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Thursday, December 12, 2002

World Bank Warns on Risk of Latin American Detachment

In a report published 11 December (Global Economic Prospects and the Developing Countries: 2003) the World Bank suggests something which most thinking people have already discerned: that economic growth 2003 will be a sluggish affair. They also the opportunity to highlight the growing risk that Latin American economies generally can become detached from the pack in an environment of hightened investment risk and stronger than par economic growth in Asia.

They argue that after exceptionally slow growth in 2001 and 2002, global GDP is now expected to rise by 2.5 percent in 2003, higher than the previous two years but still well below the 3.9 percent expansion recorded in 2000 and significantly below long-term potential growth rates. The report warns that the global rebound might quickly lose momentum and suggest there is a significant risk that the world could slip back into recession. According to their latest forecasts, high-income countries are expected to grow at about 2.1 percent in 2003. On average developing countries will grow considerably faster, at 3.9 percent. But the average masks wide regional differences, with East Asia leading the pack at 6.1 percent, followed by South Asia at 5.4 percent. Other regions are expected to grow less than 4 percent, with Latin America managing a mere 1.8 percent. Outside of Asia and Eastern Europe, growth rates in most developing countries are too low to generate a marked reduction in poverty.

The report argues that factors suppressing global growth in the near term include waning consumer confidence, high debt levels in the face of a weak equity market, and the fallout from corporate financial scandals in the U.S., continuing investor worries over imbalances in the Japanese banking system, and over-investment in telecommunications and other high technology in Europe, as well as concerns about debt problems in Latin America.

At the same time, the region remains more vulnerable than many other developing regions. First, a high debt overhang from the 1980s remains a problem to finance in many countries. In the 1990s, some countries continued to rely on significant debt financing, particularly in the public sector. Public debtto- GDP ratios rose in some countries and the maturity of that debt shortened in duration, increasing their vulnerability to shifts in investor sentiment as they question debt sustainability. LAC countries may have to learn to live with less debt in the future, adjusting public expenditures as required. Countries need to create fiscal space during good times (boom years) to be able to conduct countercyclical policies in future downswings in economic activity. Second, many countries, especially the low-income coffee producers, also need to further diversify their export base to reduce vulnerability to large swings in commodityprices. Finally, the region still lags in financial deepening (which could help raise national saving rates), infrastructure, and quality of institutions—areas that need to be improved before the region can attain high sustainable growth rates.
Source: World Bank

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