Developing countries will not be able to escape the impact of the financial crisis that originated in the West, World Bank chief economist Justin Lin warned yesterday.
“The hope of decoupling will be unattainable,” he said, dismissing developing economies’ aspirations to avoid the worst effects of the slump in growth in industrialized countries.
“The impact on the developing countries will be substantial,” he told Emerging Markets. “A slowdown in the developing countries will be unavoidable.”
He said there was a growing consensus that poorer countries needed a coordinated response in the form of “comprehensive, systematic and decisive action”.
Lin, the first Bank chief economist from a developing country, said that the poor countries under most threat were those with large current account deficits, weak reserves, and fiscal budget deficits.
He said the Bank had identified 28 countries whose national budgets were under threat from the recent surge in food and fuel prices. The list was led by the Seychelles and Solomon Islands, where the price increase was equivalent to 20% of GDP.
It identifies 15 of those countries, including Eritrea, Togo and Haiti, as being in debt distress or at a high risk of debt distress. “If they have a stressful situation then the room for governments [to act] will be very small,” he said.
However he gave an upbeat outlook for China. “China will be affected [but] it may be able to weather through the crisis in very much better shape,” he said.
He said that China benefited from having large financial reserves, capital controls that would enable it to erect a “firewall against contagion”, and from its strong fiscal position.
He said that China’s budget surplus would enable it to deliver a fiscal stimulus. “There is scope for a lot of investment in infrastructure and improvements in social safety nets,” he said.
Lin said he expected GDP growth in China to slow from a recent annual average of 11% to 8%-9%. “So compared with other countries, growth of 8% or 9% is still very strong – but compared with 11% it is still a substantial reduction so I am sure China will, like other countries, hope to have prosperity,” he said.
He also gave an optimistic outlook for food and fuel prices for next year following the huge surge earlier this year. “The positive sign is that demand for fuel and commodities, which set the prices, will dampen down,” he said.
The bank is projecting an average oil price of $79/barrel while commodity prices will fall by 19% from current levels. “This is good news for importing countries because I think in April the concern was the fight against imported inflation due to high food prices,” he said.
“Now with the fall in prices the pressure on inflation has reduced and has given governments much more room for monetary policy to stimulate economic growth”, he said.
He defended the so-called “Washington Consensus” of market liberalization policy advice from the IMF and the US, saying it remained “desirable for a well-functioning market economy”. But he said countries should be pragmatic about its application.
“The Washington consensus should be a goal for our effort, but it should not be a prescription that we need to adopt all those recommendations immediately”, said Lin.