December 12, 2002	Thursday	Shawwal 7, 1423

NEW DELHI, Dec 11: The recent global economic slowdown, adverse weather conditions, and internal and external security concerns reduced growth figures for the South Asia region in 2002. Growth in the region is expected to average 4.6 per cent for the year, a downward revision from the Global Economic Prospects 2002 forecast of 5.3 per cent GDP growth.

Future prospects appear brighter, however. According to a new World Bank report, Global Economic Prospects and the Developing Countries 2003: Investing to Unlock Global Opportunities, available on the World Wide Web, South Asia should achieve an average of 5.4 per cent growth in 2003, and 5.8 per cent in 2004.

“This improvement in growth prospects is premised upon a return to normal weather patterns, an improvement in political stability and regional security aspects thereby facilitating faster implementation of reforms, and a recovery in world trade volumes,” says Sadiq Ahmed, World Bank South Asia’s chief economist.

A sluggish global economic outlook, with slower growth in the next 12 to 18 months than previously anticipated, will impede poverty reduction in developing countries, according to the report. Action to remove barriers to trade and investment that hurt poor people in developing countries is becoming increasingly urgent.

According to the report, uncertainties in global financial markets have sapped the momentum of the modest recovery that began in late 2001. The report outlines steps that rich countries and developing countries can take in the current uncertain environment to increase growth rates and speed poverty reduction in developing countries.

SOUTH ASIA: For the South Asia region, the report’s near to medium-term forecast of growth is based on a return to a more normal weather pattern, following the recent drought in the region. It also assumes improvement in political stability and regional security issues which allow a more rapid implementation of required reforms. As an example, given improved internal conditions in Sri Lanka and better policies, a sharp increase in GDP over the near term from their recent stagnant levels can be expected. In contrast, Nepal may under-perform in comparison to the regional growth averages for the near-term, if domestic turmoil continues and reforms falter.

The report also notes that a recovery in world trade prospects could translate into stronger external demand for exports from South Asia. Most regional economies have general monetary and exchange rate policies aimed at shoring up foreign reserves and promoting exports. These policies have a positive impact on the current account balances for the region.

The report’s 10-year growth forecast for the region is expected to average about 5.5 per cent, which is higher than the 5.2 per cent average real growth posted during the 1990s. This forecast is based on the assumption that fiscal consolidation and further structural reforms will lead to an increase in productivity when combined with recent improvements in human development indicators, such as rising literacy rates and school enrolments, and declining infant mortality rates.

In contrast, some of the downside risks to this forecast include a weaker than anticipated recovery in global demand, which would slow down export growth; a protracted implementation of fiscal and structural reforms in the region; a persistence of regional political tensions; and vulnerabilities to external shocks and natural disasters. Should these risks prevail, growth prospects will be sharply lower than projected.

POVERTY REDUCTION: After exceptionally slow growth in 2001 and 2002, global GDP is now expected to rise by 2.5 per cent in 2003, higher than the previous two years but still well below the 3.8 per cent expansion recorded in 2000, and significantly below long-term potential growth rates, according to the report. The report warns that the global rebound might quickly lose momentum and there is a significant risk that the world could slip back into recession. “The recovery has been much more hesitant and uneven than we had expected,” says Nicholas Stern, World Bank chief economist and senior vice president for development economics.

According to the latest forecasts, high-income countries are expected to grow at about 2.1 per cent in 2003. On average developing countries will grow considerably faster, at 3.9 per cent. But the average masks wide regional differences, with East Asia leading the pack at 6.1 per cent, followed by South Asia at 5.4 per cent. Other regions are expected to grow less than 4 per cent, with Latin America managing a mere 1.8 per cent. Outside of Asia and Eastern Europe, growth rates in most developing countries are too low to generate a marked reduction in poverty.

PRIVATE CAPITAL FLOWS: The sagging global economy has reduced private capital flows to developing countries. Net commercial bank lending has turned negative, and foreign direct investment flows to developing countries have fallen since their peak in 1999.

Private foreign investment in infrastructure is down 25 per cent from 1997 in developing countries. Investors are becoming averse to long-term projects; accounting scandals in industrial countries have driven major players such as Enron and Worldcom from the market; and slower growth in East Asia, Russia and Brazil has reduced investment demand.

DOHA TRADE AGENDA: The slowing global economy threatens to distract attention from the need for rapid progress in global trade talks. Global trade talks launched at Doha in November last year to address the needs of developing countries are showing signs of becoming bogged down. “Rich-country agricultural subsidies and barriers to agriculture and textile exports from developing countries in Europe, Japan, and the US prevent the developing countries from fully exploiting their comparative advantage,” said Stern, in a recent speech in New Delhi.

According to Global Economic Prospects 2003, an investment agreement on trade could potentially help developing countries — but only if it takes up the issues with the largest development impact such as removing investment-distorting trade barriers facing “developing-country’s” exports.

Developing countries in general face external barriers to their trade that are twice those of rich countries. The report enumerates many of these barriers, including for example, tariff escalation.

INVESTMENT CLIMATE: Even in a sluggish global economy, developing countries can do much on their own to promote growth and poverty reduction. While previous Bank studies emphasized good governance, sound institutions, and property rights as necessary conditions to produce greater quantities of private investment, both domestic and foreign, this year’s Global Economic Prospects 2003 goes further by considering policies to promote competition as a way of improving the quality of investment, that is, making investment more productive.