Developing countries warned to tighten fiscal policy

Posted on June 12, 2012

Developing countries should tighten fiscal policy to prepare for a long period of volatility in the global economy that could require strong doses of fresh government stimulus, the World Bank said.

The World Bank says growth in developing countries will slow to a “relatively weak” pace of 5.3 per cent this year, before rebounding to 5.9 per cent next year, and 6 per cent in 2014. But this still puts many developing countries in far better shape than high-income countries, which are stuck with growth rates of 1.4 per cent for this year, 1.9 per cent next year, and 2.3 per cent in 2014.

    Andrew Burns, manager of global macroeconomics at the World Bank and lead author of its latest report on global economic prospects, said that it would “not make that much sense” to “pre-emptively loosen policy” in reaction to the latest market turmoil related to the eurozone crisis.

    “For those who are in a good position with solid growth, they should keep using that to rebuild their buffers,” Mr Burns said, adding that developing countries “have less ammunition and they are bit more vulnerable” from a budgetary perspective than they were before the 2008 financial crisis and global recession hit.

    The World Bank has been advocating a tighter fiscal stance in developing countries for some time. In June of last year, it was to guard against possible inflationary shocks due to overheating in some of these economies. But those pressures have now abated amid slowing global growth.

    Hans Timmer, director of development prospects at the World Bank, said setting economic policy was particularly difficult at a time of volatility in the markets, and urged governments to hunker down and focus on domestic reforms. “In this environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment,” Mr Timmer said.

    The World Bank report forecast that growth in eastern Europe and central Asia had taken the hardest hit this year, as a result of the crisis in the neighbouring eurozone, decelerating from 5.6 per cent in 2011 to 3.3 per cent in 2012. Growth in East Asia was projected to slow from 8.3 per cent to 7.6 per cent, and in South Asia from 7.1 per cent to 6.4 per cent.

    The Middle East/north Africa region has been suffering from the most sluggish growth, of 1 per cent last year and 0.6 per cent this year, while sub-Saharan Africa is the only region expected to post better growth this year, of 5 per cent compared with 4.7 per cent last year. In Latin America, growth was expected to slow from 4.3 per cent to 3.5 per cent.

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