Development Prospects Group

Hans Timmer

January 2010

Development Prospects GroupCrisis, finance and growth

• The acute phase of the crisis is over, but with a muted recovery it will take several years to undo the damage

• In the medium run higher capital costs will reverse the process of capital deepening, lower potential output, and slow growth

• Developing countries may overcome the medium-term impacts by strengthening their domestic financial markets

Development Prospects GroupSpreads appear to have stabilized at

about 150 basis points higher than during the boom period

Source: JP Morgan.

0

200

400

600

800

1000

1200Corporate Bonds CEMB...

Emerging market bond spreads in bps

Development Prospects GroupBank-lending was very weak most of

the yearSyndicated bank loans

Source: DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

010,00020,00030,00040,00050,00060,00070,00080,000 Private

Public corporates and Sovereign

$ billions

Development Prospects GroupPrivate capital flows are unlikely to

recover to the pre-crisis levels for some timeNet private capital flows to developing countries

Source: DataStream, World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

0200400600800

100012001400

012345678910

of which LIC countriesPrivate capital flows

$ billions percent

2010

Development Prospects Group

Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09-40

-30

-20

-10

0

10

20

WorldOECDDeveloping

Rebound in industrial production growth is easing

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Industrial production growth, 3m/3m, saar

Development Prospects GroupFor much of the world industrial

production has yet to recover pre-crisis levels

Industrial production, index, January 2008=100

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

80

85

90

95

100

105

High-incomeDeveloping excl China

Development Prospects GroupRebound in trade led by East Asia

Quarterly import volumes, seasonally adjusted, annualized percentage change

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growthJan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

-80

-40

0

40

80

120High incomeEast Asia & PacificDev ex China

Development Prospects GroupContinued financial-sector

restructuring, implies a weak recoveryReal GDP growth rates in percent

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

-4-202468

10

WorldHigh-incomeDeveloping countries

Development Prospects GroupRegional growth

-10

-5

0

5

10

15

WorldEast Asia & PacificEurope & Central AsiaLatin America & Caribbean

Development Prospects GroupDespite stronger growth, output

will remain depressed for a long timeOutput gap, percent difference between actual and potential GDP

-6

-4

-2

0

2

4

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Development Prospects GroupCrisis has cut four-year growth rates by two

or more percentage points in every regionfour year, average growth rate

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Japan Euro zone

Europe & Cen-

tral Asia

USA Latin Amer-ica & Car-ibbea

n

Sub-Saha-ran

Africa

Middle-East & North Africa

South Asia

East Asia & Pacific

-2

0

2

4

6

8

102004-07 2008-11

Development Prospects GroupCrisis will have serious poverty

impacts• Increase in the global count of

extremely poor of 64 million in 2010

• Possible 35-50,000 additional children in Africa may have died of malnutrition in 2009

• Unless aid is upped, program spending will have to fall even as need climbs

Development Prospects GroupBoom period conditions will be

reversed• Growth acceleration in developing

countries was due to improved fundamentals (60%) and increased global liquidity (40%)

• As a result of the crisis capital costs will rise, capital deepening will be reversed and growth of production potential will slow

Development Prospects Group

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0123456789

Developing countries

High-income countries

The boom did not reflect unusually strong demand from high-income countries

GDP growth

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Development Prospects GroupSince the early 2000s, credit

expansion has grown more than twice as fast as nominal GDP

Source: Bank of International Settlements, World Bankk

1990

0001991

0001992

0001993

0001994

0001995

0001996

0001997

0001998

0001999

0002000

0002001

0002002

0002003

0002004

0002005

0002006

0002007

0002008

0100200300400500600700

Global Banking As-sets

World nominal GDP

Index, June 1990=100

Development Prospects GroupLiquid capital markets prompted

surge in developing country finance and investmentChange in selected financial variables (2000-07)

Cost of capital (basis points) -400

(% of GDP)Capital inflows 5.0Stock market capitalization 78.6Private credit by deposits money banks

5.5

Investment 5.5Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Development Prospects GroupDeveloping country potential output

growth was boosted by low borrowing costs

2

4

6

8Potential outputwithout capital deepening

Percent growth in potential output

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Development Prospects GroupImpact on potential output of a return to

normal pricing of risk and higher base rates

Transition impact on growth of potential

Long-term impact on level of potential output

Base rates at boom-period levels, spreads at October 2009 levels -0.2 -3.4Base rates at boom-period levels, spreads at “normal” levels

-0.4 -5.2

Base rates at 100 basis points higher than boom-period levels, spreads at October 2009 levels

-0.7 -8.0

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Development Prospects GroupHigh costs in domestic banking

sectors, because of poor regulation and a lack of competition

Net int

erest

rate m

argin

Reven

ues t

o asse

ts

Opeatr

ing co

sts/Asse

ts

Non-in

terest

expe

nses/

assets

Profit

margin

01234

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Index, high-income countries = 1

Development Prospects GroupImpact of improved fundamentals on long-term

growth prospects may counteract impact of crisisGrowth of potential output; deviation from baseline; in

percentage points

2009-15 2016-50

-0.5-0.4-0.3-0.2-0.1

00.10.20.30.40.5 Post-crisis Improving fundamentals

Source: World Bank, Global Economic Prospects 2010: Crisis, finance, and growth

Development Prospects GroupConcluding remarks

• Recovery too weak to undo damage done in 2009

• Going forward process of capital deepening will be reversed

• There remains enormous scope for policy to help improve performance

Development Prospects Group

For more information visit:

www.worldbank.org/gep2010

www.worldbank.org/globaloutlook

http://blogs.worldbank.org/prospects