Tuesday, October 5, 2010

Developing countries to the rescue...

So say the authors of a new book "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World" published by the World Bank. The economic size of developing countries is projected to surpass the size of developed countries by 2015. The authors argue that developing countries are the "new locomotives of growth which will move global growth forward while high-income countries remain stagnant." This is somewhat in line with growth projections done by Goldman Sachs (2003), Carnegie Endowment (2010), and Pricewaterhousecoopers (2005). These projections look at either BRIC or the G20 economies.

According to the authors of the new book, growth in developing countries is estimated to reach 6.1 percent in 2010, 5.9 percent in 2011, and 6.1 percent in 2012, while corresponding figures are 2.3 percent, 2.4 percent, and 2.6 percent for high- income countries. These diverging growth prospects continue in the medium term. East Asia, Latin America and South Asia have the potential to turn into 'newly developed' nations.

Five factors account for it:

  • faster technological learning

  • larger middle- class population 

  • more South-South commercial integration

  • high commodity prices

  • healthier balance sheets that will allow borrowing for infrastructure investment
The study states that there will be recovery of remittances in the developing countries, an increase in South-South trade, rising investment by sovereign wealth funds, more conservative debt management, and progress by many governments in gaining public trust.

Reason-wise recommendation:

Sub-Saharan Africa, which saw an additional 7-10 million people thrown into poverty as a result of the global economic crisis, will have to address challenges of infrastructure, job creation, governance and shrinking aid in order to achieve faster growth.

MENA region, which will see around 2.6 million additional people fall into poverty by 2011, needs to "open the door for a new generation of private entrepreneurs and for women to fully join economic life." High oil prices and stable financial sector in the Gulf countries is helping in regional recovery.

East Asia and the Pacific is leading the world out of the economic slump. It recommends China to do some "rebalancing" through scaling up of domestic consumption and expansion of service sector. Meanwhile, middle-income countries like Indonesia, Malaysia, the Philippines and Thailand have to move up into knowledge- and innovation-based markets. Trade facilitation is needed in low-income countries like Cambodia, Lao PDR, and Vietnam. Eastern Europe and Central Asia needs to improve its competitiveness and put its social service provision on a fiscally sustainable path.

Latin America had no economic or social meltdown, mainly due to the progress over the previous decade on macroeconomic management and social policy (the success of social workfare and welfare programs in Latin America is well-known and emulated in other parts of the world). The study projects that the region is well-positioned to enter a path of fast and sustained development, given that it fends off external shocks.

South Asia, which withstood the impact of the crisis reasonably well, needs to make recovery stronger, inclusive and sustainable. It still has around 600 million people below the US$1.25 a day poverty line. Fiscal space (for social programs and infrastructure) has to be created by reducing fiscal deficit and taming public debt accumulation. Trade integration within the region will also be critical in shaping the growth path of this region.

Stay tuned for summary of two of the chapters: one about remittances, and the other about economic policy in South Asia.