, remains a challenge. Such a deficit is justments are assumed to be benign. The ex- not sustainable over the long run. Each year, it pected narrowing of short-term interest-rate augments the net international debtor position differentials is projected to prompt investors of the Unites States and its financing costs. The to continue shifting assets into euros, placing United States has already become the world’s downward pressure on the dollar. This should largest net debtor, with the value of foreign- be offset somewhat by a tendency for U.S. owned U.S. assets exceeding that of U.S.-owned long-term rates to rise relative to those in foreign assets by 21 percent of U.S. GDP in Europe. While the relative depreciation of the 2005. In addition, the balance of the interest dollar should be smooth, the dollar could payments on these debts was Ϫ$8.8 billion weaken quickly if investors were to react ner- during the first three quarters of 2006, the first vously. That would provoke much higher U.S. time in some 30 years that the United States interest rates and a sharper slowdown. Such a paid out more than it received on internation- risk can be reduced by collaborative policy ac- ally held financial assets. Unless savings in the tions to increase public and private savings in United States increase substantially, even as- the United States, strengthen demand in the suming further improvements in the trade bal- rest of the world, and provide for more ance, the net asset position of the United States flexible management of exchange rates. will continue to deteriorate, potentially reach- However adjustment occurs—be it a sharp ing between 65 and 48 percent of GDP by 2015 adjustment led by the financial sector or a more (Higgins, Klitgaard, and Tille 2005). gradual real-side adjustment—the process is As long as the trend toward real-side ad- likely to be relatively short-lived in the context justment (increased savings in the United of the 25-year projections reported in chapter States and increased domestic demand and 2. Although a disorderly adjustment would imports abroad) continues, the resolution of imply up to two years of substantially below- global imbalances should proceed in an or- trend growth for the global economy, this derly manner, even though it may take several would have minimal effects on the average years beyond our medium-term projection long-term growth rates reported there. period (2006–08) before the U.S. current account deficit reaches sustainable levels. An oil-sector supply shock could That said, the medium-term risk to the global disrupt growth economy remains that adjustment will occur With spare production capacity at only not on the real side but on the financial side, 3 mbpd, the world oil market remains vulner- either because investors rapidly lose confi- able to a supply shock. Because no country dence in the dollar—thereby provoking a cur- can easily ramp up production, if output in a rency crisis, much higher U.S. interest rates, producing country were to fall significantly, and financial market turmoil—or because world supply would fall, provoking a decline they increasingly demand higher interest rates in economic activity. on U.S.-denominated assets. While this would Simulations presented in last year’s Global help increase U.S. savings and therefore has- Economic Prospects (World Bank 2006) sug- ten adjustment compared with an orderly ad- gest that a negative supply shock of two mil- justment, it would do so at greater cost in lion barrels per day that caused oil prices to terms of growth in high- and low-income double for a period of three months and then 25 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 remained at $80 for nine further months World Bank’s East Asia update provides more detailed would cause global output to shrink initially information on recent developments and prospects for the East Asia and Pacific region (www.worldbank.org/ by about 1.5 percent of GDP, as compared eapupdate/). with the baseline scenario.12 Inflation would 3. In addition to the Prospects for the Global pick up rapidly, and on average the current Economy Web site (www.worldbank.org/globaloutlook), account position of oil-importing countries which describes regional developments in more detail, would deteriorate by about 1.1 percent of the World Bank’s Middle East and North Africa GDP. The impact would be more severe in Web site, Economic Developments and Prospects large low-income and middle-income coun- (www.worldbank.org/mena) provides an even more comprehensive discussion of recent economic develop- tries, both because of higher energy intensities ments, projections, and policy priorities. and a greater inflationary impact, which re- 4. For the purposes of this report the developing quires a larger contraction to eliminate. countries of the region are Algeria, the Arab Repub- While the impact in terms of GDP for lic of Egypt, Jordan, the Islamic Republic of Iran, current-account-constrained low-income coun- Morocco, Oman, the Syrian Arab Republic, Tunisia, tries is smaller, it is more severe in terms of and the Republic of Yemen. Djibouti, Iraq, Lebanon, domestic consumption and investment. Such and Libya were excluded from the projections be- cause of a lack of data. Important regional players countries have limited access to international such as Bahrain, Kuwait, Qatar, Saudi Arabia, and capital markets and their capacity to pay the United Arab Emirates are included in the high- higher oil prices is limited by their export rev- income aggregate. enues. If these revenues are stable, such coun- 5. As of early November 2006, the credit ratings of tries would be forced to reduce domestic 34 emerging market countries have been upgraded. demand and non-oil imports in order to pay Only 3 have been downgraded. their higher oil bill. As a consequence, when oil 6. Agricultural prices are quoted in U.S. dollars and therefore have been deflated by U.S. inflation. prices rise, oil consumption remains relatively 7. The short-term price elasticity of oil demand constant in terms of volume (being generally is estimated at between Ϫ0.01 and Ϫ0.2 percent inelastic in the short run), but the oil bill rises. (Burger 2005), implying that immediately following a To compensate, non-oil imports and domestic 100 percent increase in oil prices, such as observed demand tend to decline in unison—leaving between 2002 and 2005, oil demand would be GDP relatively unchanged. For these countries, expected to decelerate by between 1 and 20 percent. the terms-of-trade-shock of the initial increase Long-term elasticities are larger (between Ϫ0.2 and Ϫ0.6 percent), implying that the negative effect of in oil prices is estimated at 4.1 percent of their higher prices over the past few years will continue to GDP, which would translate into a 2.7 percent be felt. decline in domestic demand, with potentially 8. In the three years following both the 1973 and serious impacts on poverty. 1979 oil price hikes, non-OPEC and non–former Soviet Union oil producers increased their output by some 3.5 million barrels per day. In contrast, since 2002, production from these sources has actually de- Notes clined. OPEC did increase its deliveries during 2004 by 1. Housing prices, which had been rising by 10 per- drawing down its spare capacity, but so far investment cent a year, declined at a 1.2 percent annualized pace to increase that capacity has been limited. in the third quarter of 2006. As a result, increases in 9. Robust increases in residential investment and household wealth slowed, and home-equity with- rising housing prices have been important drivers of drawals, which boosted GDP growth by as much as growth in recent years in Canada, Denmark, France, 1 percentage point during 2000–05, turned negative. Ireland, Spain, and the United States. At the same time, the contribution of residential in- 10. As of September 2006 the median sales price of vestment to GDP growth fell from 0.5 percentage houses in the United States had fallen 1.2 percent (year- points in 2005 to Ϫ0.7 and Ϫ1.1 percentage points in over-year). This measure, produced by the National As- the second and third quarters of 2006, respectively. sociation of Realtors, differs from data provided by the 2. In addition to the Prospects for the Global OFHEO, which are reproduced in figure 1.20, because it Economy Web site (www.worldbank.org/outlook) the does not control for the quality of the houses being sold. 26 P R O S P E C T S F O R T H E G L O B A L E C O N O M Y 11. Girouard and others (2006) estimate that U.S. OECD Economics Department Working Papers housing prices have a more than 75 percent chance of No. 475. falling if interest rates rise by 100 basis points. Higgins, Mathew, Thomas Klitgaard, and Cedric Tille. 12. Studies suggest that the likelihood of such a dis- 2005. “The Implications of Rising U.S. Interna- ruption occurring over the next several years may be as tional Liabilities.” Current Economic Issues (Fed- high as 70 percent (Beccue and Huntington 2005). eral Reserve Bank of New York) 11(5). Institute for International Finance. 2006. Capital Flows to Emerging Markets. References IMF (International Monetary Fund). 2006. World Eco- Beccue, Phillip C., and Hillard G. Huntington. 2005. nomic Outlook: Financial Systems and Economic “An Assessment of Oil Market Disruption Risks.” Cycles. Washington, DC: IMF. Final Report of Energy Modelling Forum & SR 8, Newfarmer, Richard. 2005. Trade, Doha, and Devel- Energy Modeling Forum. October. opment: A Window into the Issues. Washington, Burger, Victor. 2005. “House Prices in Developing DC: World Bank. Countries.” World Bank, Washington, DC. Norman, John, and Lei Shen. 2006. “How Much Dimaranan, Betina, Elena Ianchovichina, and Will Money Has Left Commodities?” Global Cur- Martin. 2006. “Competing with Giants: Who rency & Commodity Strategy (JP Morgan, New Wins, Who Loses?” In Dancing with Giants: York), September 18. China, India, and the Global Economy, ed. L. Alan OECD (Organisation for Economic Co-operation and Winters and Shahid Yusuf. Washington, DC, and Development). 2006. OECD Economic Outlook Singapore: World Bank and Institute of Policy 80 (December). Studies. World Bank. 2006. Global Development Finance Girouard, N. and others. 2006. “Recent House Price 2006: The Development Potential of Surging Developments: The Role of Fundamentals.” Capital Flows. Washington, DC: World Bank. 27 Appendix Regional Economic Prospects East Asia and the Pacific regional Growth in Vietnam was also very robust at 8 percent. Growth in the region excluding prospects China is expected to reach a more modest Recent developments 5.4 percent, the same as in 2005 (table A.1). The economies of East Asia and the Pacific con- Rapid investment growth, and a surge in ex- tinued to expand rapidly in 2006, with regional ports as new capacity came on stream, saw the gross domestic product (GDP) estimated to Chinese economy expand by 10.7 percent have increased 9.2 percent in 2006, the highest (year-over-year) in the first nine months of regional growth rate since 2001.1 Once again 2006. Robust expansion in credit and money China led the region with 10.4 percent growth. supply, in part fueled by strong balance of Table A.1 East Asia and the Pacific forecast summary Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 GDP at market prices (2000 US$)b 8.3 8.8 9.0 9.0 9.2 8.7 8.1 GDP per capita (units in US$) 6.9 7.8 8.1 8.1 8.3 7.8 7.2 PPP GDPc 8.9 9.2 9.2 9.3 8.8 8.2 Private consumption 7.3 6.1 7.3 7.7 6.0 6.5 7.3 Public consumption 7.3 5.3 6.3 5.9 4.0 6.3 6.4 Fixed investment 9.7 17.0 11.8 9.6 8.9 11.7 9.0 Exports, GNFSd 12.4 17.8 22.4 17.7 16.1 12.7 11.9 Imports, GNFSd 12.0 17.0 19.4 12.5 13.1 14.0 12.8 Net exports, contribution to growth 1.2 5.3 7.0 9.6 11.4 11.3 11.2 Current account balance/GDP (%) 0.4 3.5 3.4 5.8 7.0 6.4 5.9 GDP deflator (median, LCU) 6.6 3.4 4.2 3.0 2.7 4.7 3.4 Fiscal balance/GDP (%) Ϫ0.8 Ϫ2.5 Ϫ1.8 Ϫ1.3 Ϫ1.1 Ϫ1.1 Ϫ1.0 Memo items: GDP East Asia, excluding China 5.9 5.5 6.1 5.4 5.4 5.7 5.9 China 9.5 10.0 10.1 10.2 10.4 9.6 8.7 Indonesia 3.3 4.9 5.1 5.6 5.5 6.2 6.5 Thailand 3.6 7.0 6.2 4.5 4.5 4.6 5.0 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. c. GDP is measured at PPP exchange rates. d. Exports and imports of goods and nonfactor services. 29 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 payments inflows, helped support an accelera- tion in domestic demand, whose contribution to growth increased to an estimated 7.3 per- centage points in 2006, up from 5.6 percentage points the year before. Investment demand was particularly strong in the first half of the year, but efforts to contain it via tighter monetary policy and sector-specific administrative mea- sures2 resulted in a modest slowing of GDP in the third quarter to a 10.4 percent pace. Notwithstanding an estimated 20.3 percent increase in the volume of exports during the course of the year, the contribution of the ex- ternal sector to growth may turn out margin- ally lower than in 2005 because imports accel- erated compared with 2005, increasing by an estimated 16.7 percent. Nevertheless, China’s trade surplus increased further, reaching $110 billion during the first nine months of the year, already higher than the total for all of 2005, and its international reserves now exceed domestic consumption and investment. GDP is $1 trillion. Moreover, owing to years of annual expected to increase by 5.5 percent for the year export growth of more than 20 percent, China as a whole. Vietnam’s 8 percent growth has overtook the United States as the world’s been backed by across-the-board strength in second-largest exporting nation during the exports, domestic consumption, and invest- course of this year. ment. Both Malaysia and the Philippines are Growth in the rest of the region has also estimated to have grown by about 5.5 percent. been robust—if less spectacular—with smaller This robust result in the Philippines occurred countries averaging a broadly stable 5.4 per- despite a substantial tightening of fiscal policy, cent growth rate. A rebound in global high- whose effects on GDP were countered by a tech demand and stronger import demand recovery in agriculture and strong growth of from China prompted an acceleration of ex- electronic exports, outsourced back office ports (figure A.1), which offset weaker domes- services, and remittance inflows. In Thailand tic demand growth owing to higher oil prices growth was flat at 4.5 percent in 2006, as de- and a widespread tightening of monetary poli- pressed domestic demand (reflecting high oil cies around the region, together with fiscal prices, political uncertainty, and turmoil) offset tightening in some economies. a rebound in export activity. Cambodia is esti- Outturns across countries were varied, mated to have grown an unprecedented 13.4 ranging from an estimated high of 8 percent in percent in 2005, driven by solid garment Vietnam to close to zero growth in the exports, strong tourism receipts, significant Solomon Islands. In Indonesia, growth slowed growth in foreign direct investment (FDI), a at the end of 2005 and in early 2006 as do- continuing construction boom, and record mestic demand eased following a $10 billion agricultural crops. Growth in Fiji in 2006 was reduction of fuel subsidies in the latter part of more modest at 3.1 percent, reflecting robust 2005, a series of natural disasters, and mone- expansions in the agriculture, forestry, fishing, tary and fiscal policy tightening.3 Activity and services sectors. GDP is estimated to have appears to be picking up now, with monthly increased by more than 7 percent in both indicators suggesting a strong rebound in the Lao People’s Democratic Republic and 30 R E G I O N A L E C O N O M I C P R O S P E C T S Mongolia. The outturn in the Lao PDR reflects Inflationary pressures in the region had improved monetary and fiscal policy discipline, picked up because of higher oil prices and trade reforms, private sector development, sustained rapid growth. However, they ap- and public financial management, while in pear to have peaked in 2006, owing to rapid Mongolia industrial production, mining, and productivity growth, a generalized tightening foreign direct investment have been the main of monetary policy in the region, and cur- drivers of growth. Although the petroleum sec- rency appreciation in a number of economies. tor continued to grow rapidly in Timor-Leste, Following a build-up in inflationary pressure political turmoil caused non-oil GDP to stag- beginning in 2004 several central banks in the nate and per capita incomes likely declined. region increased policy interest rates. During Overall, the region’s current account sur- 2006, both headline and core inflation were plus increased to about 7 percent of regional stable or easing in most of the larger GDP. Excluding China, the change was more economies in the region (figure A.2). In modest—from 2.3 to 3 percent of GDP—and China, despite the strong expansion, inflation reflects a number of factors, notably the accel- remains low at 1.6 percent in September, eration in Chinese import demand and the although prices in the service and housing strengthening of the high-tech cycle. In several sectors are rising more quickly (2 and 4.7 countries, weaker domestic demand due percent, respectively). In Indonesia and to a tightening of macroeconomic policy Thailand, inflation has declined after picking (Indonesia, Thailand) and/or political turmoil up following the removal of fuel subsidies in (Solomon Islands, Thailand, Timor-Leste) also 2005, and it is projected to reach central bank contributed, while in several countries high oil targets in the course of 2006. Inflation has and mineral prices played a role (Indonesia, Lao also declined in the Philippines, from 7.9 per- PDR, Mongolia, Papua New Guinea, Solomon cent in 2005 to 5.7 percent in September, de- Islands, and Vietnam). In others, intensified spite an increase in value-added taxes. In competition in the garment sector and rising Timor-Leste inflation spiked to nearly 7 per- fuel prices placed current accounts under seri- cent in the year to June 2006, driven by higher ous pressure and prompted a worrisome de- transportation costs. These developments cline in foreign reserves. In Fiji, for example, have allowed central banks to keep policy the value of reserves has fallen to less than that rates stable, and in the case of Indonesia, to of three months of imports. begin easing. 31 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Regional equity markets were subject to the demand from China, growth in exports to other general correction affecting many emerging fast-growing developing markets, and further markets in May–June 2006. However, spreads competitive gains in market share are expected on bonds remain low, and equity markets to partially offset weaker demand from Europe began recovering in August, suggesting that and the United States, so that export demand markets continue to judge the region’s funda- grows by about 8 percent annually. Given ear- mentals favorably. The cut in Indonesian fuel lier tightening and stable inflation, central subsidies and improved fiscal balances con- banks are expected to continue easing monetary tributed to the appreciation of the currency, a policy in 2007, which should help bolster do- 40 percent up-tick in stock market valuations, mestic demand in case of a significant export- and ratings upgrades. led slowdown. In addition, high capacity utilization rates and continued efforts to Medium-term outlook strengthen the investment climate should stim- Looking forward, growth is expected to mod- ulate investment and domestic demand more erate somewhat, with GDP for the region as a generally, permitting a modest acceleration whole increasing by 8.1 percent in 2008. in growth rates in a number of countries The outlook for China’s economy remains (Indonesia, Philippines, and Thailand). Else- favorable. GDP is projected to slow from 10.4 where, growth is projected to remain stable percent in 2006 to about 8.7 percent in 2008. (Malaysia, Papua New Guinea, Samoa, and While export growth rates are projected to de- Vietnam) or decline somewhat (Cambodia, Fiji). celerate toward 14 percent, continued robust investment demand and a pickup in private Risks and policy challenges consumption should maintain GDP growth at Given the region’s large current account sur- high rates. plus, economic pressures for the revaluation of For the moment, signs of overheating are developing Asian currencies are likely to inten- limited to specific sectors and regions. Produc- sify. The 2.5 percent appreciation of the ren- tion capacity continues to expand in line with minbi against the dollar since the beginning of demand, inflation remains low, and the current the year is a modest step toward alleviating account is in surplus—all of which augurs well these pressures. An appreciation of Asian cur- for a soft landing. However, high investment rencies would make imports more competitive, rates and excess capacity in several sectors dom- reduce capital inflows, and promote a switch in inated by state-owned enterprises leave open investment spending toward the nontradables the possibility of a sharp decline in investment. sector, helping alleviate global imbalances and Moreover, while much of recent investment has fostering a more balanced development path at been financed by retained earnings and has oc- home. At the domestic level it would help re- curred in relatively open and commercial sec- duce inflationary pressures, improve capabili- tors, the risk that some of these investments will ties for domestic macroeconomic management, prove uneconomic and prompt an important steady asset markets, and improve living stan- increase in bad loans remains real. dards for local populations. Should regional Excluding China, growth is actually pro- surpluses not stabilize, there is a risk that pro- jected to strengthen somewhat from 5.4 to tectionist pressures in some of the region’s mar- 5.9 percent by 2008. Having adjusted to the oil kets will build possibly to the detriment of price shock of the last three years, oil-importing growth and medium-term prospects. While the economies in the region should now derive recent decision by Chinese authorities to par- modest benefits from the fall in world oil prices tially liberalize capital outflows should help re- in the second half of 2006 and from the stabi- duce the upward pressure on the renminbi and lization and further gradual declines in oil prices the need to accumulate reserves, likely more that are forecast. Continued strong import needs to be done to reorient the economy 32 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.2 East Asia and the Pacific country forecasts Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Cambodia GDP at market prices (2000 US$)b 7.0 10.0 13.4 8.9 6.5 7.0 Current account balance/GDP (%) Ϫ3.6 Ϫ3.9 Ϫ6.4 Ϫ13.7 Ϫ10.7 Ϫ7.7 China GDP at market prices (2000 US$)b 9.5 10.0 10.1 10.2 10.4 9.6 8.7 Current account balance/GDP (%) 1.5 2.8 3.6 7.1 8.5 7.5 7.0 Fiji GDP at market prices (2000 US$)b 2.1 3.0 5.3 0.7 3.1 2.2 2.5 Current account balance/GDP (%) Ϫ3.1 Ϫ8.3 Ϫ17.0 Ϫ17.1 Ϫ10.3 Ϫ6.1 Ϫ1.9 Indonesia GDP at market prices (2000 US$)b 3.3 4.9 5.1 5.6 5.5 6.2 6.5 Current account balance/GDP (%) Ϫ0.4 3.5 0.6 0.3 0.8 0.2 Ϫ0.5 Lao PDR GDP at market prices (2000 US$)b 6.1 6.4 7.0 7.3 6.6 6.9 Current account balance/GDP (%) Ϫ8.2 Ϫ14.3 Ϫ19.9 Ϫ14.6 Ϫ24.9 Ϫ23.6 Malaysia GDP at market prices (2000 US$)b 5.4 7.2 5.2 5.5 5.5 5.5 Current account balance/GDP (%) 12.9 12.9 15.6 14.8 14.8 15.2 Papua New Guinea GDP at market prices (2000 US$)b 3.9 2.7 2.9 3.0 3.8 4.0 4.0 Current account balance/GDP (%) 2.3 11.2 2.2 13.5 8.0 7.0 4.9 Philippines GDP at market prices (2000 US$)b 3.1 3.6 6.2 5.0 5.5 5.7 6.0 Current account balance/GDP (%) Ϫ0.2 4.4 1.9 2.5 2.6 1.8 1.5 Samoa GDP at market prices (2000 US$)b 2.7 Ϫ1.0 3.1 3.0 3.0 3.5 3.5 Current account balance/GDP (%) Ϫ8.4 5.0 Ϫ4.5 Ϫ7.3 0.1 0.2 0.0 Thailand GDP at market prices (2000 US$)b 3.6 7.0 6.2 4.5 4.5 4.6 5.0 Current account balance/GDP (%) Ϫ1.2 5.5 2.9 Ϫ1.5 0.2 2.2 2.5 Vietnam GDP at market prices (2000 US$)b 7.0 7.3 7.8 8.4 8.0 7.5 7.5 Current account balance/GDP (%) Ϫ4.9 Ϫ2.0 Ϫ0.4 2.4 0.1 Ϫ1.7 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other Bank documents. Kiribati, Dem. Rep. of Korea, N. Mariana Islands, Marshall Islands, the Federated States of Micronesia, Mongolia, Myanmar, Palau, American Samoa, Solomon Islands, Timor-Leste, and Tonga are not forecast owing to data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. toward domestic demand, perhaps by placing significant direct reduction in demand for the more emphasis on developing sectors that ser- region’s exports and an indirect impact as vice the domestic as opposed to the external global growth slows. Slower extraregional sectors of the economy. trade growth would also weaken intraregional Other important risks to the region include trade growth. Reduced global demand would a sharper-than-projected slowdown in the weaken commodity prices more quickly than United States. This would likely imply both a projected, with additional negative impacts for 33 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 resource-rich countries in the region (for ex- rapid growth of oil exporters (estimated at ample, Indonesia, Mongolia, Papua New 7.3 percent in 2006) generating substantial ex- Guinea, and Vietnam). port demand for regional oil importers. The Overall, the region’s export performance latter’s economies are expected to have ex- has relied much more heavily on increasing its panded by 5.9 percent. Growth is broad-based share in global markets than on rapidly rising in the region. Only 2 of the 23 European and import demand. As a result, while growth in Central Asian countries covered in these pro- the region will be sensitive to a slowing in the jections (Moldova, growing at 3 percent, and growth of high-income countries, even in Hungary at 3.8 percent) are expected to expe- the face of a serious U.S. recession, output in rience growth below 4 percent in 2006. the region is unlikely to slow by much more While the growth picture is very similar for than 1 or 2 percentage points. Indeed, such a oil importers and oil exporters (including nat- slowing may be necessary in order to eliminate ural gas exporters), the situation on current some of the capacity constraints and macro- accounts is strikingly different. Oil exporters economic tensions that have become apparent are enjoying an estimated average surplus of in the region. nearly 10 percent of GDP in 2006, while im- As indicated, most of the larger economies porters are facing an estimated average deficit in the region are running current account of 5.9 percent of GDP. Similar, albeit less ex- surpluses and are holding exceptionally large treme, is the fiscal situation, with a projected foreign exchange reserves and are therefore 7.9 percent of GDP surplus in oil-exporting less vulnerable to a sharp deterioration in countries and a projected 2.6 percent deficit in international financial conditions. Some low- oil-importing countries. As a consequence of income countries with large current account these different positions, the challenges facing deficits such as Cambodia are also recipients of these countries are very different. While oil ex- significant development aid inflows. One area porters have to focus on management of sur- of note is the need for prudent management of pluses in a sustainable way, oil importers, hav- high commodity price–driven windfall gains ing become vulnerable to swings in conditions in small low-income minerals and other com- in international financial markets, need to modity-exporting economies such as Mongolia focus on consolidating their fiscal positions and Papua New Guinea. In Mongolia, for ex- and hastening adjustment to high oil prices. ample, where the stock of external debt ex- Domestic demand continues to drive the ceeds 70 percent of GDP, the debt burden could expansion among oil exporters, as oil rev- become unsustainable if international com- enues are channeled into the domestic econ- modity prices were to fall substantially. In this omy via government transfers, the wage bill of context, efforts by the government to work out civil servants, and various investment pro- a revised debt management strategy and artic- grams. Domestic demand rose an estimated ulate medium-term priorities for domestic and 11.3 percent among regional oil exporters in external borrowing will be important. 2006, with private consumption up 12.4 per- cent. Notwithstanding growing constraints on Europe and Central Asia regional foreign partnerships in the energy sector, in- prospects vestment in the Russian Federation expanded by an estimated 13.4 percent. Overall, exports Recent developments rose for oil exporters by 7.8 percent, reflecting GDP growth in Europe and Central Asia is es- expanded output and production capacity, in- timated to have accelerated to 6.4 percent in cluding the opening of the Baku-Tbilisi- 2006, up from 6 percent in 2005 (table A.3). Ceyhan (BTC) pipeline. Nevertheless, volume Growth in the region continued to be heavily growth of imports outstripped that of exports influenced by high oil prices, with the very by a wide margin, expanding by an estimated 34 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.3 Europe and Central Asia forecast summary Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 GDP at market prices (2000 US$)b Ϫ0.2 5.9 7.2 6.0 6.4 5.7 5.5 GDP per capita (units in US$) Ϫ0.4 5.9 7.2 6.0 6.3 5.6 5.5 PPP GDPc Ϫ0.4 6.2 7.4 5.9 6.5 5.8 5.6 Private consumption 1.2 6.0 8.1 7.9 7.8 6.3 5.8 Public consumption 0.5 2.9 2.3 2.9 3.1 3.0 2.9 Fixed investment Ϫ4.6 10.4 12.7 11.7 10.9 8.9 7.9 Exports, GNFSd 3.8 12.7 13.4 7.3 10.0 9.5 9.9 Imports, GNFSd 2.8 15.7 17.7 10.5 12.8 10.6 10.2 Net exports, contribution to growth 0.5 2.2 0.5 Ϫ1.1 Ϫ2.5 Ϫ3.2 Ϫ3.5 Current account balance/GDP (%) Ϫ1.0 0.3 0.9 0.8 Ϫ0.6 Ϫ1.4 GDP deflator (median, LCU) 104.7 4.3 6.2 4.0 6.0 5.1 5.0 Fiscal balance/GDP (%) Ϫ2.6 Ϫ0.6 1.4 1.9 2.2 1.5 Memo items: GDP Transition countries 2.6 4.8 6.7 5.5 5.8 5.2 5.2 Central and Eastern Europe 2.2 4.3 5.5 4.6 5.7 5.3 5.3 Commonwealth of Independent States Ϫ3.7 7.7 8.0 6.7 7.3 6.4 6.0 Poland 4.5 3.8 5.3 3.4 5.4 5.1 5.2 Russia Ϫ3.4 7.3 7.2 6.4 6.8 6.0 5.5 Turkey 3.5 5.8 8.9 7.4 6.0 5.0 5.0 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. c. GDP is measured at PPP exchange rates. d. Exports and imports of goods and nonfactor services. 17.3 percent for all regional oil exporters. Ex- trends. While domestic demand slowed, cess domestic demand—in part driven by the growth in exports picked up from 7.9 percent stimulus deriving from higher energy prices— in 2005 to 11.1 percent, fueled in part by very resulted in strong net imports, with an esti- strong import demand by oil exporters and mated Ϫ3.2 percent contribution to GDP the strengthening recovery in industrialized growth. Nevertheless, higher oil prices meant Europe. Increased export volumes were partic- that the current account position of these ularly important for GDP growth in Bulgaria, countries improved further, moving to an esti- the Czech Republic, and Poland; all three ex- mated surplus of 10 percent of GDP. perienced an export acceleration of 5 percent- Oil revenues bolstered the fiscal positions of age points or more. In addition, remittance in- oil exporters, although increased spending flows emanating from regional oil exporters limited the extent to which fiscal balances supported growth in Armenia (with GDP improved. In Russia, surging oil revenues are growth of 9.5 percent), Georgia (7.5 percent), expected to result in a record fiscal surplus of the Kyrgyz Republic (4.3 percent), Moldova 8.4 percent of GDP in 2006. Part of this surplus (3 percent), and Tajikistan (8 percent). On the has been funneled into foreign currency re- downside, Russia’s imposition of import re- serves, which reached over $250 billion (as of strictions and elimination of “friendship pric- end-August), as well as the repayment of $22 ing” of hydrocarbon fuels dampened outturns billion in Soviet-era debt to the Paris Club in in Moldova and Ukraine (6 percent). August 2006. Strong FDI and capital inflows have been a Growth among regional oil importers has further factor underpinning the rapid expan- remained stable as a result of two offsetting sion of domestic demand among oil importers. 35 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 For Bulgaria and Romania, whose admission to Russian trade restrictions and rising gas prices), the European Union (EU) has been approved reaching deficits of an estimated 12–15 percent for 2007, as well as Turkey (which began of GDP in Bosnia and Herzegovina, Bulgaria, accession negotiations at the end of 2005), Estonia, and Latvia, and of 4 percent or more in investment inflows have boosted domestic Albania, Armenia, Croatia, Georgia, Hungary, demand, wages, and employment. Inflation is the Kyrgyz Republic, Lithuania, Romania, the up in Bulgaria and Turkey, and current account Republic of Serbia, the Slovak Republic, and deficits have ballooned in all three countries. In Turkey (figure A.3). Deficits in these countries Turkey, this combination—along with other have been mainly driven by surging imports factors, including political tensions and con- fueled by capital inflows, rapid investment cerns about the pace of reforms—contributed growth, and higher energy prices. In the Czech to a 16 percent depreciation of the currency Republic, the former Yugoslav Republic of during May and June of this year, which led the Macedonia, Poland, and Slovenia, current ac- central bank to raise policy rates by a cumula- count deficits are relatively low, equivalent to tive 549 basis points up to 19.24 percent be- 3 percent of GDP or less. tween May and July. Strong regional growth over the last four Current account balances deteriorated in a years has contributed to an increase in median number of other oil importers, surging to more consumer price inflation (figure A.4) from 3.6 than 20 percent of GDP in Moldova (due to percent in 2003 to 4.8 percent in the third 36 R E G I O N A L E C O N O M I C P R O S P E C T S quarter of 2006. Rapid credit growth (due in rejected. Slovenia, however, is on track to part to capital inflows) has been an important adopt the euro in January 2007. The Baltics, driver, as have supply-side pressures and the Czech Republic, Poland, and the Slovak tighter labor markets—the latter especially Republic have no firm target dates. evident in the Baltics. While central banks in a number of Inflation in Turkey picked up substantially countries—including the Czech Republic, the after the depreciation of the lira during the fi- Slovak Republic, and Turkey—have responded nancial turbulence in the spring. Nevertheless, by raising nominal interest rates, in several the recent tightening of monetary policy has countries higher interest rates have generated helped to stabilize inflation at just above 10 capital inflows and additional credit expansion, percent, and the authorities aim to reestablish which forced the authorities to rely on fiscal the broad downward trend achieved in recent tightening to restrain demand. Azerbaijan, years that reduced inflation from 55 percent Bulgaria, Bosnia and Herzegovina, Estonia, in 2000 to single digits in 2004. Kazakhstan, Russia, Serbia and Montenegro,4 Russia has succeeded in controlling prices, Turkmenistan, and Uzbekistan are running with inflation averaging 9.4 percent during the fiscal surpluses ranging from about 1 percent to third quarter of 2006, down from 12.7 percent 12 percent of GDP, with the oil exporters bene- in 2005, reflecting relatively small increases in fiting from significant inflows tied to high oil administered prices and ruble appreciation. prices. Additionally, there has been extensive Problems in meeting inflation criteria in the sterilization, notably in Romania. Baltic countries and the Slovak Republic led Nevertheless, the average government them to postpone adoption of the euro and deficit of oil importers in the region rose Lithuania’s bid to join in January 2007 was from 2.2 percent of GDP in 2005 to an 37 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 estimated 2.6 percent in 2006. Tax cuts and economic ties to oil exporters, such as Georgia, increased outlays tied to elections boosted the Kyrgyz Republic, and Tajikistan, lower oil deficits and contributed to overheating in most prices are expected to be reflected in weaker of the new EU member countries (with the key exports and a more protracted slowing in exception of the Slovak Republic) and in a growth rates. number of other oil importers. In Hungary, a For the oil-exporting economies, growth is relaxed fiscal stance has inflated domestic de- projected to slow progressively from 7.3 per- mand and contributed to the estimated 8 per- cent in 2006 to 6.2 percent by 2008 (from cent of GDP current account deficit. 6.8 to 5.5 percent for Russia). Because of the strength of domestic demand and non-oil- Medium-term outlook sector capacity constraints, import volume Growth in the region is projected to decelerate growth is expected to continue to outpace ex- to about 5.5 percent in 2007 and 2008. The ports. Strong import demand, coupled with de- slowdown reflects both weaker export growth clining oil prices, is projected to reduce the cur- and an expected dampening of domestic de- rent account surpluses of oil exporters from an mand, owing to tighter monetary policy within estimated 10 percent of GDP in 2006 to and outside the region, and some tightening of 3.6 percent in 2008. At the same time, lower fiscal policies. Higher interest rates and slower oil prices will serve to reduce government rev- growth, coupled with a decline in oil prices, enues, without having a comparable impact on are expected to reduce inflationary pressures spending. As a result, fiscal surpluses are ex- over the forecast horizon, although inflation is pected to decline over the projection period, likely to remain well in excess of 5 percent in from an estimated average of 7.9 percent of many countries. While external demand is pro- GDP in 2006 to 5.9 percent of GDP in 2008. jected to ease in 2007—in part reflecting weaker growth in Germany—import demand Risks and policy challenges is expected to slow in line with weaker domes- Large current account deficits in a number of tic demand, and net exports are projected to countries in the region make them vulnerable have only a limited effect on GDP growth. to changes in capital flows, which history The anticipated growth cycle among the oil demonstrates can occur rapidly. While FDI importers, from 5.9 percent in 2006 to 5.1 forms an important component of financial percent in 2007 and back to 5.2 percent in inflows to the region and is normally thought 2008, mainly reflects an expected decline in to be less likely to reverse direction, much of import demand from Germany (especially for the inflows have gone into the banking sector countries in Central and Eastern Europe). where such reversals are easier. Moreover, Weaker domestic demand, due to an assumed given the extent of current account deficits, tightening of macroeconomic policy (in a simple pause in inflow could generate Hungary and to a lesser extent in the Baltics) sufficient pressure to force a substantial will also play a role, and, together with lower adjustment—either in exchange rates or to the oil prices, should be reflected in a reduction in real side of the economy. current account deficits over the forecast pe- If private capital flows were to suddenly dry riod. In Turkey, similar factors will be at work up, many countries might be vulnerable. That in 2007. For most regional EU member coun- is especially true for countries with relatively tries (including soon-to-be-member Romania), inflexible exchange-rate regimes, such as fiscal policy is expected to remain broadly ex- Bulgaria, Croatia, Estonia, and Lithuania. pansionary, which along with continued ro- Countries with flexible exchange rates, such as bust private investment activity—financed Turkey, might also find it difficult to absorb both domestically and from abroad—should reversals in capital flows, as their current keep growth strong. For countries with closer account deficits require sustained inflows of 38 R E G I O N A L E C O N O M I C P R O S P E C T S foreign capital. Measures of liquidity risk— revenues should help reduce upward pressure such as broad money to foreign exchange re- on prices and currencies, to the benefit of the serves (which is especially relevant for currency competitiveness of the non-oil sector. They boards and fixed exchange rate regimes)—are should also help minimize the potential eco- high. The coexistence of large government nomic consequences should oil prices drop. deficits and sizeable current account deficits Nevertheless, improving transparency and ac- suggests that there remains considerable scope countability for the management of fund hold- for a tightening of fiscal policy in Croatia, ings, including safeguarding funds for future Hungary, and the Slovak Republic. generations, remain important tasks. For oil exporters, the possibility that oil Additional steps need to be taken to encour- prices will decline by more than projected does age investment in these economies. Improving not appear likely to threaten their financial the investment climate by strengthening gover- stability over the forecast horizon, given large nance, modernizing decaying infrastructure, current account and fiscal surpluses. and preventing the further erosion of human For these countries the main policy chal- capital will remain critical. In Russia, the oil lenge concerns managing oil revenues, so as to sector would benefit from additional invest- prevent an overheating of the economy, con- ment to overcome capacity constraints due to tain inflationary pressures, and limit the im- outdated facilities and infrastructure. There, pact of the so-called Dutch disease on the in- and in other resource-rich countries, special ternational competitiveness of the non-oil efforts will be required to promote growth sector. Steps over the last decade to establish in the non-oil non-resource sectors of the oil funds that accumulate and invest windfall economy. Table A.4 Europe and Central Asia country forecasts Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Albania GDP at market prices (2000 US$)b 4.7 6.0 5.9 5.5 5.0 6.0 5.8 Current account balance/GDP (%) Ϫ5.6 Ϫ8.1 Ϫ5.5 Ϫ7.8 Ϫ8.1 Ϫ7.1 Ϫ6.5 Armenia GDP at market prices (2000 US$)b Ϫ2.6 13.9 10.5 14.0 9.5 8.5 7.5 Current account balance/GDP (%) Ϫ6.8 Ϫ4.5 Ϫ3.9 Ϫ4.7 Ϫ4.6 Ϫ4.5 Azerbaijan GDP at market prices (2000 US$)b Ϫ5.1 11.2 10.2 26.2 22.7 25.7 19.9 Current account balance/GDP (%) Ϫ27.8 Ϫ30.0 1.1 15.1 25.6 34.1 Belarus GDP at market prices (2000 US$)b Ϫ1.1 7.0 11.0 9.2 9.3 4.5 3.3 Current account balance/GDP (%) Ϫ2.2 Ϫ5.2 1.5 Ϫ0.2 Ϫ3.2 Ϫ3.9 Bulgaria GDP at market prices (2000 US$)b Ϫ0.9 4.5 5.7 5.6 5.6 5.6 5.6 Current account balance/GDP (%) Ϫ2.3 Ϫ5.5 Ϫ5.8 Ϫ11.3 Ϫ12.5 Ϫ12.0 Ϫ11.3 Croatia GDP at market prices (2000 US$)b 0.8 5.3 3.8 4.3 4.5 4.0 4.0 Current account balance/GDP (%) Ϫ7.2 Ϫ5.4 Ϫ6.6 Ϫ6.7 Ϫ5.1 Ϫ5.0 Czech Republic GDP at market prices (2000 US$)b 1.5 3.2 4.2 6.1 6.8 6.0 6.3 Current account balance/GDP (%) Ϫ6.4 Ϫ6.2 Ϫ2.1 Ϫ3.0 Ϫ3.1 Ϫ3.0 (continued) 39 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Table A.4 (continued ) Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Estonia GDP at market prices (2000 US$)b 0.0 6.7 7.8 9.8 9.2 8.0 6.8 Current account balance/GDP (%) Ϫ12.1 Ϫ13.0 Ϫ11.0 Ϫ11.8 Ϫ11.2 Ϫ10.5 Georgia GDP at market prices (2000 US$)b Ϫ7.2 11.1 6.2 8.5 7.5 6.5 6.0 Current account balance/GDP (%) Ϫ7.2 Ϫ8.3 Ϫ8.4 Ϫ9.9 Ϫ11.5 Ϫ11.0 Hungary GDP at market prices (2000 US$)b 2.1 3.4 5.2 4.1 3.8 2.5 3.2 Current account balance/GDP (%) Ϫ5.4 Ϫ8.7 Ϫ8.6 Ϫ7.4 Ϫ8.0 Ϫ6.7 Ϫ6.0 Kazakhstan GDP at market prices (2000 US$)b Ϫ2.5 9.3 9.6 9.4 9.0 9.0 8.9 Current account balance/GDP (%) Ϫ0.9 1.1 Ϫ0.9 7.0 2.4 Ϫ1.9 Kyrgyz Republic GDP at market prices (2000 US$)b Ϫ3.2 7.0 7.1 Ϫ0.6 4.3 5.5 4.8 Current account balance/GDP (%) Ϫ5.2 Ϫ3.4 Ϫ8.3 Ϫ11.0 Ϫ9.8 Ϫ7.7 Latvia GDP at market prices (2000 US$)b Ϫ1.6 7.2 8.5 10.2 9.8 7.5 6.0 Current account balance/GDP (%) Ϫ8.2 Ϫ12.9 Ϫ12.4 Ϫ13.5 Ϫ12.0 Ϫ11.5 Lithuania GDP at market prices (2000 US$)b Ϫ2.8 9.7 7.0 7.5 7.0 6.5 6.0 Current account balance/GDP (%) Ϫ7.0 Ϫ7.7 Ϫ7.0 Ϫ8.5 Ϫ8.4 Ϫ8.0 Macedonia, FYR GDP at market prices (2000 US$)b Ϫ0.3 2.8 4.1 4.0 4.0 4.0 4.5 Current account balance/GDP (%) Ϫ3.3 Ϫ7.7 Ϫ1.4 Ϫ3.1 Ϫ3.9 Ϫ3.9 Moldova GDP at market prices (2000 US$)b Ϫ8.2 6.6 7.4 7.1 3.0 3.0 5.0 Current account balance/GDP (%) Ϫ7.1 Ϫ2.0 Ϫ9.8 Ϫ21.2 Ϫ17.6 Ϫ9.8 Poland GDP at market prices (2000 US$)b 4.5 3.8 5.3 3.4 5.4 5.1 5.2 Current account balance/GDP (%) Ϫ3.5 Ϫ2.1 Ϫ4.2 Ϫ1.4 Ϫ1.5 Ϫ1.9 Ϫ2.4 Romania GDP at market prices (2000 US$)b Ϫ0.3 5.2 8.3 4.1 5.8 6.2 6.3 Current account balance/GDP (%) Ϫ6.7 Ϫ5.8 Ϫ8.2 Ϫ8.7 Ϫ11.4 Ϫ12.9 Ϫ13.6 Russian Federation GDP at market prices (2000 US$)b Ϫ3.4 7.3 7.2 6.4 6.8 6.0 5.5 Current account balance/GDP (%) 8.2 10.2 10.9 9.7 5.2 2.9 Slovak Republic GDP at market prices (2000 US$)b 1.9 4.5 5.4 6.1 6.7 7.1 5.7 Current account balance/GDP (%) Ϫ0.9 Ϫ3.1 Ϫ8.5 Ϫ7.2 Ϫ4.2 Ϫ3.5 Turkey GDP at market prices (2000 US$)b 3.5 5.8 8.9 7.4 6.0 5.0 5.0 Current account balance/GDP (%) Ϫ1.1 Ϫ3.4 Ϫ5.2 Ϫ6.4 Ϫ8.0 Ϫ7.5 Ϫ6.4 Ukraine GDP at market prices (2000 US$)b Ϫ7.2 9.4 12.1 2.6 6.0 4.5 5.5 Current account balance/GDP (%) 5.8 10.5 3.1 Ϫ1.0 Ϫ3.4 Ϫ4.1 Uzbekistan GDP at market prices (2000 US$)b Ϫ0.2 4.2 7.7 7.0 6.0 4.0 4.0 Current account balance/GDP (%) 8.7 9.9 14.3 17.0 17.2 14.8 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other Bank documents. Bosnia and Herzegovina, the Republic of Montenegro, the Republic of Serbia, Tajikistan, and Turkmenistan are not forecast owing to data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. 40 R E G I O N A L E C O N O M I C P R O S P E C T S Latin America and the Caribbean interest rates boosted domestic demand and construction activity. Stronger exports of cars to regional prospects the United States and oil exports also con- Recent developments tributed. For the year as a whole 4.5 percent Economic activity in Latin America and the growth is expected, 1.5 percentage points higher Caribbean picked up during the course of than in 2005. Lower interest rates also sup- 2006 and for the region as a whole GDP is ex- ported a 3.5 percent increase in Brazilian GDP pected to increase by 5 percent (table A.5). during the first half of the year, which is also ex- The faster growth reflects favorable interna- pected to be the growth outcome for the year as tional conditions, with low interest rates, high a whole, implying a 1.2 percentage point accel- commodity prices and strong import demand, eration. Nevertheless, growth in Brazil is being and a relaxation of monetary policy in Brazil held back by real interest rates that remain in ex- and Mexico, two of the region’s largest cess of 10 percent and the resulting strong cur- economies. Despite tensions building up in rency, which keeps export growth restrained. some countries, notably Argentina and Growth has slowed but remains extremely República Bolivariana de Venezuela, the over- high in both Argentina and República all picture is a healthy one, with strong growth Bolivariana de Venezuela, where GDP is ex- in historical perspective, average inflation in pected to increase by an unsustainable 7.7 and single digits, and, on average, modest fiscal 8.5 percent, propelled by 8.3 and 12.3 percent and current account surpluses. increases in domestic demand, respectively. In Mexico, GDP was up 5.1 percent (year- Notwithstanding the deep recessions each over-year) in the first half of 2006 as lower country experienced in 2002–03, output gaps Table A.5 Latin America and the Caribbean forecast summary Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 GDP at market prices (2000 US$)b 2.9 2.0 6.0 4.5 5.0 4.2 4.0 GDP per capita (units in US$) 1.4 0.5 4.5 3.1 3.7 2.8 2.7 PPP GDPc 3.5 2.1 5.6 4.3 4.9 4.1 4.0 Private consumption 2.5 2.5 5.3 4.7 5.0 3.8 3.6 Public consumption 1.5 5.9 0.9 3.4 3.3 1.9 1.1 Fixed investment 5.2 Ϫ3.2 14.6 7.7 9.0 8.1 6.9 Exports, GNFSd 7.4 2.7 12.4 7.8 6.2 5.7 6.8 Imports, GNFSd 8.9 2.0 14.4 11.3 9.0 7.6 7.2 Net exports, contribution to growth Ϫ0.6 1.6 1.3 0.6 Ϫ0.1 Ϫ0.6 Ϫ0.7 Current account balance/GDP (%) Ϫ2.8 0.5 1.0 1.6 1.9 1.4 1.0 GDP deflator (median, LCU) 10.1 7.2 8.3 9.1 7.3 6.1 6.1 Fiscal balance/GDP (%) Ϫ0.1 0.2 0.2 0.7 0.1 Ϫ0.4 Memo items: GDP Latin Amer. & the Carib., excluding Argentina 2.8 1.0 5.5 3.8 4.6 3.9 4.0 Caribbean 3.1 3.2 2.5 6.5 7.6 5.0 4.8 Central America 3.1 1.6 4.3 3.2 4.5 3.6 3.6 Argentina 3.3 8.8 9.0 9.2 7.7 5.6 4.0 Brazil 2.6 0.5 4.9 2.3 3.5 3.4 3.8 Mexico 3.0 1.4 4.4 3.0 4.5 3.5 3.5 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. c. GDP is measured at PPP exchange rates. d. Exports and imports of goods and nonfactor services. 41 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 have been eliminated and demand is estimated nontraditional exports, and a much less to exceed domestic supply by some 3.3 and destructive hurricane season compared with 1.9 percent, respectively. Reflecting this imbal- 2005. Growth in Jamaica is expected to be ance between domestic demand and supply, about 3 percent, a marked improvement from current account balances in both countries results in the 1990s. Output in the Dominican have deteriorated, although they are expected Republic is estimated to have increased by to remain in surplus (2.2 and 17.1 percent of 8.5 percent as the economy rebounds from the GDP, respectively) in 2006. 2003 currency crisis. Reflecting this strong In these conditions, inflation has picked up growth and despite tighter monetary policy, and exceeds 10 percent in each country. In the inflation is on a rising trend, which, together case of Argentina, this surge has occurred de- with an electricity crisis, is hurting the coun- spite price freezes in a number of sectors that try’s competitiveness and has contributed to have had negative consequences for sectoral in- an estimated 2.8 percent of GDP deterioration vestment and supply. In República Bolivariana in its current account balance in 2006. de Venezuela, supply-side constraints have Trinidad and Tobago has enjoyed strong been magnified because reductions in invest- growth in recent years owing to high energy ment by the state-owned oil company and by prices and rapidly rising investment levels. private oil firms (discouraged by the govern- Growth is estimated to have accelerated fur- ment’s antibusiness posturing, high taxes, and ther to 12 percent in 2006, but price pressures royalties) have contributed to a decline in oil are emerging and inflation is expected to reach production. 7.9 percent. Other countries in the region are also grow- Uncertainty from elections and the future ing rapidly. GDP growth in Chile, Colombia, path of U.S. interest rate policy contributed to and Peru has slowed but is estimated to have financial market volatility in the spring of 2006. remained robust at 5 percent this year. In Cen- The currencies of a number of countries depre- tral America, high prices for the region’s ex- ciated, following earlier appreciations in some port crops and strong remittances inflows have cases (Brazil and Colombia). Stock markets partly offset the income effects of high energy also underwent a major correction. However, prices. This, plus increased foreign and domes- the improved fiscal stance and reduced indebt- tic investment inflows following the passage of edness of countries meant that the region was free trade agreements with the United States, not particularly affected by this episode—and underpinned the estimated 4.5 percent increase risk premia, after rising somewhat, have once of GDP in Honduras during 2006, and the again declined and are currently just 20 points 4.1 percent expansion in Guatemala. Strong above their historical minima (see figure A.5). growth and higher oil prices have been associ- ated with deteriorations in current account Outlook balances, which exceed 4 percent of GDP in An end to the rising trend and even a decline in Costa Rica, Guatemala, and Panama. Al- the prices of the region’s main commodity ex- though public debt levels remain high in many ports, slower import demand from the United Central American countries and debt-servicing States, capacity constraints, and a return to charges remain a burden on the government more sustainable growth rates in some of the accounts, increased multilateral aid, debt re- region’s fastest-growing economies are pro- lief, and growing flows of remittances have jected to cause regional growth to decline to boosted international reserves and reduced the about 4 percent by 2008. risk of currency instability. Most of the deceleration reflects slower Growth among Caribbean countries has growth in Argentina and República Bolivari- benefited from strong FDI inflows into the ana de Venezuela. When those two countries tourism and mining sectors, a recovery of are excluded, the expansion in the rest of the 42 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.6 Main Latin America and the over the past several years. In addition, as in Caribbean region stock market index returns Argentina, strong domestic inflation, rapidly Percent changes rising wages, domestic capacity constraints Country January–July 2006 May 2006 and rising leakages are projected to slow the Argentina 4.4 Ϫ13.5 pace of production and contribute to a 9.5 per- Brazil 4.2 Ϫ9.5 cent of GDP reduction in República Bolivariana Chile 3.8 Ϫ2.1 de Venezuela’s current account surplus. Mexico 3.6 Ϫ9.6 Peru 80.7 1.0 The slowdown is expected to be less marked Venezuela, R. B. de 55.3 Ϫ3.0 elsewhere in the region. Weaker import demand Source: World Bank; DataStream. in the United States in 2007 will affect many economies in the region (see figure A.6), no- tably Mexico where growth is projected to fall region is projected to moderate by only to 3.5 percent. The outlook for Brazil is slightly 0.7 percentage points. In Argentina, tighter brighter, partly because the external economy is monetary policy, increased leakages, and slow- less closely tied to U.S. imports. While export ing investment demand as high domestic costs growth is projected to slow, it will remain rela- squeeze profits are expected to contribute to a tively robust thanks to continued strong de- slowing of growth to about 4 percent by 2008, mand from emerging Asian economies. At the which is nevertheless well above that country’s same time, lower domestic interest rates should trend growth rate. Growth in República contribute to a pickup in investment in 2007. Bolivariana de Venezuela is projected to ease Similar factors, including the recent implemen- to about 5.5 percent by 2008, partly because tation of a free trade agreement with China, the contribution of government spending to in- will support continued robust growth in Chile. creased demand will fall, both because falling Output in a number of Caribbean countries (in- oil prices and stagnant production will reduce cluding Dominica and St. Vincent and the revenues and because to make the same contri- Grenadines) is projected to weaken in line with bution, spending would have to continue to in- reduced sugar and banana production follow- crease by about 14 percent annually as it has ing disappointing outcomes from negotiations 43 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 with the European Union over the Economic materialize. Should domestic demand continue Partnership Agreement. In other countries, to expand at excessive rates, inflationary pres- these effects may be countered by further im- sures would likely build and current account provements in the mining and financial service positions would deteriorate even more quickly sectors (Barbados, Trinidad and Tobago) or than projected. Such a scenario would increase tourism (St. Kitts and Nevis, St. Lucia). With the likelihood of a hard landing, including the recent swearing in of a new democratically much higher interest rates and the possibility, elected legislature and the prospects of consoli- in the case of Argentina, of a significant further dating the improvements in the political and currency depreciation. security situation, Haiti should experience a Elsewhere in the region, downside risks pre- mild economic recovery with GDP growth of dominate. Given the relative importance of the 2.7 percent in 2007. United States as a destination for regional ex- Overall, weaker commodity prices and strong ports, the region would be particularly sensitive domestic demand are expected to contribute to a to a more serious-than-projected downturn in deterioration in the region’s current account the United States, such as might follow a sharp balance from a surplus of 1.9 percent of GDP in decline in housing prices. Such a scenario 2006 to about 1 percent by 2008. would likely have both direct impacts in the form of reduced export demand and significant Risks and policy challenges indirect impacts as slower U.S. and global The outlook is subject to a number of uncer- growth would likely also cause commodity tainties. On the upside, the relatively gradual prices to ease more quickly than projected, slowdown projected for Argentina and reducing regional incomes and current account República Bolivariana de Venezuela may not balances by more than would have been 44 R E G I O N A L E C O N O M I C P R O S P E C T S expected otherwise. For oil-importing coun- for highly indebted countries in the region. tries the impact of lower oil prices might offset While improved fundamentals, including re- the reduced export prices, but for oil exporters duced debt exposure and relatively liquid posi- and other commodity-rich countries the overall tions following the prefinancing of 2007 debt re- negative impact could be large. quirements, should insulate many countries in A second persistent risk for the region stems the region from the most severe potential conse- from the possibility of a disorderly resolution quences of a sharp reversal in interest rate trends, of global imbalances. This could have effects such an outturn could have serious conse- similar to a housing-price-induced slowdown, quences for countries where debt ratios remain but would likely be combined with higher inter- high (Argentina, Chile, Colombia, Jamaica, est rates and rising risk premia, raising the costs Panama, Paraguay, Peru, and Uruguay). Table A.7 Latin America and the Caribbean country forecasts Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Antigua and Barbuda GDP at market prices (2000 US$)b 3.1 4.9 5.2 5.0 7.1 3.9 4.1 Current account balance/GDP (%) Ϫ5.3 Ϫ10.1 Ϫ18.7 Ϫ15.9 Ϫ20.4 Ϫ18.4 Ϫ16.7 Argentina GDP at market prices (2000 US$)b 3.3 8.8 9.0 9.2 7.7 5.6 4.0 Current account balance/GDP (%) Ϫ3.1 6.2 1.9 2.7 2.2 1.4 0.9 Belize GDP at market prices (2000 US$)b 4.8 9.4 4.6 3.1 2.6 2.6 3.3 Current account balance/GDP (%) Ϫ7.2 Ϫ20.3 Ϫ17.6 Ϫ18.5 Ϫ18.8 Ϫ24.9 Ϫ24.9 Bolivia GDP at market prices (2000 US$)b 3.2 2.8 3.6 4.1 3.1 3.1 3.2 Current account balance/GDP (%) Ϫ6.1 0.8 3.5 5.2 5.3 4.0 3.9 Brazil GDP at market prices (2000 US$)b 2.6 0.5 4.9 2.3 3.5 3.4 3.8 Current account balance/GDP (%) Ϫ2.1 0.8 2.0 1.9 1.4 1.1 0.8 Chile GDP at market prices (2000 US$)b 5.6 3.7 6.1 6.3 5.0 5.3 5.3 Current account balance/GDP (%) Ϫ2.8 Ϫ1.5 1.7 0.6 3.5 2.7 2.0 Colombia GDP at market prices (2000 US$)b 2.3 4.1 4.8 5.1 4.7 4.2 4.0 Current account balance/GDP (%) Ϫ1.9 Ϫ1.2 Ϫ1.0 Ϫ1.9 Ϫ2.3 Ϫ3.0 Ϫ3.7 Costa Rica GDP at market prices (2000 US$)b 5.0 6.5 4.1 5.9 5.0 4.6 4.1 Current account balance/GDP (%) Ϫ3.6 Ϫ5.3 Ϫ4.6 Ϫ4.9 Ϫ5.7 Ϫ4.1 Ϫ4.4 Dominica GDP at market prices (2000 US$)b 1.8 0.0 3.6 2.4 3.0 3.0 3.0 Current account balance/GDP (%) Ϫ16.3 Ϫ19.5 Ϫ23.0 Ϫ23.2 Ϫ24.2 Ϫ24.5 Ϫ24.0 Dominican Republic GDP at market prices (2000 US$)b 5.9 Ϫ0.4 2.0 9.3 8.5 5.5 5.0 Current account balance/GDP (%) Ϫ3.2 6.3 5.3 Ϫ0.4 Ϫ3.2 Ϫ4.1 Ϫ3.6 Ecuador GDP at market prices (2000 US$)b 1.3 2.7 7.9 4.7 3.5 3.0 3.0 Current account balance/GDP (%) Ϫ2.3 Ϫ1.7 Ϫ0.9 Ϫ0.3 0.7 Ϫ1.1 Ϫ2.7 El Salvador GDP at market prices (2000 US$)b 4.2 1.8 1.5 2.8 3.2 3.1 3.1 Current account balance/GDP (%) Ϫ2.0 Ϫ5.1 Ϫ3.9 Ϫ4.4 Ϫ5.7 Ϫ4.7 Ϫ4.3 (continued) 45 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Table A.7 (continued) Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Guatemala GDP at market prices (2000 US$)b 3.7 2.1 2.7 3.2 4.1 4.0 4.0 Current account balance/GDP (%) Ϫ4.6 Ϫ4.2 Ϫ4.3 Ϫ4.4 Ϫ4.1 Ϫ4.0 Ϫ3.4 Guyana GDP at market prices (2000 US$)b 4.3 Ϫ0.6 1.6 Ϫ3.0 3.5 3.3 3.6 Current account balance/GDP (%) Ϫ19.9 Ϫ6.3 Ϫ8.9 Ϫ19.9 Ϫ26.1 Ϫ22.3 Ϫ15.4 Honduras GDP at market prices (2000 US$)b 3.0 3.5 4.6 4.2 4.5 4.5 4.0 Current account balance/GDP (%) Ϫ7.7 Ϫ4.6 Ϫ5.3 Ϫ0.5 Ϫ1.5 Ϫ1.3 Ϫ1.2 Haiti GDP at market prices (2000 US$)b Ϫ1.7 0.4 Ϫ3.8 1.5 2.5 2.7 3.0 Current account balance/GDP (%) Ϫ1.6 Ϫ0.4 0.4 0.7 Ϫ1.2 Ϫ1.4 Ϫ1.5 Jamaica GDP at market prices (2000 US$)b 0.7 2.3 0.9 2.0 3.0 3.5 3.0 Current account balance/GDP (%) Ϫ2.7 Ϫ9.4 Ϫ5.8 Ϫ8.8 Ϫ10.4 Ϫ8.4 Ϫ5.0 Mexico GDP at market prices (2000 US$)b 3.0 1.4 4.4 3.0 4.5 3.5 3.5 Current account balance/GDP (%) Ϫ3.7 Ϫ1.4 Ϫ1.0 Ϫ0.6 0.1 Ϫ0.2 0.4 Nicaragua GDP at market prices (2000 US$)b 3.4 2.3 5.1 4.0 3.7 4.2 4.6 Current account balance/GDP (%) Ϫ28.6 Ϫ18.1 Ϫ18.7 Ϫ18.8 Ϫ18.1 Ϫ19.4 Ϫ19.9 Panama GDP at market prices (2000 US$)b 4.1 4.3 7.6 6.4 6.3 5.7 5.5 Current account balance/GDP (%) Ϫ4.8 Ϫ3.9 Ϫ7.8 Ϫ5.2 Ϫ4.6 Ϫ5.0 Ϫ6.2 Peru GDP at market prices (2000 US$)b 3.7 4.0 4.8 6.7 6.6 5.5 5.0 Current account balance/GDP (%) Ϫ5.5 Ϫ1.5 0.0 1.4 1.1 0.5 Ϫ0.4 Paraguay GDP at market prices (2000 US$)b 1.7 2.6 4.1 3.0 3.2 3.0 3.1 Current account balance/GDP (%) Ϫ2.0 2.2 0.3 Ϫ0.2 Ϫ0.3 Ϫ0.4 Ϫ0.3 St. Kitts and Nevis GDP at market prices (2000 US$)b 4.1 2.1 6.4 4.9 3.7 4.0 4.1 Current account balance/GDP (%) Ϫ18.8 Ϫ51.8 Ϫ24.4 Ϫ21.6 Ϫ21.0 Ϫ20.0 Ϫ20.0 St. Lucia GDP at market prices (2000 US$)b 2.4 3.0 4.0 5.4 5.5 3.4 3.3 Current account balance/GDP (%) Ϫ11.3 Ϫ18.6 Ϫ13.0 Ϫ25.2 Ϫ15.3 Ϫ10.0 Ϫ10.0 St. Vincent and the Grenadines GDP at market prices (2000 US$)b 2.0 4.5 4.3 4.9 4.3 4.1 4.2 Current account balance/GDP (%) Ϫ19.0 Ϫ15.5 Ϫ19.4 Ϫ23.6 Ϫ24.3 Ϫ25.0 Ϫ25.8 Trinidad and Tobago GDP at market prices (2000 US$)b 2.9 13.2 6.5 7.0 12.0 6.2 6.5 Current account balance/GDP (%) 0.2 9.4 15.4 18.9 23.2 17.2 17.3 Uruguay GDP at market prices (2000 US$)b 2.7 2.5 12.3 6.6 5.5 4.4 3.8 Current account balance/GDP (%) Ϫ1.5 Ϫ0.5 0.3 Ϫ0.5 Ϫ1.7 Ϫ2.2 Ϫ2.5 Venezuela, R. B. de GDP at market prices (2000 US$)b 1.1 Ϫ7.7 17.9 9.3 8.5 6.0 5.5 Current account bal/GDP (%) 2.6 13.7 12.6 18.1 17.1 12.6 7.6 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other Bank documents. Barbados, Cuba, Grenada, and Suriname are not forecast owing to data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. 46 R E G I O N A L E C O N O M I C P R O S P E C T S Middle East and North Africa their rapidly growing labor force, but they face the challenge of ensuring competitiveness in regional prospects5 non-energy sectors and avoiding permanent re- Recent developments liance on government support. Their challenge Thanks to oil revenues surging in 2006 and is much more complicated than that of high- boosting government expenditure, growth in income oil exporters, which are typically labor the developing countries of the Middle East and importers. The high-income regional oil ex- North Africa has reached its highest level in the porters, such as Kuwait, Qatar, Saudi Arabia, past four years. Growth is estimated to have and the United Arab Emirates, are not part of picked up by 0.5 percentage points to 4.9 per- the low- and middle-income grouping dis- cent in 2006 (table A.8), with developing- cussed in this appendix. The oil-importing country oil exporters accelerating from 4.7 per- countries are benefiting from the increased cent to 4.9 percent and oil importers from spending by oil exporters in the region, but 4 percent to 5 percent. Growth in the oil sector their main challenge is to keep their fiscal bal- itself was relatively modest, with oil and natural ances under control. Energy subsidies, which gas output volumes increasing by 1.9 percent. increased with rising oil prices, have created Developing-country oil exporters seek with fiscal strain and only recently some oil im- new government programs to create jobs for porters have started to adjust their policies. Table A.8 Middle East and North Africa forecast summary Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 GDP at market prices (2000 US$)b 3.8 4.4 4.8 4.4 4.9 4.9 4.8 GDP per capita (units in US$) 1.9 2.7 3.0 2.6 3.1 3.0 3.1 PPP GDPc 3.9 4.6 4.8 4.4 5.2 4.9 4.9 Private consumption 3.5 3.7 6.3 4.8 5.0 5.0 6.5 Public consumption 3.6 3.1 2.8 6.2 9.2 5.3 5.2 Fixed investment 3.2 5.9 10.0 5.4 10.1 9.5 3.7 Exports, GNFSd 3.8 3.8 6.2 4.8 6.6 4.7 5.2 Imports, GNFSd Ϫ0.9 3.8 12.9 7.2 12.5 8.7 7.2 Net exports, contribution to growth Ϫ4.1 0.0 Ϫ1.9 Ϫ2.6 Ϫ4.4 Ϫ5.7 Ϫ6.4 Current account balance/GDP (%) Ϫ0.5 0.0 2.5 6.6 6.8 3.6 2.3 GDP deflator (median, LCU) 7.7 4.4 6.9 14.5 8.7 4.1 4.8 Fiscal balance/GDP (%) Ϫ4.3 Ϫ0.9 Ϫ2.4 Ϫ1.2 Ϫ0.4 0.1 0.1 Memo items: GDP MENA Geographic Regione 3.1 5.7 5.0 5.3 5.5 5.2 5.0 Resource poor-labor abundantf 4.8 4.0 4.8 4.0 5.0 5.1 5.3 Resource rich-labor abundantg 2.8 5.1 4.9 4.7 4.7 4.6 4.4 Resource rich-labor importingh 2.3 7.4 5.3 6.7 6.5 5.7 5.2 Algeria 1.8 6.8 5.2 5.3 3.0 4.5 4.3 Egypt, Arab Rep. of 4.4 3.1 4.2 4.9 5.8 5.6 5.8 Iran, Islamic Rep. of 2.9 5.0 5.1 4.4 5.8 5.0 4.7 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. c. GDP is measured at PPP exchange rates. d. Exports and imports of goods and nonfactor services. e. Geographic region includes high-income countries: Bahrain, Kuwait, and Saudi Arabia. f. Egypt, Jordan, Lebanon, Morocco, and Tunisia. g. Algeria, Iran, the Syrian Arab Republic, and the Republic of Yemen. h. Bahrain, Kuwait, Oman, and Saudi Arabia. 47 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 The surge in oil prices over the course of the does little to increase productive capacity. The year has boosted oil revenues of developing- increased public-sector wages in Algeria, up by country oil exporters in the region by 32 per- 20–25 percent, could be an example of such cent to $160 billion. For example, hydrocarbon spending with less favorable effects in the revenues increased by more than 30 percent in longer run than in the short run. Algeria, thanks to two new natural gas projects, In addition to current spending, a number while oil-related receipts rose by 33 percent in of developing-country oil exporters have the Islamic Republic of Iran. In 2006 this sought to use revenues to pay down debt—for helped to finance a surge in domestic demand instance, Algeria has paid off substantial and, because domestic production has not been amounts of external debt, which dropped able to keep up, increased import volumes. from 47 percent of GDP in 2000 to 17 percent Overall domestic demand among regional oil by 2005—or create funds from which future exporters increased 7.9 percent, with govern- expenditures can be paid. Much of these ment spending accounting for roughly half this funds were allocated to pro-development pro- increase. GDP growth was much less rapid at grams such as infrastructure development (for 4.9 percent because much of this demand was example, Algeria initiated a five-year, $90 bil- met by a 12.2 percent increase in imports com- lion program that would double outlays for pared with a 2.5 percent rise for exports. infrastructure, housing, and rehabilitation In Algeria, growth declined from 5.3 per- investment). cent in 2005 to 3 percent in 2006 due to slower Investments by high-income regional oil hydrocarbon export volumes, stagnant oil exporters have influenced oil-exporting and production, delays in the implementation of a -importing developing countries.6 A portion of large government investment program, and a their oil revenues is being recycled through FDI contraction of banking credit, including to the and equity investments within the region. Partly private sector, due to nonperforming loans. In as a result, regional equity prices and real estate Iran growth accelerated to 5.8 percent from values increased substantially during 2005 and 4.4 percent in 2005. In Oman, increased nat- the first half of 2006, although as in many other ural gas production contributed to a 6.5 per- developing regions there was a price correction cent increase in GDP, up from 4.8 percent in in equity markets during the financial-market 2005. The imbalance in export and import vol- turbulence of May–June 2006. ume growth meant that the current account These investments are becoming an impor- balance of oil-exporting developing countries tant link between the diversified economies of in the region improved by only $9 billion, the region and the resource-abundant coun- reaching $50 billion or 11.4 percent of GDP. tries. FDI flows from Gulf Cooperation Coun- Given heavy government involvement in the cil (GCC) governments, private firms, and oil sector, high energy prices have greatly in- other entities are beginning to make a substan- creased government revenues. While spending tial impact on economic developments in both has increased by 20–35 percent as a result of the Mashreq and Maghreb. Among recent ex- several countries passing supplementary bud- amples of investment activity, FDI inflows into gets, government fiscal balances in developing- Jordan surged to $2 billion over January– country oil exporters have changed little from August 2006, up from $750 million in the like the 2.3 percent of GDP recorded in 2005, and period of 2005. A large proportion is being in- they are estimated to equal 2.6 percent of GDP vested in real estate and tourism infrastructure. in 2006. While some of the additional spend- A Bahrain-based firm recently announced a ing is easily affordable at the moment, it might $1.4 billion investment in Morocco, support- create tensions in the longer run if oil revenues ing tourism and related facilities—this in the come down. That is especially true for addi- wake of a $9 billion investment by the United tional spending that is difficult to reverse and Arab Emirates. And Egyptian projects and 48 R E G I O N A L E C O N O M I C P R O S P E C T S equity markets have attracted a good deal of Morocco were up 20 percent in the wake of a capital from the GCC. foreign trade agreement with the United States These foreign investments were one reason in force as of January 2006. why growth among developing-country oil im- Morocco experienced the largest accelera- porters within the region also accelerated in tion in GDP growth, shifting from a weak 2006, moving from 4 percent in 2005 to an es- drought-influenced 1.7 percent advance in timated 5 percent increase in 2006, despite ris- 2005 to 7 percent in 2006. In Egypt, vibrant ex- ing oil prices. Other contributing factors were a ports, tourism, remittance receipts, and govern- rebound in growth following the severe ment spending underpinned a solid 5.8 percent drought in the Maghreb in 2005, stronger increase in economic activity. Growth picked demand for the region’s exports as European up by 1 percentage point in Tunisia, coming in recovery firmed, and strong remittance and at an estimated 5.3 percent in 2006, while tourism flows from both the Euro Area and growth in Jordan remained strong at 6.3 per- regional oil exporters (figure A.7). Private con- cent, buoyed by investment in real estate and sumption in the oil-importing countries tourism projects largely financed from high- increased 4.5 percent in 2006, boosted by income regional oil exporters. Political uncer- improved agricultural output and a 10.7 per- tainty and then war in Lebanon is estimated to cent increase in government outlays. House- have provoked a 5.5 percent fall in GDP during hold consumption surged 12 percent in 2006, although some observers suggest that the Morocco and 5.5 percent in Jordan. Overall the loss might have been as high as 10 percent. The increase in private consumption was responsi- United Nations Development Programme ble for four-fifths of the increase in oil im- (UNDP) places costs of infrastructure and other porters’ demand. Exports also surprised to the damages at more than $15 billion. upside for several countries, in part as demand The surge in oil revenues and government in the Euro Area rebounded. The Arab Repub- spending among oil exporters has yet to gener- lic of Egypt’s exports were up 55 percent ate substantial inflationary pressures, with the during the first half of 2006, and those for notable exception of the Islamic Republic of Iran, where inflation exceeds 10 percent. How- ever, rapidly rising credit and external flows have pushed inflation up in a number of coun- tries, including Egypt, Morocco, Oman, and Tunisia. Moreover, regional stock and housing markets have appreciated enormously. While local markets lost as much as 25–33 percent of their value in the May–June 2006 market cor- rection, valuations remain high and there is a concern that private-sector balance sheets are becoming over-leveraged. Regional equity markets have since bottomed out, but remain some 10 percent below “precrisis” levels. Rising crude oil prices in the first eight months of the year contributed to a deteriora- tion in the current accounts of oil importers, whose aggregate deficit rose from 1.3 percent of GDP in 2005 to an estimated 2.1 percent of GDP in 2006. At the same time, higher oil prices weighed on fiscal balances as several oil-importing countries—among them Egypt, 49 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Jordan, Morocco, and Tunisia—did not fully pass through the price hikes to consumers. More recently, Jordan reduced subsidy expen- ditures by 60 percent in the second quarter of 2006 to rein in the fiscal deficit, which hit 4.6 percent of GDP in 2005. Egypt has taken steps that reduced the consolidated government deficit from 9.1 percent in fiscal 2005 to 6.5 percent, while in Tunisia the government raised petrol prices 5 percent in July. Medium-term outlook Growth among developing countries in the Middle East and North Africa is projected to remain broadly stable, easing from 4.9 per- cent in 2006 to 4.8 percent in 2008, reflecting a modest slowdown among oil exporters (from 4.9 to 4.5 percent). Oil importers are expected to register 5.1 percent growth in 2007, fol- The modest slowdown projected among oil lowed by 5.3 percent gains in 2008 (figure A.8). exporters reflects plans to reduce oil production These projections are predicated on a further in an effort to support prices. Robust govern- but gradual decline in oil prices from $57 per ment spending will keep domestic markets tight barrel in the fourth quarter of 2006 to an aver- and import growth strong. Already non-oil- age of $53 in 2008, low long-term interest sector capacity constraints are becoming more rates, continued strong growth among develop- binding and inflation is rising. Over the projec- ing countries (notably China), a moderate tion period, domestic demand is anticipated to slowdown in European growth, and a some- increase by 6.5 percent on average, fueled by what more pronounced growth cycle in the high (though declining) oil revenues. Increas- United States characterized by significant slow- ingly, this demand will be met by imports, which ing in 2007 and a pickup in 2008 (figure A.9). are projected to rise by more than 8.5 percent per year (versus less than 3 percent for exports), and as a result GDP growth will slow. Given the continued strength of domestic demand in the oil-exporting countries, infla- tionary pressures are projected to intensify and real exchange rates are likely to appreci- ate. Both factors will keep import demand strong, while a projected moderate decline in oil prices will reduce export revenues. As a re- sult, developing-country oil exporters’ current account surpluses are projected to decline from about 11.4 percent of GDP in 2006 to about 5.3 percent in 2008. Prospects for the diversified oil-importing developing countries are expected to be shaped by first a fall and then an increase in exports to the Euro Area and the United States, and strong capital and remittance inflows. Fiscal 50 R E G I O N A L E C O N O M I C P R O S P E C T S consolidation as governments pursue efforts to Risks and policy challenges narrow deficits from high-single digits to more The future price of oil has important potential sustainable levels may dampen growth mod- implications for the prospects of countries— estly in Jordan and Morocco. Overall, growth both oil exporters and oil importers—in the re- is projected to rise moderately from 5 percent gion. In the baseline forecast oil prices are as- in 2006 to 5.1 percent in 2007, as Lebanon’s sumed to decline gradually toward a long-term 5.5 percent growth falloff of 2006 is recouped, price of $53 in 2008, but a scenario where helping to offset an easing in the postdrought prices rise as they did last year (or even rise by growth rebound in the Maghreb countries. By much more owing to a supply shock) or de- 2008, these two effects are expected to have cline even more quickly cannot be ruled out. worn off and growth should pick up once Higher prices would likely accentuate the ten- more to 5.3 percent. sions currently visible in oil-exporters, leading Table A.9 Middle East and North Africa country forecasts Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Algeria GDP at market prices (2000 US$)b 1.8 6.8 5.2 5.3 3.0 4.5 4.3 Current account balance/GDP (%) 3.3 13.0 13.1 21.2 24.2 17.5 15.8 Egypt, Arab Rep. of GDP at market prices (2000 US$)b 4.4 3.1 4.2 4.9 5.8 5.6 5.8 Current account balance/GDP (%) 0.9 4.5 4.3 3.3 1.7 1.5 Ϫ0.7 Iran, Islamic Rep. of GDP at market prices (2000 US$)b 2.9 5.0 5.1 4.4 5.8 5.0 4.7 Current account balance/GDP (%) 1.2 Ϫ7.8 0.9 7.5 5.6 2.2 2.0 Jordan GDP at market prices (2000 US$)b 4.9 4.1 8.4 7.3 6.3 5.0 5.0 Current account balance/GDP (%) Ϫ4.3 11.6 Ϫ0.2 Ϫ18.2 Ϫ21.6 Ϫ20.3 Ϫ16.2 Lebanon GDP at market prices (2000 US$)b 4.9 6.3 1.0 Ϫ5.5 4.5 2.9 Current account balance/GDP (%) Ϫ27.5 Ϫ23.7 Ϫ21.7 Ϫ21.5 Ϫ23.1 Ϫ23.5 Morocco GDP at market prices (2000 US$)b 1.6 5.5 4.2 1.7 7.0 3.5 4.5 Current account balance/GDP (%) Ϫ1.4 3.5 1.9 2.4 1.2 0.7 0.9 Oman GDP at market prices (2000 US$)b 4.0 1.3 3.1 4.8 6.5 5.5 5.0 Current account balance/GDP (%) Ϫ3.7 4.0 2.2 14.6 25.2 19.1 14.4 Syrian Arab Republic GDP at market prices (2000 US$)b 4.1 1.1 3.9 5.1 4.0 3.7 3.5 Current account balance/GDP (%) 1.0 3.4 1.1 Ϫ4.0 Ϫ2.5 Ϫ4.9 Ϫ6.7 Tunisia GDP at market prices (2000 US$)b 4.3 5.6 6.0 4.2 5.3 5.6 6.0 Current account balance/GDP (%) Ϫ4.3 Ϫ2.9 Ϫ1.7 Ϫ1.1 Ϫ1.2 Ϫ1.4 Ϫ1.2 Yemen, Republic of GDP at market prices (2000 US$)b 5.3 3.1 2.6 3.8 3.9 2.5 3.0 Current account balance/GDP (%) Ϫ4.3 1.4 2.0 5.0 Ϫ4.9 Ϫ8.4 Ϫ11.5 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other Bank documents. Djibouti, Iraq, Libya, and the West Bank and Gaza are not forecast owing to data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. 51 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 to stronger domestic demand that would be 7.5 percent (table A.10). A group of factors offset by even higher imports—and as a result have contributed to this trend, including only limited additional GDP growth. Inflation- progress in promoting private sector–led ary pressures and a tendency for flexible ex- growth, improved macro management, and change rates to appreciate would accentuate, greater integration. Loose monetary and fiscal while current account balances could be ex- policies and strong remittance inflows also pected to improve. For oil importers the effects played a role, providing a boost to domestic would be more complex. To the extent that demand, while the reimposition of restrictions they benefit from additional leakages in the on Chinese exports of textiles and clothing, form of exports and FDI, their growth rates combined with strong external demand, kept might actually pick up, even as government export growth strong. Throughout much of deficits and current account balances deterio- the region, supply was unable to keep up with rate. In the case of weaker oil prices, domestic demand, resulting in rising inflation and demand among oil exporters would weaken, rapidly growing imports. As a result, despite but the GDP impact would be less severe be- very strong export growth, net exports actu- cause import demand would also likely ally reduced GDP growth by 1.7 percentage weaken. Lower oil prices would result in re- points. Growth in some of the smaller coun- duced government and foreign currency rev- tries of the region has been supported by enues, resulting in deterioration in both gov- strong remittance inflows as well as recoveries ernment and current account balances. from natural disasters (including the December The possibility of increased political tension 2004 tsunami in Sri Lanka and the Maldives, is a further risk for the region. Events in and floods in Bangladesh). Lebanon illustrate how serious an economic India, the largest economy in the region, led impact even a short-lived conflict can have. the way with GDP expanding by an estimated Even an increase in uncertainty can generate 8.7 percent in 2006—backed by nonagricul- significant global impacts if it affects financial tural growth in excess of 10 percent. Very low market confidence, interest rates, and invest- real interest rates combined with an improved ment intentions. business climate and rising household savings On the positive side, a number of countries have enabled higher investment rates, helping in the region have made substantial efforts to sustain stronger growth. Elsewhere in the re- at reforms: Egypt, Tunisia, and among oil- gion, growth was less rapid but nevertheless ro- exporting countries, Algeria and Oman. A bust at 6.5 percent. Output in Pakistan is esti- number are enjoying the benefits in the form of mated to have slowed from 7.8 to 6.6 percent, increasing FDI, more vibrant private sector ac- following a return to more normal agricultural tivity, and broader reductions in the “cost of production in the wake of a bumper harvest in doing business.” And to the extent that oil- 2005. In Bangladesh, growth rebounded owing financed government investment projects suc- to stronger remittance inflows and the waning ceed in improving potential supply, these too impact on agricultural output and incomes could have long-term benefits. from last year’s floods, and by vibrant services and manufacturing sector output. Economic activity in Nepal slowed because of the intensi- South Asia regional prospects fied conflict, a weather- related decline in agri- cultural production, and a trend decline in Recent developments clothing exports. In Sri Lanka growth picked GDP for the region is estimated to have up to an estimated 7 percent, thanks to a good expanded at a very rapid 8.2 percent pace in harvest, post-tsunami recovery, and reconstruc- 2006, marking the fourth consecutive year tion activity (including tourism, despite in- that regional GDP has advanced by more than creased political uncertainty). Bhutan’s GDP 52 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.10 South Asia forecast summary Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 GDP at market prices (2000 US$)b 5.0 7.8 8.0 8.1 8.2 7.5 7.0 GDP per capita (units in US$) 3.2 6.1 6.3 6.4 6.7 5.9 5.6 PPP GDPc 5.6 8.0 8.1 8.2 8.3 7.5 7.1 Private consumption 3.8 6.7 6.3 8.2 7.8 7.0 6.3 Public consumption 5.1 4.6 8.4 4.4 5.3 4.2 4.2 Fixed investment 5.8 11.5 8.2 10.9 12.6 12.1 10.3 Exports, GNFSd 9.4 11.5 12.9 19.0 22.3 15.5 13.8 Imports, GNFSd 10.2 11.3 21.9 19.6 23.6 16.9 13.3 Net exports, contribution to growth Ϫ2.4 0.4 Ϫ1.1 Ϫ1.3 Ϫ1.7 Ϫ2.2 Ϫ2.2 Current account balance/GDP (%) Ϫ1.6 1.4 Ϫ0.8 Ϫ1.4 Ϫ2.2 Ϫ2.5 Ϫ2.5 GDP deflator (median, LCU) 8.1 4.5 7.6 6.3 8.1 7.4 6.5 Fiscal balance/GDP (%) Ϫ7.6 Ϫ7.8 Ϫ7.2 Ϫ7.1 Ϫ7.1 Ϫ6.7 Ϫ6.1 Memo items: GDP South Asia, excluding India 3.9 5.1 6.1 6.9 6.5 6.6 6.4 Bangladesh 4.5 5.3 6.3 6.2 6.7 6.2 6.5 India 5.4 8.6 8.5 8.5 8.7 7.7 7.2 Pakistan 3.4 5.0 6.4 7.8 6.6 7.0 6.5 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. c. GDP is measured at PPP exchange rates. d. Exports and imports of goods and nonfactor services. growth is expected to post strong gains of has also contributed to government deficits, no- 14 percent in 2006, largely as a result of capac- tably in Bangladesh, the Maldives, Pakistan, ity expansion following the coming on stream and Sri Lanka. These factors have contributed of the Tala hydroelectric plant. In the Maldives, to very rapid investment growth (over 13 per- a rebound in tourism, post-tsunami reconstruc- cent in India and 8 percent in Pakistan). Strong tion, and new resort construction helped in- remittance inflows—especially among smaller crease GDP by nearly 18 percent, while a countries—contributed to a 7.8 percent in- drought and increased fighting are expected crease in consumer demand. to slow growth in Afghanistan to a still robust Reflecting very strong demand, inflation 12 percent. in the region has risen from an average of Despite higher nominal interest rates, rising 3.8 percent in 2003 to 7.8 percent in September inflation has kept real interest rates close to zero (and from 4.3 to 6.8 percent in India). This or negative (see figure A.10). This, plus strong has occurred despite the failure of most gov- capital inflows (predominantly in the form of ernments to pass through much of the in- portfolio investment) has led to a substantial crease in world oil prices. In 2006, inflation expansion of credit throughout the region. At was up in Bangladesh, India, and Nepal. the same time, despite rapidly rising tax rev- Tighter monetary policies in Pakistan are ex- enues, fiscal deficits remain elevated at 7.1 per- pected to bring inflation down to about 8 per- cent of GDP overall (about 7.5 percent in India) cent from 9.1 percent in 2005. In Sri Lanka, because of increased implicit subsidization of inflationary pressures have reemerged since energy costs and major public-sector invest- April 2006, reflecting adjustments in fuel ment programs. Higher government expendi- prices and rapid money supply growth, de- tures for reconstruction tied to natural disasters spite increases in policy rates and open market 53 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 operations. In October, the annual rate of in- to translate into a sharp reduction in the cur- flation (year-over-year) was 17.2 percent. rent account deficit, from about 40 percent of Ample international and domestic liquidity GDP in 2005 to an estimated 20 percent in has also contributed to a strong runup in asset 2006. Substantial remittance inflows and weak prices, with the stock markets in India and domestic demand are estimated to have sup- Pakistan rising by roughly 45 percent (in both ported Nepal’s current account surplus at more dollar and local-currency terms, as of mid- than 2 percent of GDP, while in Bangladesh, November). remittances and strong export growth are The influence of excessive domestic demand expected to bring the current account to a was also reflected in the strength of import vol- surplus of nearly 1 percent of GDP. (See fig- umes, which are estimated to have grown by ure A.11.) 24 percent in 2006. As a result, notwithstand- ing a record 22 percent increase in exports, the external sector made a Ϫ1.7 percent contribu- tion to regional growth. These developments, in combination with further oil-price hikes, caused the regional current account deficit to deteriorate from Ϫ1.4 to Ϫ2.2 percent of GDP, despite strong remittance inflows in many of the regional economies. The largest deteriora- tion was recorded in Sri Lanka, where the cur- rent account deficit is projected to reach about 4.9 percent of GDP in 2006 compared with 2.8 percent in 2005, owing to a sharp rise in import growth combined with weaker export growth. India and Pakistan witnessed more modest increases in their deficits. In the Maldives, a significant easing of import demand—which had spiked in 2005 because of the massive reconstruction effort—is expected 54 R E G I O N A L E C O N O M I C P R O S P E C T S Medium-term outlook are expected to contribute to a moderation of Real GDP in South Asia is projected to slow GDP growth to about 7.2 percent over the gradually from 8.2 percent in 2006 to a still forecast horizon. In Pakistan, neither fiscal robust 7 percent in 2008 (5.5 percent in per nor monetary policy are likely to turn restric- capita terms). Weaker external demand, re- tive in the run up to the 2007 presidential elec- flecting slower growth in the United States in tion. As a result, GDP in Pakistan is expected 2007 (a major trading partner for the region), to pick up in 2007, bolstered by an expansion tighter domestic monetary and fiscal policies, in agricultural production and increased ca- and tighter international monetary conditions pacity following government infrastructure in- are all factors contributing to the expected vestments and private sector investments in slowdown. the textile sector. Growth is expected to tail This projection assumes a modest tighten- off in 2008 as more restrictive macroeco- ing of fiscal policy over the next two years, fol- nomic policies begin to restrain domestic lowing several years during which increased demand. subsidy spending on heavy fuel and heating oil Among the smaller regional economies, kept deficits elevated despite rapid growth growth in Sri Lanka is projected to be sus- and rising revenues. A notable exception is tained at current rates, supported by a number Pakistan where higher deficits are anticipated of post-tsunami infrastructure and reconstruc- because of earthquake reconstruction efforts tion projects (ports, roads, buildings) and by and subsidies. The stance of monetary policy an expected recovery in tourism. In Nepal, in the region is also expected to tighten, and growth is projected to strengthen, owing to di- higher borrowing costs should cause invest- minished political uncertainties following the ment growth (which is already anticipated to recent restoration of Parliament and the cessa- have reached its cyclical peak) to slow to tion of fighting with insurgents. Bhutan’s eco- single-digit rates in 2008. Overall, the initial nomic expansion is expected to remain strong, weakening and then strengthening of export at about 12 percent in 2007, as the impacts of demand, in line with the slowdown and recov- the Tala hydropower project continue to be ery projected for the United States, combined felt. In the Maldives, the construction of 46 with an easing of energy prices and weaker new resorts will contribute to growth of about domestic demand is projected to result in a 7 percent. modest deterioration in the regional current account balance in 2007, followed by a simi- Risks and policy challenges larly small improvement in 2008. Governments in the region will need to strike Despite somewhat weaker prospects, appropriate policy stances if the projected soft domestic demand is projected to continue ex- landing is to be achieved. The incomplete pass- panding at the same rate as—or faster than— through of past energy price increases to con- supply. This, combined with emerging capacity sumers suggests that significant latent inflation- constraints and the expectation that past in- ary pressures remain. In the baseline scenario, a creases in international energy prices will be relatively aggressive policy tightening is as- gradually passed on to consumers, should pre- sumed, which allows overheating tensions to clude any significant easing of inflationary dissipate smoothly. Should policy not tighten pressures. and demand continue to expand well in excess of Prospects for individual countries will be supply, inflation outturns will be higher, current affected by weather, political developments, account deficits larger, and the subsequent slow- and earlier outturns. In India, slower invest- down more pronounced and disruptive. Most ment growth in response to tighter financial vulnerable are countries such as Pakistan, where conditions and weaker consumer and govern- the current account and fiscal deficits are large ment consumption (as fiscal policy tightens) (both projected at 4 percent or more of GDP for 55 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Table A.11 South Asia country forecasts Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Bangladesh GDP at market prices (2000 US$)b 4.5 5.3 6.3 6.2 6.7 6.2 6.5 Current account balance/GDP (%) Ϫ0.4 0.3 Ϫ0.4 Ϫ0.9 0.9 0.4 Ϫ0.6 India GDP at market prices (2000 US$)b 5.4 8.6 8.5 8.5 8.7 7.7 7.2 Current account balance/GDP (%) Ϫ1.2 1.1 Ϫ0.8 Ϫ1.3 Ϫ2.2 Ϫ2.5 Ϫ2.4 Nepal GDP at market prices (2000 US$)b 4.4 3.1 3.8 2.7 1.9 3.7 4.5 Current account balance/GDP (%) Ϫ6.3 2.1 2.9 2.2 2.4 3.9 2.9 Pakistan GDP at market prices (2000 US$)b 3.4 5.0 6.4 7.8 6.6 7.0 6.5 Current account balance/GDP (%) Ϫ3.7 4.3 Ϫ0.8 Ϫ3.1 Ϫ3.9 Ϫ4.4 Ϫ5.3 Sri Lanka GDP at market prices (2000 US$)b 4.7 6.0 5.4 6.0 7.0 6.5 6.0 Current account balance/GDP (%) Ϫ4.6 Ϫ0.6 Ϫ3.2 Ϫ2.8 Ϫ4.9 Ϫ4.1 Ϫ3.5 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other Bank documents. Afghanistan, Bhutan, and the Maldives are not forecast owing to data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. 2006) and hard currency reserves are relatively on growth, particularly of investment. An es- low (with import cover down to about 3.5 calation of these situations—or the emergence months in 2006 from over 9 months in 2003). of political conflict elsewhere in the region— Higher-than-anticipated international oil could lead to a fall in output, with potentially prices due to a significant interruption of supply serious consequences for the most vulnerable also are an important risk for the region. Higher members of society. Externally, heightened ten- prices would have a direct impact on inflation, sions in the Middle East—the source of the the current account deficit, and the government majority of migrant remittances flowing to balance because of increased government spend- South Asia—could result in a sharp fall-off in ing on fuel subsidies. At the same time, reduced transfer payments (in addition to the above- exports due to slower global growth would mentioned rise in oil prices). weaken government revenues and export earn- ings, thereby exacerbating direct impacts on government and current account deficits. A si- Sub-Saharan Africa regional multaneous rise in both fiscal and current ac- prospects count imbalances could undermine the per- ceived creditworthiness of countries in the Recent developments region, resulting in significantly higher interest GDP in Sub-Saharan Africa is estimated to rates that could undermine growth prospects. have increased an impressive 5.3 percent in Political tensions, both domestic and exter- 2006, down marginally from 5.5 percent in nal, also pose risks. The simmering domestic 2005 and marking the third year of more than conflict in Sri Lanka and the international 5 percent growth (table A.12). The decelera- tensions on Pakistan’s borders generate insta- tion in growth is mainly explained by a mod- bility and reduce confidence, acting as drags erate slowdown in South Africa, the region’s 56 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.12 Sub-Saharan Africa forecast summary Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 GDP at market prices (2000 US$)b 2.3 4.2 5.2 5.5 5.3 5.3 5.4 GDP per capita (units in US$) 0.0 1.9 3.0 3.2 3.3 3.3 3.5 PPP GDPc 3.2 3.8 5.4 5.7 5.6 5.7 5.7 Private consumption 1.9 0.6 5.6 5.8 5.3 4.5 4.6 Public consumption 2.9 7.2 5.7 5.7 5.0 5.9 5.9 Fixed investment 3.8 7.7 13.6 9.0 13.6 8.7 8.7 Exports, GNFSd 4.3 7.5 6.0 6.8 5.7 7.2 7.1 Imports, GNFSd 4.3 7.3 9.5 9.2 10.3 7.7 7.7 Net exports, contribution to growth 0.7 Ϫ1.7 Ϫ3.0 Ϫ3.9 Ϫ5.6 Ϫ5.9 Ϫ6.3 Current account balance/GDP (%) Ϫ2.1 Ϫ1.0 Ϫ0.2 0.8 0.3 Ϫ0.2 Ϫ0.9 GDP deflator (median, LCU) 10.0 5.7 6.4 6.7 5.8 4.6 5.0 Fiscal balance/GDP (%) Ϫ4.4 Ϫ2.6 Ϫ2.4 Ϫ1.3 Ϫ1.0 Ϫ1.2 Ϫ0.9 Memo items: GDP Sub-Saharan Africa, excluding South Africa 2.6 5.0 5.7 5.9 5.8 6.2 6.1 Oil exporters 2.4 6.7 6.6 7.0 6.9 7.5 7.2 CFA countries 2.5 3.5 5.0 4.3 4.1 3.6 4.4 Kenya 1.7 3.0 4.9 5.8 4.9 5.1 4.9 Nigeria 2.2 10.7 6.5 6.2 4.8 5.1 5.4 South Africa 1.9 3.0 4.5 4.9 4.6 3.9 4.3 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. c. GDP is measured at PPP exchange rates. d. Exports and imports of goods and nonfactor services. largest economy. Excluding South Africa, re- by the United States and the European Union gional growth was steady at 5.8 percent, with to reintroduce quotas on Chinese clothing and oil exporters growing 6.9 percent and small oil textile exports, the value of regional exports importers 4.7 percent (figure A.12). Encourag- of these goods to the United States and the ingly, this strong growth has been broadly European Union declined by 17.3 percent and based, with a third of the countries experienc- 16.9 percent, respectively, over 2005, and sim- ing growth in excess of 5 percent and only six ilar declines are expected this year. However, countries experiencing declining per capita in- China also represents a rapidly growing desti- comes (the Republic of Congo, Eritrea, Gabon, nation for the region’s exports and, of course, the Seychelles, Swaziland, and Zimbabwe). Chinese demand has played a key role in the Robust growth in the region reflects favor- rise of commodity prices. able international conditions and a substan- At the same time, debt relief combined with tially improved domestic policy environment lower interest rates and risk premia have re- that has improved countries’ supply potential. duced debt-servicing costs, increasing public Low world interest rates have contributed to funds available for productive investment. In strong global growth, which has been reflected addition, aid flows to poor African countries in an acceleration in regional exports (notably have been increasing. These factors have made to China), and higher prices for many of the re- investment projects more attractive, which is gion’s commodities—most notably oil but also reflected in a 7.7 percentage point increase in metals and minerals. average investment growth rates between the Export competition from China and India 1990s and the first half of this decade (3.1 per- has been intense. Notwithstanding decisions centage points for small oil importers). 57 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Growth among small oil importers was years because capacity constraints are begin- broadly stable at 4.7 percent in 2006. In West ning to be felt. The relative weakness in the oil Africa, a recovery in agriculture, good perfor- sectors was largely offset by strong domestic mance in the industrial sector, and strong ex- demand, fueled by oil receipts, which caused ports bolstered growth. For the aggregate, this the non-oil sectors in most oil-exporting coun- was offset by weaker performance in East tries in the region to expand rapidly. However, Africa, where drought-related crop failures and the impact on GDP was mitigated by an esti- a decline in hydro-based electrical production mated 11 percent increase in import volumes. took a toll on growth. Strong minerals and met- The slowdown in South Africa, where GDP als prices have fueled growth in a number of is expected to increase by 4.6 percent for the countries such as Guinea (aluminum, alumina), year as a whole, reflected weaker performance Namibia (diamonds), and Zambia (copper). in the mining sector and poor crops. In contrast, The economies of the Seychelles and Zimbabwe the manufacturing sector and service sectors continued to contract, while those of Eritrea, have experienced relatively strong growth. On Lesotho, and Swaziland are estimated to have the demand side, household expenditure has expanded by less than 2 percent. been exceptionally strong, benefiting from low The economies of oil exporters grew an es- nominal interest rates, rising real incomes, and timated 6.9 percent in 2006, down marginally wealth effects. Indeed, consumer confidence re- from 7 percent the year before. Output decel- mains at historically high levels and consumer erated in Angola, Chad, the Republic of spending has shown little signs of easing even in Congo, and Nigeria but accelerated in the wake of the latest increase in interest rates. Cameroon and Sudan. Technical difficulties in Despite higher oil prices and robust domestic Chad and civil strife in Nigeria disrupted oil demand, inflation accelerated in only a handful production, which contributed to falls in oil of countries, owing to prudent monetary output in both countries. In Angola output policies, low global inflation, improved crops, continued to rise but less rapidly than in past and falling food prices in most countries. In 58 R E G I O N A L E C O N O M I C P R O S P E C T S Eastern and Southern Africa there was a pickup (figure A.13). In South Africa weak export in aggregate inflation, reflecting drought-induced growth and strong domestic demand provoked a food scarcity, although core inflation rates have sharp deterioration in the current account deficit, been coming down. which jumped to 6.4 percent of GDP in the first In South Africa, excessive domestic demand quarter of 2006, the highest rate in 24 years. Fol- in conjunction with higher oil prices and in- lowing the depreciation of the rand in May–June, creased import costs following the rand’s depre- the deficit declined to 6.1 percent of GDP in ciation threaten to push inflation above 6 per- the second quarter. Further improvements in the cent, the upper limit targeted by the central bank. third and fourth quarters are expected, so that the Indeed, producer price inflation accelerated to deficit declines to 5.5 percent of GDP for the year 9.2 percent in August. While producer prices as a whole. The current account deficit of small eased somewhat in September, indications are oil importers—excluding Mauritania, which that consumer price index inflation will continue started oil production in February 2006— to accelerate. In oil-producing countries, cur- deteriorated only marginally to an estimated 5.5 rency appreciation has helped keep inflation in percent of GDP in 2006 from 5.1 percent of GDP check, despite strong domestic demand, but diffi- the year before, thanks to marked improvements culties in sterilizing oil revenues has kept inflation in the current account balances of Burkina Faso, at relatively high levels. Malawi, Mali, Sierra Leone, and Zambia. Several years of strong growth and the rise of oil Several countries in Sub-Saharan Africa prices have increased the current account deficits have received additional debt relief from Paris of several oil-importing economies in the region to Club creditors under the Multilateral Debt worrisome levels, although higher commodity Relief Initiative (MDRI), which are expected prices and increased official and private trans- to reduce their debt-servicing charges by sub- fers have helped contain the deterioration stantial margins. 59 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Medium-term outlook also represent a drag on growth for closely Growth in Sub-Saharan Africa is projected to linked economies. While increased Chinese de- remain above 5 percent over the next two mand for cotton and declines in price subsidies years, as small oil-importing economies con- in the European Union and the United States tinue to grow by about 4.8 percent and growth should benefit cotton producers in West Africa, in oil exporters accelerates owing to increasing further declines in market share are expected capacity in Angola and Equatorial Guinea, as among textile exporters as producers lose share well as a normalization of production levels in to low-cost producers such as China and India. Nigeria. Economic activity is projected to accelerate Economic growth in the regional power- further among oil-producing countries to house, South Africa, is expected to decelerate above 7.5 percent in 2007, and to remain to less than 4 percent next year, owing to above 7 percent in 2008. New fields and more weaker domestic demand following increases efficient extraction should boost oil production in interest rates, the depreciation of the rand, in Angola (up 20 percent) and Equatorial and higher inflation. While slower credit Guinea (up 8 percent), while production in growth and reduced revenues from commod- Nigeria is expected to rebound following this ity exports due to price declines are expected year’s disruptions. In the Republic of Congo, to slow investment and consumer spending, depletion of existing oil fields is projected to a hard landing is not anticipated—in part cause a sharp contraction in the oil sector, because the depreciation of the rand should dragging growth down to 1 percent. Notwith- boost output in the export sector, notably in standing lower oil prices, revenues remain ele- the mining and manufacturing sectors, and vated and will continue to fund rapid domestic because government infrastructure spending demand growth in excess of 7 percent. will increase ahead of the 2010 Soccer Inflationary pressures are projected to sub- World Cup. side in many oil-importing economies in the Growth in small oil-importing countries is region, owing to lower international oil and projected to pick up somewhat, coming in at non-oil commodity prices, improved food 4.9 percent in 2008, although growth in supply, and prudent monetary policies. In oil- Eritrea, Lesotho, the Seychelles, Swaziland, and producing countries currency appreciation Zimbabwe is projected to remain below 2 per- will help tame inflationary pressures stem- cent. This relative strength is predicated on im- ming from pent-up domestic demand, the im- proved rainfall in East and West Africa, which minent consequence of large increases in is expected to restore hydroelectrical produc- public spending, higher private consumption, tion and improve agricultural output. Growth and supply bottlenecks. In South Africa infla- in these economies should also benefit from tionary pressure is projected to inch upward strengthening investment and government in the first part of 2007, exceeding 6 percent, spending, as debt relief and increased aid flows before easing in the second half, as weaker free resources for infrastructure and social private consumption offsets inflationary pres- service projects. Over the medium term, im- sures stemming from higher import costs, the proved road, electricity, and telecom infrastruc- consequence of a weaker rand, and higher ture will help reduce the cost of doing business construction costs as infrastructure investment in many countries, benefiting other sectors of picks up. Zimbabwe will remain the region’s the economy. On the downside, lower interna- outlier, experiencing the highest inflation rate tional agricultural, metal, and mineral prices in the world. will negatively affect domestic incomes, and Despite a projected decline in oil prices to high fertilizer prices are expected to reduce crop $53 per barrel, strong growth and weaker non- yields and agricultural incomes. Weaker do- oil commodity prices are expected to contribute mestic demand expansion in South Africa will to a further deterioration in the current account 60 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.13 Sub-Saharan Africa country forecasts Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Angola GDP at market prices (2000 US$)b 0.9 3.4 11.1 18.7 16.9 22.3 15.7 Current account balance/GDP (%) Ϫ6.0 Ϫ5.0 3.5 8.7 11.9 15.3 13.1 Benin GDP at market prices (2000 US$)b 4.3 3.9 3.1 3.5 4.3 4.2 4.1 Current account balance/GDP (%) Ϫ6.8 Ϫ9.8 Ϫ7.9 Ϫ7.3 Ϫ7.4 Ϫ7.4 Ϫ7.4 Botswana GDP at market prices (2000 US$)b 4.4 6.7 4.9 4.0 5.2 4.3 4.1 Current account balance/GDP (%) 8.4 6.0 9.9 14.0 14.0 12.1 9.5 Burkina Faso GDP at market prices (2000 US$)b 3.2 8.0 4.6 7.1 6.5 4.9 5.2 Current account balance/GDP (%) Ϫ5.6 Ϫ12.2 Ϫ13.2 Ϫ12.2 Ϫ6.9 Ϫ6.5 Ϫ5.0 Burundi GDP at market prices (2000 US$)b Ϫ2.2 Ϫ1.2 4.8 0.9 5.3 5.7 5.4 Current account balance/GDP (%) Ϫ3.4 Ϫ4.8 Ϫ8.1 Ϫ10.5 Ϫ15.6 Ϫ14.3 Ϫ13.7 Cameroon GDP at market prices (2000 US$)b 1.8 4.2 3.6 2.4 4.1 3.9 4.1 Current account balance/GDP (%) Ϫ3.6 Ϫ6.3 Ϫ3.1 Ϫ2.0 0.5 0.2 0.2 Cape Verde GDP at market prices (2000 US$)b 5.6 5.0 4.4 5.9 5.8 5.9 5.6 Current account balance/GDP (%) Ϫ8.3 Ϫ11.1 Ϫ14.6 Ϫ4.5 Ϫ9.0 Ϫ8.6 Ϫ8.2 Central African Republic GDP at market prices (2000 US$)b 1.7 Ϫ4.6 1.8 2.8 3.6 3.9 4.3 Current account balance/GDP (%) Ϫ4.3 Ϫ2.2 Ϫ4.5 Ϫ2.8 Ϫ3.1 Ϫ2.9 Ϫ3.0 Chad GDP at market prices (2000 US$)b 1.2 14.3 33.2 8.4 3.9 2.8 2.7 Current account balance/GDP (%) Ϫ5.5 Ϫ43.9 Ϫ3.8 4.1 8.7 7.0 4.8 Comoros GDP at market prices (2000 US$)b 1.8 2.1 Ϫ0.2 4.2 1.3 2.1 2.7 Current account balance/GDP (%) Ϫ6.7 Ϫ4.1 Ϫ4.1 Ϫ4.6 Ϫ4.7 Ϫ4.2 Ϫ3.7 Congo, Rep. of GDP at market prices (2000 US$)b 1.3 0.8 3.6 7.7 6.8 1.1 6.5 Current account balance/GDP (%) Ϫ16.5 14.1 20.7 19.6 25.5 25.4 25.6 Côte d’Ivoire GDP at market prices (2000 US$)b 2.3 Ϫ1.5 1.5 1.8 1.7 2.2 2.7 Current account balance/GDP (%) Ϫ4.0 2.0 1.6 Ϫ0.1 1.7 2.5 2.3 Equatorial Guinea GDP at market prices (2000 US$)b 18.5 14.0 29.4 8.1 8.2 8.3 12.3 Current account balance/GDP (%) Ϫ33.0 Ϫ147.6 Ϫ23.8 Ϫ13.4 Ϫ7.0 Ϫ8.4 Ϫ8.6 Eritrea GDP at market prices (2000 US$)b 3.0 2.8 4.5 1.7 1.9 2.4 Current account balance/GDP (%) 11.0 5.9 Ϫ0.6 Ϫ1.1 Ϫ1.7 Ϫ1.9 Ethiopia GDP at market prices (2000 US$)b 3.8 Ϫ3.9 12.3 8.7 5.8 5.6 5.5 Current account balance/GDP (%) Ϫ0.9 Ϫ2.6 Ϫ4.4 Ϫ7.6 Ϫ7.7 Ϫ5.5 Ϫ4.9 Gabon GDP at market prices (2000 US$)b 1.8 2.2 1.4 2.9 2.7 1.9 2.7 Current account balance/GDP (%) 5.6 9.5 10.9 15.9 21.3 19.7 17.2 Gambia, The GDP at market prices (2000 US$)b 3.0 6.9 5.1 5.0 4.4 3.8 3.6 Current account balance/GDP (%) 4.5 Ϫ5.7 Ϫ11.8 Ϫ12.7 Ϫ9.1 Ϫ6.9 Ϫ5.9 (continued) 61 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 Table A.13 (continued ) Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Ghana GDP at market prices (2000 US$)b 3.8 5.2 5.8 5.4 5.6 5.7 5.8 Current account balance/GDP (%) Ϫ6.5 1.9 Ϫ2.7 Ϫ7.6 Ϫ7.6 Ϫ7.1 Ϫ6.9 Guinea GDP at market prices (2000 US$)b 3.8 1.2 2.6 3.1 4.1 4.7 3.9 Current account balance/GDP (%) Ϫ5.7 Ϫ2.9 Ϫ5.2 Ϫ2.9 Ϫ4.0 Ϫ3.2 Ϫ3.1 Guinea-Bissau GDP at market prices (2000 US$)b 1.0 0.6 1.6 2.4 3.8 2.9 3.1 Current account balance/GDP (%) Ϫ24.0 Ϫ10.9 3.1 Ϫ7.1 Ϫ5.2 Ϫ7.8 Ϫ7.0 Kenya GDP at market prices (2000 US$)b 1.7 3.0 4.9 5.8 4.9 5.1 4.9 Current account balance/GDP (%) Ϫ1.6 0.4 Ϫ2.7 Ϫ2.2 Ϫ3.5 Ϫ5.5 Ϫ4.7 Lesotho GDP at market prices (2000 US$)b 3.0 3.3 2.7 1.3 1.7 1.8 2.1 Current account balance/GDP (%) Ϫ13.3 Ϫ10.7 Ϫ2.3 13.4 16.3 17.9 19.6 Madagascar GDP at market prices (2000 US$)b 2.4 9.8 5.2 4.6 4.9 5.3 5.5 Current account balance/GDP (%) Ϫ7.8 Ϫ8.0 Ϫ9.3 Ϫ11.2 Ϫ10.6 Ϫ9.6 Ϫ8.3 Malawi GDP at market prices (2000 US$)b 2.6 3.9 5.1 2.1 8.1 4.7 5.1 Current account balance/GDP (%) Ϫ8.5 Ϫ7.9 Ϫ9.7 Ϫ8.1 Ϫ4.7 Ϫ6.3 Ϫ5.8 Mali GDP at market prices (2000 US$)b 3.9 7.6 2.3 6.8 5.7 5.0 4.8 Current account balance/GDP (%) Ϫ5.7 Ϫ13.0 Ϫ6.1 Ϫ7.9 Ϫ6.6 Ϫ5.8 Ϫ5.4 Mauritania GDP at market prices (2000 US$)b 4.5 6.4 5.2 5.4 17.9 9.8 14.7 Current account balance/GDP (%) Ϫ0.6 Ϫ9.4 Ϫ19.2 Ϫ40.0 4.7 Ϫ1.5 3.7 Mauritius GDP at market prices (2000 US$)b 4.6 4.4 4.7 2.5 3.8 2.9 2.7 Current account balance/GDP (%) Ϫ1.6 1.7 Ϫ1.6 Ϫ3.9 Ϫ4.8 Ϫ6.2 Ϫ6.4 Mozambique GDP at market prices (2000 US$)b 5.1 7.8 7.5 6.6 6.9 6.5 6.7 Current account balance/GDP (%) Ϫ17.2 Ϫ14.1 Ϫ8.6 Ϫ10.8 Ϫ12.3 Ϫ13.9 Ϫ13.7 Namibia GDP at market prices (2000 US$)b 3.4 3.5 6.0 3.3 3.5 3.9 4.1 Current account balance/GDP (%) 4.1 5.4 8.6 8.8 9.0 5.9 2.3 Niger GDP at market prices (2000 US$)b 1.5 3.8 Ϫ0.6 7.1 4.1 4.0 4.0 Current account balance/GDP (%) Ϫ6.9 Ϫ12.2 Ϫ12.2 Ϫ10.8 Ϫ7.7 Ϫ7.4 Ϫ6.6 Nigeria GDP at market prices (2000 US$)b 2.2 10.7 6.5 6.2 4.8 5.1 5.4 Current account balance/GDP (%) 0.7 16.3 17.7 23.1 18.5 17.6 15.2 Rwanda GDP at market prices (2000 US$)b 0.4 0.9 4.0 6.5 5.1 6.1 5.7 Current account balance/GDP (%) Ϫ3.5 Ϫ7.5 Ϫ2.7 Ϫ3.6 Ϫ9.3 Ϫ10.2 Ϫ9.7 Senegal GDP at market prices (2000 US$)b 3.0 6.5 5.6 5.5 3.8 5.1 5.2 Current account balance/GDP (%) Ϫ6.0 Ϫ7.6 Ϫ7.1 Ϫ9.9 Ϫ9.9 Ϫ8.9 Ϫ8.0 Seychelles GDP at market prices (2000 US$)b 4.3 Ϫ6.3 Ϫ2.0 Ϫ2.3 Ϫ1.8 0.4 0.9 Current account balance/GDP (%) Ϫ7.4 Ϫ2.3 Ϫ4.2 Ϫ13.1 Ϫ4.1 Ϫ3.9 Ϫ3.7 62 R E G I O N A L E C O N O M I C P R O S P E C T S Table A.13 (continued ) Annual percent change (unless otherwise indicated) Estimate Forecast 1991–2000a 2003 2004 2005 2006 2007 2008 Sierra Leone GDP at market prices (2000 US$)b Ϫ5.6 9.3 7.4 7.2 6.9 6.1 6.2 Current account balance/GDP (%) Ϫ9.0 Ϫ7.1 Ϫ4.3 Ϫ8.4 Ϫ6.9 Ϫ6.0 Ϫ5.6 South Africa GDP at market prices (2000 US$)b 1.9 3.0 4.5 4.9 4.6 3.9 4.3 Current account balance/GDP (%) Ϫ0.2 Ϫ1.4 Ϫ3.5 Ϫ4.2 Ϫ5.9 Ϫ5.7 Ϫ5.3 Sudan GDP at market prices (2000 US$)b 4.9 6.0 5.2 7.9 11.8 10.1 9.2 Current account balance/GDP (%) Ϫ6.8 Ϫ5.4 Ϫ3.4 Ϫ11.0 Ϫ5.1 Ϫ3.7 Ϫ3.5 Swaziland GDP at market prices (2000 US$)b 2.8 2.4 2.1 1.8 1.2 1.1 0.9 Current account balance/GDP (%) Ϫ2.6 1.7 1.4 Ϫ1.9 Ϫ2.5 Ϫ3.1 Ϫ4.0 Tanzania GDP at market prices (2000 US$)b 2.7 5.7 6.7 6.9 5.5 7.1 6.8 Current account balance/GDP (%) Ϫ12.5 Ϫ0.6 Ϫ3.0 Ϫ4.7 Ϫ7.3 Ϫ7.2 Ϫ7.6 Togo GDP at market prices (2000 US$)b 2.3 Ϫ1.3 4.6 1.5 2.8 2.7 3.1 Current account balance/GDP (%) Ϫ8.5 Ϫ9.9 Ϫ7.6 Ϫ11.0 Ϫ9.0 Ϫ7.2 Ϫ7.0 Uganda GDP at market prices (2000 US$)b 6.2 6.5 5.5 6.3 5.1 5.7 5.8 Current account balance/GDP (%) Ϫ7.0 Ϫ5.1 Ϫ1.7 Ϫ2.8 Ϫ6.5 Ϫ7.4 Ϫ7.0 Zambia GDP at market prices (2000 US$)b 0.7 5.1 5.4 4.8 5.1 4.9 4.6 Current account balance/GDP (%) Ϫ10.5 Ϫ8.1 Ϫ10.3 Ϫ7.8 Ϫ6.1 Ϫ6.9 Ϫ7.3 Zimbabwe GDP at market prices (2000 US$)b 0.4 Ϫ10.4 Ϫ3.8 Ϫ6.5 Ϫ3.3 Ϫ2.9 Ϫ2.1 Current account balance/GDP (%) Ϫ7.5 Ϫ6.1 Ϫ19.4 Ϫ20.6 Ϫ7.6 Ϫ8.7 Ϫ9.4 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other Bank documents. The Democratic Republic of Congo, Liberia, Mayotte, São Tome and Principe, and Somalia are not forecast owing to data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP is measured in constant 2000 U.S. dollars. deficits of small oil-importing Sub-Saharan to this relatively benign scenario. A hard land- countries from 5.5 percent of GDP (excluding ing in the region’s major export markets (the Mauritania) in 2006 to 6.9 percent of GDP in European Union and South Africa) would 2008. Surpluses in oil exporters are also pro- soften external demand and could result in a jected to decline (from 10.7 to 8.9 percent of sharper-than-projected correction in commod- GDP) and as a result, the region as a whole is ity prices. This would exacerbate the projected expected to move from a moderate surplus of deterioration in regional current account 0.4 percent of GDP to a deficit of 0.8 percent balances, likely requiring many small oil- of GDP (figure A.14). importing countries to cut into imports and domestic demand because of limited access to Risks and policy challenges financial markets. Higher oil prices, lower non-oil commodity A disorderly adjustment in global imbal- prices, and a disorderly adjustment in global ances would have similar effects, but would imbalances all present significant external risks also cause the euro to appreciate, which would 63 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 gion’s second-largest economy as consumer and investor confidence wanes. Notes 1. The Web site of the World Bank’s East Asia and Pacific region (http://www.worldbank.org/eapupdate/) provides more detailed information on recent develop- ments and prospects for individual countries in the region. 2. In addition to higher interest rates and raising re- serve requirements, administrative measures included limits on real-estate investment; reinforcement of exist- ing restrictions on investment projects, including a reevaluation of all large investment projects; and loos- ening of controls on capital outflows. 3. The earthquake in the Yogyakarta and Central Java regions yielded property and livelihood destruc- tion equivalent to the toll from the December 2004 tsunami in Aceh. There was another smaller tsunami in West Java and a mud volcano in East Java, all adding to the toll of destroyed property and displaced people. 4. “Serbia and Montenegro” is used when separate data for the Republic of Serbia and the Republic of Montenegro are not available. undermine the export competitiveness of 5. For the purposes of this report the Middle East and North Africa region is restricted to the following countries with currencies pegged to the euro. developing countries within the geographic region: In addition, the higher interest rates that Algeria, the Arab Republic of Egypt, Jordan, the Islamic would likely accompany a disorderly adjust- Republic of Iran, Lebanon, Morocco, Oman, Syrian ment would reduce global liquidity and invest- Arab Republic, Tunisia, and the Republic of Yemen. ment, exacerbating the impact on demand Data limitations prevent the inclusion of Djibouti, caused by reduced global imports. Iraq, Libya, and the West Bank/Gaza in the projections. Drought presents an important domestic Among high-income countries in the geographic region the following are included: Bahrain, Kuwait, and Saudi risk to growth, threatening subsistence and ex- Arabia. Data problems preclude the inclusion of Qatar port crops. Moreover, because the region has and the United Arab Emirates in the high-income become more reliant on hydroelectrical power, aggregates. secondary and tertiary sectors are also sensi- The World Bank’s MENA: Economic Developments tive to sustained shortages in rainfall. and Prospects—2006 offers a useful breakout of coun- Finally, political turmoil could undermine tries based on resource and labor endowments. It is growth outcomes in Chad, the Democratic available at http://www-wds.worldbank.org/mena. 6. Projects valued at $1 trillion were either planned Republic of Congo, Côte d’Ivoire, Eritrea, or underway by Gulf Cooperation Council (GCC) con- Lesotho, the Seychelles, Somalia, Swaziland, cerns as of April 2006, up from $277 billion 18 months and Zimbabwe. Local unrest and uncertainty earlier (Institute for International Finance. September related to the election results in Nigeria could 2006. “Capital Flows to Emerging Market.” 2006. “ISI postpone the growth bounce-back in the re- Emerging Market News: Middle East and Africa.” 64 R E G I O N A L E C O N O M I C P R O S P E C T S 65 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 66 R E G I O N A L E C O N O M I C P R O S P E C T S 67 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 68 R E G I O N A L E C O N O M I C P R O S P E C T S 69 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 7 70 Globalization will likely intensify O ver the next 25 years, developing countr ies will move to center over the coming years. Our ability stage in the global economy. Global Economic Prospects 2007: Managing the Next Wave of Globalization analyzes the opportunities— to harness this next wave to and tensions—this will create. While r ich and poor countr ies alike stand to benefit as many people as possible benefit, certain stresses already apparent today—in income inequality, in will determine whether the world labor markets, and in the environment—will become more acute. of 2030 will realize its potential. By 2030, the world’s population will have r isen from some 6.5 billion to 8 billion, with more than 97 percent of this growth in developing coun- —François Bourguignon tr ies. Over the next 25 years, rapid technological progress, burgeoning trade Senior Vice President and in goods and services, and the increased integration of financial markets will Chief Economist facilitate faster long-term growth. However, some regions, notably Afr ica, are at r isk of being left behind. Moreover, even though many in the devel- oping world are likely to enter what can be called the “global middle class,” income inequality could widen within many countr ies. At the same time, low-wage competition from China, India, and other developing countr ies— not only in goods trade but also in services—will place additional pressure on an integrating global market for labor. Unskilled workers, in particular, may fall farther behind. Managing these forces will place a new burden on national policy makers—and on the international community as a whole— to ensure that the opportunities of global integration are broadly shared. The coming globalization will also see intensified stresses on the “global commons.” Addressing global warming, preserving mar ine fisher ies, and containing infectious diseases will require effective multilateral collaboration to ensure that economic growth and poverty reduction proceed without causing irreparable harm to future generations. Global Economic Prospects 2007: Managing the Next Wave of Globalization builds on an analysis of short-term prospects for the world economy to present scenar ios for its future, analyzing the challenges that policy makers confront today in shaping the world economy of tomorrow. For additional information, please visit www.worldbank.org/prospects. To access Prospects for the Global Economy, an online companion publication, please visit www.worldbank.org/globaloutlook.