Middle-income countries are at risk of slipping backward as the global economic recovery sputters, shredding many of the developmental gains achieved in recent years, a leading figure at the World Bank warned on Saturday.
Sri Mulyani Indrawati, managing director of the World Bank and a former Indonesian finance minister, warned that this slippage was hurting those economies that had emerged from poverty over recent decades, but had yet to transform themselves into fully developed or wealthy nations.
“After the 2008 financial crisis, there was this euphoria among many middle-income countries: an assumption that the [developed and developing] worlds would decouple” – thereby making the economies of Africa, Latin America and Asia less dependent on the spending habits of Western consumers.
Yet this didn’t happen. “The decoupling wasn’t there,” she added. “And this has led to a slowdown among [most] middle-income countries in 2012 – and 2013 is not going to be dramatically better.”
Major emerging economies such as China were most at threat, she warned. Hundreds of millions of Chinese people had been lifted out of poverty over the past three decades, thanks to Beijing’s hitherto successful economic model, which favours exports over private capital and domestic consumption.
Yet this model, she warned, “was no longer working”, and could not be revived until Europe’s problems are brought under control. “This is a very serious problem for emerging and middle-income countries, seeking to change their growth model without slipping backward,” she added.
Even smaller middle-income nations are in danger of slipping backward as global economic growth slowed, experts have warned. Lorne McDonnough, chief executive of Barbados-based Caricom Development Fund, said that incomes in many Caribbean states were slipping fast. “Many Caribbean states can go back to being much poorer,” McDonnough told Emerging Markets. “Multilaterals are focusing on funding the needs of poorer states, and that is hitting middle-income nations – many of them are losing ground now.”
Sri Mulyani also voiced her fears that China, whose economy is likely this year to grow at less than 8%, the minimum rate required to prevent higher unemployment leading to social conflict, faced a painful and long-term transition to a more consumption-focused economy. “Transition can only happen when Chinese individuals understand that issues like their pensions, education, and healthcare, are being addressed,” she said. “It will be painful, as China will have to start relying on its own sources of growth to push its economy forward.” “So the pain will be more about shifting policy [on] issues like urbanization, improving [national] finances and social and local services. It will take some time for China to adjust to this change.”
Turning her attention to Europe, Sri Mulyani said the eurozone’s embattled leaders could learn much the financial crisis that roiled the Asian tiger economies 15 years ago.
“Europe suffers from the same problems now that Asian nations suffered from then,” she said, pointing to asset bubbles and – notably in the likes of Greece, Spain and Italy – the sort of “crony capitalism” that ties public institutions, political leaders and well-connected private-sector conglomerates.