The world has changed radically over the course of the past 10 years. Developing countries now provide half of global growth. China consumes half of the world’s cement and about 47% of steel and iron ore. This has created multiple poles of growth, and that’s a good thing for the international system.
But the direction of the risks is down and the aspect we are watching most closely is the possible contagion effect that events in the eurozone could have on developing countries.
We are in a very dangerous period. Coming into the summer, you had a multi-speed growth picture. Developed economies were growing slowly, with high unemployment, while the emerging economies had recovered quite well. But events since the start of August have lowered the prospects for developed economies and lessened confidence. We are starting to see that effect on emerging markets too.
In the emerging markets, bond spreads increased and the equity markets took a hit. Developing countries already had a weakness, because their exports to the developed world had not recovered fully.
The risk now is that if the downturn in confidence in developed markets moves to developing markets, then consumer confidence, business confidence and investment in emerging markets would slow what has been the primary bright spot for the global economy.
The world is still an interconnected place, and what has happened in bond and equity markets also shows that they can be undermined by these events. That is not only bad for poor countries and poor people, but it is bad for growth in the international system.
All of this suggests that the “European issue” has global implications. The same is true of events in the US.
With slower growth, it looks like energy prices have come down a bit, but the food price situation is one that remains high risk. The stocks of basic grains remain very tight. We have a food-price index that’s about 28% higher than it was a year ago. If you have adverse weather events with wheat and corn, you don’t have a lot of cushion in terms of the stocks. Rice prices, which by-and-large have not been so high, rose 5% in August.
That is not only dangerous for poor people and food prices, but it complicates the inflation issue, because in many emerging markets food is a very significant component of the inflation index and higher than it is in developed markets, as people in developing economies spend more of their income on food.
At a time when monetary authorities were trying to deal with overheating, they are now facing the impact of a potential downturn in demand in an environment where you still have high food prices.
High food prices are a risk, but I have tried to see this as an opportunity for emerging markets. If we can increase production and productivity, emerging market farmers can take advantage of higher prices.
Secondly, the G20 has started to take steps to counter food price volatility, which puts the most vulnerable at risk. I compliment the French leadership on this, as I have been urging the G20 to put food first.
These moves are important, as high food prices are going to be with us for a while. In addition to the stock situation, you are starting to see a gradual increase in demand from the emerging markets. People have higher incomes, so they eat more meals, they eat more meat. So even if you start to have good harvests that would rebuild stocks, a lot of this is going to go to meet this additional demand.
Robert Zoellick, president of the World Bank, was interviewed by Phil Thornton