World Bank sees higher capital costs for developing countries

Developing countries will grow 5.2 per cent this year, compared with the world average of 2.2 per cent, but they will face higher capital costs in the post-crisis period unless they deepen their own financial markets, the World Bank said Thursday.  

The World Bank in its Global Economic Prospects 2010 report has predicted that developing countries, especially the developing countries of East Asia, will lead the global economic recovery in 2010 and 2011, although that recovery will be fragile and the impact of the 2009 crisis will have long-term repercussions, DPA reported.

"This is the kind of crisis that will change the world forever," Hans Timmer, World Bank director of the Development Prospect Group, said at the report's launch in Bangkok.

The structural changes will be especially obvious in the global financial markets, the economist said.

"Ten years form now the world may look back and conclude that this crisis was the start of the diminishing role of Wall Street and London in the financial markets," Timmer said.

He urged the governments of developing countries to deepen their financial markets and loosen measures in their own financial systems to assure the availability of lower-cost borrowing for their private sectors investments, deemed crucial for a real economic recovery.

The World Bank noted that syndicated loans to private-sector borrowers in developing countries had fallen from 236 billion dollars in 2008 to 123 billion last year.

The bank estimates that tighter conditions on international finance could reduce growth rates by 0.2 to 0.7 per cent in developing countries over the next next years compared with what growth would have been had finance remained as abundant and inexpensive as in was during the boom period of 2002 to 2006.

Financial prospects for the world's poorest countries are even bleaker. The World Bank predicts the poorest countries will require an additional 35 to 50 billion dollars in grant aid this year, which will be difficult to raise in light of the economic constraints faced in donor nations. While most developing countries, especially in East Asia, were able to boost their local economies with stimulus packages last year, Timmer warned that such measures only worked in the short term.

He urged governments to invest in infrastructure building and other means of boosting productivity while facilitating credit for private sector investments.

The World Bank praised China for following the right path between stimulus funding and boosting production.

"What is needed now is medium-term polices that stimulate production," Timmer said. "That is what is happening at the moment in China and that is why their role is so important and why they have been the main factor in the rebound for the region."

The bank's development economist dismissed fears of a China bubble economy, noting the monetary authorities had been restricting credit for months.

Timmer also downplayed claims that Chinese consumption levels were still dwarfed by US consumption as a stimulus for world economic growth.

"The level of consumption in China might still be small but its contribution to global growth of consumption is much larger because their growth rate is so much faster than that of the developed world, so their contribution far outpaces that of the US," Timmer said.