Global
Economic
Prospects

The World Bank

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Global Economic Prospects
Maintaining progress amid turmoil

June 20113

Acknowledgments
This report is a product of the Prospects Group in the Development Economics Vice Presidency of the World Bank.
Its principal authors were Andrew Burns and Elliot (Mick) Riordan.
The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidance of Justin Yifu
Lin. Several people contributed substantively to the report. The modeling and data team was lead by Theo Janse van
Rensburg assisted by Irina Kogay, Sabah Zeehan Mirza and Betty Dow. The projections, regional write-ups andsubject annexes were produced by Dilek Aykut (Finance), John Baffes (Commodities) Annette De Kleine (SouthAsia), Allen Dennis (Sub-Saharan Africa, International Trade), Eung Ju Kim (Finance), Theo Janse van Rensburg(East Asia & Pacific), Elliot (Mick) Riordan (Middle-East & North Africa), Cristina Savescu (Latin America &Caribbean, Inflation, Industrial Production), Shane Streifel (Commodities), and Lucio Vinhas de Souza (Europe &Central Asia). Regional projections and annexes were produced in coordination with country teams, country directors, and the offices of the regional Chief Economists and PREM directors. In particular, the draft benefitted fromthe invaluable insights and inputs offered by our colleagues from the Middle-East and North Africa region during
this volatile and uncertain period . The short-term commodity price forecasts were produced by John Baffes, Betty
Dow, and Shane Streifel. The remittances forecasts were produced by Sanket Mohapatra,
The accompanying online publication, Prospects for the Global Economy, was produced by a team led by Nadia
Islam Spivak and Sarah Crow, and comprised of Betty Dow, Augusto Clavijo, Kathy Rollins, and Sachin Shahria
with technical support from David Horowitz and Roula Yargiz. The translation process was coordinated by Jorge
del Rosario (French and Spanish) and Li Li (Chinese).
Rebecca Ong and Merrell Tuck-Primdahl managed media relations and the dissemination. Hazel Macadangdang
managed the publication process.
Several reviewers offered extensive advice and comments. These included Otaviano Canuto, Jorg deCressin, Doerte
Doemeland, Shahrokh Fardoust, Marianne Fay, Kalpana Kochlar, David Rosenblatt, Sergio Schmukler, Phil Suttle,
Hans Timmer, Robert Townsend, and Volker Trichiel.

4

Global Economic Prospects June 2011:
Maintaining progress amid turmoil
Overview & main messages
percent in 2012 and 2013, as the negative
effects of household, banking andgovernment budget consolidation begin to
fade and rebuilding in Japan intensifies.
Excluding Japan, high-income growth will
be more stable, slowing only marginally in2011 and strengthening to 2.7 percent in2012 and 2013.

The global financial crisis is no longer the
major force dictating the pace of economic
activity in developing countries. The majority
of developing countries have, or are close to
having regained full-capacity activity levels. As
a result, country-specific productivity andsectoral factors are now the dominant factors
underpinning growth.
Macroeconomic policy in developing
countries needs to turn toward medium-term
productivity enhancements, managing
inflationary pressures re-establishing the
fiscal and monetary cushions that allowed
most developing countries to come throughthe crisis so well. In contrast, activity in highincome and some developing European countries
continues to struggle with crisis-related
problems, including banking-sector, fiscal andhousehold restructuring.
The earthquake and tsunami in Japan andthe political turmoil in the Middle-East andNorth Africa have contributed to a modest
slowing in global industrial production andtrade. Nevertheless, global activity is expanding
significantly faster than its long-term trend rate.
Indicators point to some further slowing in thesecond quarter of 2011, as the expansion slows
toward a more sustainable pace.
Global growth is projected to remain strong
from 2011 through 2013. After expanding 3.8
percent in 2010, global GDP is projected to slow
to 3.2 percent in 2011 before firming to a 3.6
percent pace in each of 2012 and 2013, (4.8, 4.3,
4.4 and 4.5 over 2010 to 2013) percent whenaggregated using purchasing power parities)(table 1).
Policy tightening and the earthquake inJapan, among other factors, are projected
to reduce growth in high-income countries
to 2.2 percent in 2011. Subsequently, theexpansion is expected to firm to near 2.6



As output gaps close , aggregate growth indeveloping economies is projected to easeto a still strong 6.3 percent pace in 2011
through 2013—broadly in-line with thesecountries’ underlying potential growth rate.
The good performance is broadly-based with
non-BRIC countries projected to grow byaround 4.5 percent (3 or more percent in percapita terms).

Robust domestic demand growth indeveloping countries has supported output inhigh income countries, but has accentuatedcapacity constraints in some domestic
markets and in global energy and metals
markets. Low–and middle-income countries
were responsible for 46 percent of global growthin 2010. Importantly, they were responsible formore than all the increase in global oil andmetals demand over the past 5 years, and their
growth was, therefore, responsible for much of
the rise in global inflation. In addition, stillloose policies and ample global credit flows
have contributed to domestic inflation pressuresand asset price bubbles in some middle-income
countries.
Both monetary and fiscal policy in developing
countries may have to tighten more quickly to
curb these pressures. While macro-policy istightening, a more rapid tightening of fiscal andmonetary policy and more exchange rate
flexibility may be required to avoid overheating
and keep inflation in check. More discretionary
tightening would also help re-establish the macro-policy cushions that enabled countries toGlobal Economic Prospects June 2011
Table 1 The Global Outlook in summary(percent change from previous year, except interest rates and oil price)
Global Conditions
World Trade Volume (GNFS)
Consumer Prices
G-7 Countries 1,2
United States
Commodity Prices (USD terms)
Non-oil commodities
Oil Price (US$ per barrel) 3
Oil price (percent change)
Manufactures unit export value 4Interest Rates$, 6-month (percent)€, 6-month (percent)International capital flows to developing countries (% of GDP)
Developing countries
Net private and official inflows
Net private inflows (equity + debt)
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa
Real GDP growth 5
World
Memo item: World (PPP weights) 6
High incomeOECD Countries
Euro Area
Japan
United States
Non-OECD countries
Developing countries
East Asia and Pacific
China
Indonesia
ThailandEurope and Central Asia
RussiaTurkeyRomania
Latin America and Caribbean
BrazilMexicoArgentina
Middle East and N. Africa
Egypt
Iran
AlgeriaSouth Asia

2009

2010e

2011f 2012f

2013f

-11.0

11.5

8.0

7.7

7.7

-0.2
-0.3

1.2
1.6

1.9
2.2

1.7
2.1

1.9
2.5

-24.1
61.8
-36.3
-5.6

27.6
79.0
28.0
2.5

20.7
107.2
35.6
4.9

-12.0
102.1
-4.8
-3.2

-9.4
98.7
-3.3
0.3

1.2
1.5

0.5
1.0

0.7
1.6

1.2
2.1

2.2
2.4

3.9
3.4
3.6
2.2
3.7
2.7
4.2
3.9

4.8
4.4
5.0
3.5
4.8
2.3
3.8
3.7

3.9
4.2
4.0
4.3
0.3
4.8
3.9

3.8
3.8
4.1
4.2
1.7
4.5
4.2

3.8
3.6
3.9
4.1
2.1
4.5
5.0

-2.2
-0.8
-3.4
-3.5
-4.1
-6.3
-2.6
-1.9
1.9
7.4
9.1
4.6
-2.3
-6.4
-7.8
-4.8
-7.1
-2.1
-0.7
-6.1
0.9
2.8
4.7
0.1
2.4
6.2
9.1
3.6
5.7
2.0
-1.8
6.7
2.4

3.8
4.8
2.7
2.6
1.7
4.0
2.8
4.2
7.3
9.6
10.3
6.1
7.8
5.2
4.0
8.9
-1.2
6.0
7.5
5.5
9.2
3.1
5.2
1.0
3.3
9.3
8.8
4.1
5.8
4.8
2.8
7.9
3.4

3.2
4.3
2.2
2.1
1.7
0.1
2.6
4.3
6.3
8.5
9.3
6.3
3.7
4.7
4.4
6.1
1.6
4.5
4.2
4.4
6.3
1.9
1.0
0.0
3.7
7.5
8.0
2.5
6.2
5.1
3.5
7.1
6.7

3.6
4.4
2.7
2.6
1.8
2.6
2.9
4.8
6.2
8.1
8.7
6.5
4.2
4.4
4.0
5.1
3.7
4.1
4.1
4.1
4.2
3.5
3.5
3.0
3.6
7.7
8.4
3.9
6.4
5.7
4.1
7.5
8.1

3.6
4.5
2.6
2.5
1.9
2.0
2.7
4.9
6.3
8.2
8.8
6.5
4.3
4.6
4.1
5.3
4.0
4.0
3.8
4.2
4.3
4.0
5.0
3.0
3.5
7.9
8.5
4.3
6.6
5.7
4.4
7.3
7.8

India 7, 8
Pakistan 7
Bangladesh 7
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items
Developing countries
excluding transition countries
3.1
7.8
6.5
6.4
6.5
excluding China and India
-1.8
5.5
4.5
4.5
4.6
Source: World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast.
1. Canada, France, Germany, Italy, Japan, the UK, and the United States.
2. In local currency, aggregated using 2005 GDP Weights.
3. Simple average of Dubai, Brent and West Texas Intermediate.
4. Unit value index of manufactured exports from major economies, expressed in USD.
5. Aggregate growth rates calculated using constant 2005 dollars GDP weights.
6. Calculated using 2005 PPP weights.
7 In keeping with national practice, data for India, Pakistan and Bangladesh are reported on a fiscal year basis in Table 1.1. Aggregates that
depend on these countries, however, are calculated using data compiled on a calendar year basis.
8 Real GDP at market prices. GDP growth rates calculated using real GDP at factor cost, which are customarily reported in India, can varysignificantly from these growth rates and have historically tended to be higher than market price GDP growth rates. Growth rates stated on
this basis, starting with FY2009-10 are 8.0, 8.5, 8.2, 8.5, and 8.6 percent – see Table SAR.2 in the regional annex.

2Global Economic Prospects June 2011
counteract so effectively the cyclical effects ofthe financial crisis.
Although solid growth led by developingcountries is the most likely outcome going
forward, high food prices, possible additional
oil-price spikes, and lingering post-crisis
difficulties in high-income countries pose
downside risks.
Further increases in food and fuel prices
cannot be ruled out. Although prices are
expected to moderate, supply conditions
remain tight.

A worsening of conditions in the MiddleEast and North Africa could derail global
growth. If oil prices were to rise sharply
and durably — either because of increased
uncertainty or due to a significant
disruption to oil supply, global growth
could be reduced by around 0.5 percentage
points.

A poor harvest during the 2011/12 crop
year, or a second substantial increase in oil
prices could cause domestic food prices indeveloping countries to rise much higher,
with dire consequences for poverty.
in the euro-zone should prevent an acutecrisis, a loss of confidence such asenvisioned in ECB stress-test scenarios
could have large (but manageable) negative
implications for developing countries.
Further financial stresses may emerge, asmonetary policy in high-income countries
begins to tighten. As short– and long-term
interest rates and re-financing costs rise,both banks and firms may find their balance
sheets coming under renewed pressure —requiring additional measures to address
shortcomings.

The remainder of this report is organized asfollows. The next section discusses recent
developments in global production, trade,
inflation, and financial markets, and presents
updates of the World Bank’s forecast for the
global economy and developing countries. Thisis followed by a more detailed discussion ofsome of the risks and tensions in the current
environment, and a short section of concluding
remarks. Several annexes address regional andsectoral issues in much greater detail.

Recent economic developments
The global recovery continued robustly during
the final months of 2010 and into early 2011.
Vibrant domestic demand in developing
countries, still loose macro policy, reduced dragon growth from a recovering financial sector,
and improved labor market conditions in several
high-income economies helped to overpower the
influence of a gradual tightening of monetaryand fiscal policies, rising commodity prices, thepolitical turmoil in the Middle-East and North
Africa, and the natural disaster and nuclear
catastrophe in Japan

Domestic food prices may come under
upward pressure in many countries. Since
June 2010, local food prices in developing
countries increased 7.9 percent—muchless than the 40 percent surge ininternational dollar prices. International
prices are expected to moderate in thesecond half of 2011 and into 2012/13.
However, if crops disappoint or oil prices(an important cost-side determinant offood prices) rise, lagged pass through ofhigh international prices could see local
food prices increase further — with
important negative impacts for poverty inmany developing countries.

The recovery in industrial activity is
progressing at a moderate pace
Recent developments in industrial production is
described in more detail in the industrial production
annex (http://go.worldbank.org/6J3VPK07S2).

Concerns about fiscal sustainability inhigh-income countries persist. High fiscal
deficits and rising sovereign debt pose
medium-term challenges to a wide-range ofOECD countries (gross sovereign debt isprojected to reach 103 percent of OECD
GDP in 2012). Although steps being taken
by authorities to resolve short-term problems

After marking a pause in the third quarter of2010, industrial production in both high-incomeand developing countries expanded at a morethan 15 percent annualized rate (3m/3m, saar)
toward the end of 2010. Output once again

3

Global Economic Prospects June 2011
Figure 1 Industrial production has been more volatile than global demand
Inventory cycle in manufactured goods makes IP more volatile
than underlying demand

Global industrial production slowing once again
industrial production, ch% 3m/3m, saar

6

20

20

4

15

GDP left

10

2

10
5

5

0

0

0
-2

-5
-10
-15

15

Developing
High-income
World

IP right

-5

-4

-10

-6

-15

-20
-25

-8

-30
2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01-10World real GDP growth, quarterly ch% q/q saar.
Sample of 50 high-income and developing countries

-20
-25

Q1-08

Q3-08

Q1-09

Q3-09

Q1-10

Q3-10

Q1-2011

Source: World Bank, Thomson/Reuters.

began to slow in the first quarter of 2011 (firstpanel, figure 1). The recent fading in world
industrial production growth from a 15 percent
3m/3m annualized pace in February to 8.5
percent in March reflects the 15 percent decline
in Japanese production in March, and similar
declines in Egypt and Tunisia. Excluding thesecountries, momentum growth in the rest of theworld was 10.3 percent, well above the longerterm trend growth rate of just under 3 percent.

Based on the limited recent data available forindustrial production in the Middle-East andNorth Africa, the political turmoil in the region
has had a notable impact on activity. In Tunisia
production dropped 18.8 percent between
December 2012 and February 2011, but has
picked up 8 percent in March; still, output stands
9 percent lower in the first quarter of 2011
versus year earlier levels. As of February 2011,industrial activity in Egypt was down 20 percent
from December 2010 levels and 14.4 percent
from a year earlier.

Among developing countries, the pickup in
production has been broadly-based, but alsoquite differentiated, with output expanding 19
percent in East Asia & the Pacific during thefirst quarter of 2011 (saar)—this rate
subsequently slipped to 15 percent in April; in
Latin America & the Caribbean, growth has
maintained a 10 percent pace. In contrast,
developing Europe & Central Asia has seen
momentum dip from 10 percent in March to 3.8
percent by April (saar). Though production inSouth Asia was weak in the fourth quarter of2010, it picked up pace into the first quarter —expanding at a 9 percent rate. Data for SubSaharan Africa are sparse, but industrial
production was increasing at a modest 2.1
percent pace at the end of 2010 in the 4 SubSaharan African countries for which industrial
production data are available.

Post-earthquake data for Japan indicate a sharp
contraction of activity in that country. Industrial
production declined 15.5 percent in March on aseasonally adjusted basis, while consumer
demand has also drawn back as individuals
conserve energy and moderate consumption insolidarity with disaster victims. Retail sales inMarch were 8.5 percent lower than a year before,
while machinery and equipment sales were off
17 percent. Overall, preliminary estimatessuggest that GDP declined by 3.7 percent in thefirst quarter of 2011 (saar), although much ofthat decline appears to reflect a fall ininventories (box 1).

4

Global Economic Prospects June 2011

Box 1 Short-term impact of the disaster in Japan
Official estimates place the damage from the
March 11 earthquake and tsunami at between 3 Impacts of the 1995 Kobe and 2011 Tohoku earthquakes
and 5 percent of Japanese GDP, directly affectKobe
Tohoku17-Jan-95 11-Mar-11
ing a region that represents about 4 percent ofJapanese GDP and 4.5 percent of its population. Dimension of tragedy
7.3
9.1
Some 450 thousand people have been left home- - size of tremor (Richter scale)- Lives lost
6434
15,202
less, and more than 20,000 may have died. Al- - Missing
8,718
though in some respects, the disaster is similar - people left homeless
300,000
450,000
in scale to the Kobe earthquake of 1995, notable - Estimated Property Damage (% of GDP)
2.5
4-5
7.3
differences include the nuclear crisis, the addi- - Initial disruption to power system (% of generating capacity)
3.8
tional loss of life and property damage attribut- - Medium-term disruption to power system (% gen. cap.)
-0.1
-15.3
able to the tsunami (see box table). In particular, - Industrial production growth (month of disaster)- Quarterly GDP growth (quarter of disaster)
2.9-3.7
the disaster has damaged an estimated 7.3 percent of Japan’s power supply, about 3.8 percent Source: World Bank; Various press reports and official estimates.
due to disrupted thermal generation and 3.5 percent from nuclear. In addition about 2 percent of the county’s distribution substations were damaged (table). The
lost thermal capacity is expected to be fully restored by May, while lost nuclear capacity may be permanent. Currently, generating capacity in the Tokyo area, which represents about 40 percent of Japanese GDP, exceeds demand levels by almost 20 percent— partly because of voluntary conservation efforts. At the peak of the crisis capacity was reduced by 40 percent. TEPCO now expects to have 55m KW-hours of capacity in place by the end ofJuly, approximately 87 percent of peak summer demand. For Japan as a whole, the projected shortfall represents
3.8 percent of generating capacity (TEPCO, 2011).
Although the Kobe disaster had little impact on Japan’s
GDP growth, the current crisis is expected to cut into
growth more sharply. Following Kobe, industrial production fell marginally. Both imports and exports declined by 2
percent for two months, but bounced back in the third, andGDP growth in the quarter of the earthquake was subdued
but positive — in part because of a sustained increase ingovernment spending of between 1 and 2 percent of GDP.
As a result, GDP growth came in at 1.9 percent, a full percent point higher than the preceding year, and about 0.4
percent above estimates of the economy’s productive potential at that time (figure).

Kobe had no noticeable impact on growth
Percent
7

Japanese GDP growth before and after Kobe

6

Kobe earthquake,
January 11 1995

Quarterly growth (saar)

5y-o-y growth

4
3
2
1
0
-1

-2
-3
-4
Q1 1993

Q3 1993

Q1 1994

Q3 1994

Q1 1995

Q3 1995

Q1 1996

Q3 1996

Source: Japanese statistical bureau.

The impacts from this year’s disaster are more serious. Industrial production in March was down 15.5 percent from February, in part because of electricity disruption andthe pull-back in consumer spending that has been associated with the first weeks of the post-crisis period. Retailsales during March were down 8.5 percent from a year ago, while machinery and business equipment sales were
down 17 percent. For the car industry, disruptions are expected to last until the end of the second quarter of 2011,
potentially reducing output by one-half. GDP is estimated to have fallen 3.7 percent in the first quarter and uncertainty is large, many are now expecting second-quarter GDP to decline by a further 3-7 percent (annualized rates),
before reconstruction efforts overcome the effects of economic disruption and cause growth to rebound. Regional
impacts so far have been limited, with slower growth in the initial quarter of at most 0.5 percentage points forcountries with closest trade ties (Malaysia, Vietnam and Thailand).
Should the nuclear situation deteriorate, or if nuclear pollution already having occurred requires an extended clean-up effort, longer-term impacts could be envisaged. Using Chernobyl as a model (a 50 km exclusion zone was put
in place, some 400 thousand people would be permanently displaced, and some 3 percent of Japanese agricultural
production lost (4 percent of Japanese and 0.1 percent of global rice production).

5Global Economic Prospects June 2011
export and import volumes also paused during
the middle of 2010, but is now expanding at amoderate to strong pace across economies.

The expansion of global demand has been
more stable
Recent developments in trade is described in more detailin the prospects for trade annex (http://
go.worldbank.org/2OPGGNPVD0).

Importantly, demand from developing countries
was responsible for more-than 50 percent of theincrease in global import volumes (first panel,
figure 2). Strong developing-country import
expenditures partly reflect robust domestic
demand growth in these economies. Global retailsales have posted positive growth rates for the
past 20 months of between 7 and 10 percent(3m/3m, saar), outstripping that of high-income
countries by a factor of 2 (second panel, figure2). The main beneficiaries of expanding demand
for tradables have been high-income countries,
whose exports were expanding at a still strong
15 percent annualized rate in the first quarter of
2011, down from close to 20 percent at the endof 2010.

The recovery in aggregate demand has been
more stable than that of industrial production(second panel, figure 1). GDP for the 50 highincome and developing countries for whichquarterly data are available indicates that
aggregate demand continued to expand during
the last half of 2010 and into the first quarter of2011 — albeit at a slower and more sustainable
pace than earlier. The relative stability ofdemand viz-a-viz industrial production, partly
reflects the concentration of the real-side effectsof the crisis in durables consumption andinvestment goods, but the mid-2010 pause inindustrial activity is also consistent with a sharp
inventory cycle. An initial period of de-stocking
during the acute phase of the crisis forced a rapid
resumption of activity to meet graduallystrengthening demand and to rebuild inventories.
This re-stocking may have overshot demand,
resulting in a pause in industrial activity growthat mid year. But by the final quarter of 2010,
demand had caught up and industrial activity
growth accelerated once more.

Developing country exporters also benefitted
from the uptick in global demand, with theirexport volumes expanding at a 12.1 percent
annualized rate in the three months ending
March 2011. South Asian exports have been
particularly strong, with volumes up more than
30 percent from their year-earlier levels, driven
by sales to China and the rest of East Asia.
Exports from Europe and Central Asia havegrown rapidly, notably in Russia, where they
have expanded at more-than a 17 percent
annualized pace (supported by energy exports),
and in Romania and Turkey (reflecting stronger

World trade has also bounced backReflecting the high content of manufactures in
global trade, the recovery in world merchandise

Figure 2. Robust domestic demand causes Developing country imports to lead the rebound in trade
Contributions to global merchandise import growth,% change 3m/3m saar

Retail sales growth, GDP-weighted 3m/3m saar

Contributions to global merhcandise import growth. % change 3m/3m, saar

percent, y/y

35.0

25

Rest of Developing countries
China
Germany
USA
Rest of HIY
World

30.0
25.0
20.0
15.0

20
15

Developing countries,
excl China

China

10

5

10.0
5.0

High-income

0

0.0

-5

-5.0

-10
Jan-06 Oct-06-10.0
2010M01

2010M03

2010M05

2010M07

2010M09

2010M11

Source: World Bank. Thomson Datastream.

6

Jul-07

Apr-08 Jan-09 Oct-09

Jul-10Global Economic Prospects June 2011
Figure 3. Industrial production has recovered pre-crisis trends in many developing countries
industrial production, August-2008=100
120

median percentage difference from long term trend
and within-region range
60

115

Developing countries

40

110
105

20

100

0

95

2.5

0.7
-13.8

-20

-11.9

3.2

4.4

South Asia

East Asia &Pacific-9.2

90
DEV excluding China

85

-40

High-income countries-60

80
Jan-06

Aug-06Mar-07

Oct-07

May-08Dec-08

Jul-09Feb-10Developing

Sep-10Europe & Middle East & Sub-Saharan Latin Am. &Central Asia
N. Africa
AfricaCaribbean

Source: World Bank, Thomson/Datastream.

high-income European investment and consumer
demand). In Latin American and the Caribbean,Brazilian exports had been growing briskly inresponse to continued strong East Asian demand,but growth has eased to 12 percent as of April(saar). And the expansion has been less robust inArgentina and Chile. Overall exports from theregion have been expanding at a 9.3 percent
annualized pace during thee three months ending
March 2011 (saar).

production now stands 2.5 percent below.
Compared with levels of output that might havebeen expected had there been no crisis2,
significant gaps remain. Gaps are especiallylarge among high-income countries because
these economies were most directly affected by
the financial crisis (second panel, figure 3).
Among developing regions, the gap with precrisis trends is largest for Europe & Central Asia
(13.8 percent), partly reflecting unsustainably
high pre-crisis growth rates and the severity ofthe post-crisis adjustment underway in thoseeconomies. The shortfall in both the Middle East
& North Africa and Sub-Saharan Africa isestimated to be close to 10 percent (partly
reflecting the recent political turmoil), while thegap has closed in East Asia & the Pacific, SouthAsia, and Latin America & the Caribbean.

Both trade and industrial production havereached — or are close to recovering —trend levels
Recovery in industrial production has brought
developing country output more-than 20 percent
above its pre-crisis August 2008 levels (firstpanel, figure 3), while production in highincome countries is now about 2.5 percent belowthat level, and some 9 percent below peaks of
February 2008 (trade volumes have also
recovered pre-crisis levels)1.

Overall, the recovery is well advanced in many
developing countries and industrial capacity
constraints have become increasingly binding.
Whole economy output gaps for 2011, thedifference between actual and potential GDP, areexpected to be less than one percent in 72
countries, 64 percent of the developing
economies outside of Europe and Central Asia
for which data exist (figure 4). Output gaps
among high-income countries are larger, with 45
percent of high-income countries facing anegative output gap of more-than 2 percent.

Industrial output in China is more than 40
percent above its pre-crisis peak, and 36 percent
higher for the East Asia region considered as awhole. After booming during the first half of2010, output growth in South Asia slowed
toward the end of 2010. Nevertheless, output
stands 24 percent higher than before the crisis.
Among other developing regions, Europe andCentral Asia had eclipsed pre-crisis levels by 5
percent as of March; while Sub-Saharan African

7

Global Economic Prospects June 2011
Figure 4 Growing capacity constraints are contributing to rising inflation in some countries(Estimated % difference between actual and potential GDP in 2011)

Source: World Bank.

The rise in international fuel, metals andfood prices

second half of 2010 in the face of only graduallyrising demand (box 3).

Recent developments in, and prospects for, thesemarkets are described in more detail in the commodity
annex (http://go.worldbank.org/5KM5S6POA0 ).

As of early 2011, prices of internationally tradedfood commodities reached levels just below
peaks observed during the 2008 food crisis.
However, the overall price of grains — the mostcritical food component from a poverty
standpoint3— did not increase as much as in2008, mainly because international rice prices
remained broadly stable (second panel, figure 5).
Since February, commodity prices havestabilized or declined, reflecting weakening
demand and perhaps profit taking by institutional
investors. Prices are off earlier peaks by between
3 and 10 percent for the main aggregates.

Strong GDP growth and the elimination of sparecapacity in major developing economies has
contributed to a sharp increase in the prices ofmetals and oil (box 2) during the second half of2010 (first panel, figure 5) and into the firstmonths of 2011. Higher energy prices have inturn contributed to increased fertilizer andagricultural production costs, which incombination with supply shortfalls in several
markets caused food prices to spike in the

Figure 5 Commodity prices have recovered much of the losses observed since the financial crisis
Real grain prices, January 2005=100

Real commodity pruices, index Jan 200-5=100, USA
CPI def latedtext

350

300

EnergyFoodMetals and Minerals

325
300

250

275
250

200

225
200

150

175

Rice
Wheat
Maize

150

100

125
100

50

75
50

0
Jan-05

Sep-05

May-06

Jan-07

Sep-07

May-08Jan-09Sep-09

May-10

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Jan-11

Source: World Bank.

8

Global Economic Prospects June 2011
Box 2 Strong demand from developing countries driving up prices of extractive commodities
Strong demand by developing countries (notably China) is shaping the markets for extractive commodities, andhas contributed to the rise in their prices during the post-crisis period.
Developing countries now account for almost 1/2 of global crude oil demandMore than all of the net increase in global oil demand over the past 5 years has come from developing countries(oil demand in high-income OECD countries peaked in 2005:Q4 and has since declined by 3.7 mb/d), with demand for oil by developing countries growing by more than 4.1 percent per annum over the past 5 years. NonOECD countries now consume 47 percent of global oil production, up from 25 percent in 1970, with more than
two thirds of that amount going to countries other than China and India (their global shares are 10.4 percent and3.8 percent, respectively).
Crude oil prices began rising during the fourth quarter of 2010 despite ample supplies and spare capacity, boosted
by strong demand from developing countries, declining stocks and expectations of future supply tightness. This
trend was exacerbated toward the end of the year and into 2011, as political turmoil in the Middle East and North
Africa disrupted oil deliveries from the region (notably the shutting out of some 1.3mb/d of sweet, distillate-rich
Libyan crude-oil exports4) and fears of further possible disruptions in the region.
Although fraught with uncertainty, estimates suggest that the supply loses in North Africa added about $15 to theprice of a barrel of oil. Assuming no further supply disruptions and a gradual reduction in uncertainty arising fromthe political situation in the Middle-East and North Africa, oil prices are expected to ease in the second half of2011, averaging $107/bbl for the year as a whole, before declining further in 2012 and 2013 toward a real price of
80 2011 U.S. dollars per barrel, consistent with long-term demand and supply conditions.
Chinese demand dominates metals markets
In 2009, China overtook the OECD as the world's largest metal consumer, now consuming more than 40 percent
of global metal supplies. Chinese metal demand growth over the past decade has served to single-handedly themetals intensity of global GDP (tons of metals used to produce a unit of GDP). As of 2004, increased metals demand had reversed 30 years of declining metal content of global GDP due to technological change and increased
consumption of services (World Bank, 2008).
Although metals and minerals prices declined sharply with the financial crisis, many now exceed their pre-crisis
peaks. Prices have risen the most for supply-constrained metals, such as copper and tin (up 460 and 590 percent
from their average levels in 2000/03), while despite stronger demand growth, other metal prices have increased
less rapidly due to ample supply (aluminum for example, is up 86 percent over the same period despite stronger
demand growth).
Prices for a number of metals appear to have peaked in February 2011, reflecting weaker demand growth, risinginventories and strong supply. In those few cases where future prices exceed spot prices, a large portion of stocks
are tied up in warehouse financing arrangements and not available to the market — which has given an appearanceof market tightness that has helped support prices5.
Mainly reflecting price increases already observed, metals prices in 2011 are expected to average 17 percent
higher than in 2010 before they begin to decline in 2012, as additional supply and demand-side substitution eases
market pressures. While metals markets are generally less concentrated than oil markets (and therefore less open tocartel-like pricing) future supply and prices will remain sensitive to labor disputes and energy costs.

While supply shocks played a central role inexplaining the sharp rise in grain prices in thesecond half of 2010 (box 3), the trend rise infood and other agricultural prices since the turnof the century reflects among other things risingfuel, transportation and fertilizer costs as well as
increased demand from biofuels (Timilsina andShresha, 2010).

Typically, a sustained 10 percent increase inenergy prices yields a 2-3 percent increase in thelong-run price of most foods (Baffes, 2010),
with this relationship being stronger in highincome countries that use particularly energy–
intensive technologies and lower in countries
where less fuel and fertilizer is used, e.g. in SubSaharan Africa. Bearing these relationships in

9Global Economic Prospects June 2011
Box 3 Understanding the recent rise in global agricultural prices
The rapid rise of global agricultural prices in the latter half of 2010 and into 2011 reflects a combination of factors.
Some agricultural commodities are used as raw materials, and demand and capacity constraints for these picked up
in the second half of 2010, leading to sharp increases in, for example, cotton (up 147 percent since June 2010) andrubber (up 158 percent).
The rise in food prices was broadly based. Unlike the 2008 Fats and oils were responsible for the majority offood-price spike, when almost half (48 percent) of the increase the increase in global food prices in 2010/11
in the overall food index was due to rising grain prices, this Contribution of grains, f ats & oils and other f ood to y-o-y growth in theWorld Bank's International Food index (%)
time rising fats and oils prices were responsible for the bulk 80
Other Foods(40 percent) of the increase in the aggregate index. The main
60
Fats & Oils
drivers of the run-up in internationally traded food prices in theGrainssecond half of 2010 were poor grain crops and low inventories. 40
While demand for food continued to rise, thereby contributing
to market tightness, there was no major change in this trend, 20
and indeed demand growth for most major food groups is0
slowing (see box 4).
-20

World wheat production in the 2010/11 crop year is estimatedto have declined by 5.3 percent, mainly due to a 25 percent -40
2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01
shortfall in Russian output; and stock-to-use ratios in major
exporting countries have fallen to 25 percent, well below the Source: World Bank.
30 percent average of the past decade.6 Maize prices also cameunder pressure as global production increased just 0.2 percent in 2011 and by only 2.5 percent over the past 3
years combined. Rice prices in contrast, have remained relatively subdued, ranging within a fairly narrow band of$450-$550/ton over the past two years. International food prices have declined somewhat in recent months, partly
reflecting expectations of a normal 2011/12 crop-year — although volatility remains a concern, as crops are notexpected to be large enough to restore stocks to comfortable levels.
Market tightness has been accentuated by demand for biofuels, notably maize for ethanol use in the United States,and edible oils (mostly rapeseed oil) for biodiesel in Europe. Approximately 30 percent of U.S. maize production
now goes to biofuels, reducing availability for food and feed and contributing to a fall in stock-to-use ratios to 15
percent (from the historical average of 20 percent). 7

mind, most of the 58 percent increase in the
average price of food between the periods
1986/03 and 2004/10 can be explained by the
245 percent increase in the price of oil duringthat period (figure 6).
Once the short-term supply-shortage induced
component of current high food prices
dissipates; and assuming (i) that energy prices
ease as discussed in box 2, and (ii) that 2011/12
is a normal crop year, then long-run equilibrium
food prices should also tend to decline over the
next few years. Nevertheless, food prices are
anticipated to remain substantially higher thanduring the late 1990s — largely reflecting higher
fuel and fertilizer costs. In the baseline
projection, wheat, maize and rice prices are
expected to decline in 2012 to roughly the same

Figure 6 Higher energy prices explain most of the 58
percent increase in agricultural prices since the 1990s.
commodity prices, index average 1986-2003=100
600

500

Historically, a 10 percent increase in oil prices has
increased food prices by 2-3%.
On this basis, the 245% increase in oil prices since2003 would be expected to increase food prices by
between 50 and 73%.

400

300

Oil
245% up

200

100

Food
58% up

0
1986

1988

1990

1992

1994

Source: World Bank

10

1996

1998

2000

2002

2004

2006

2008

2010

Global Economic Prospects June 2011
domestically produced and consumed foods
enters in local price indexes with a bigger
weight than in the international food priceindex. Most important for local food priceindices are grains prices, including the priceof rice (which has not increased much),cassava and other products whose prices are
only loosely connected to international
markets.

level as in 2010.

Local food prices in developing countries
have not increased as much as
international food prices
Notwithstanding the 40 percent increase in thedollar price of internationally traded foodcommodities since June 2010, and food-priceunrest in several countries, overall food priceindexes in developing countries have risen bymuch less (7.9 percent through January 2011)(figure 7). Lower food price increases indeveloping countries reflect a variety of factors(see commodity annex).
International prices are quoted in dollars, but
the dollar is depreciating against mostdeveloping country currencies (down 9
percent in nominal effective terms since June2010)— so even if all of the price increase
were passed through, the price rise in local
currency terms would be smaller.



In addition, local transport costs, pricecontrols and other market imperfections
introduce significant gaps and lags between
international and local prices.



The weights used to calculate international
food price indexes are those of commodities
in international trade, not in consumption.
Because the vast majority of food is nottraded internationally, the price ofOverall, pass-through of world prices to local
prices (even of the same commodity) is weak(see commodity annex for a fuller discussion).
On average, only about one quarter ofinternational price increases are passed on to
local prices in the space of a year, although overthe long-run this ratio tends to rise in thoseinstances where local prices are not controlled.
Countries where pass-through is stronger tend toeither be major importers or exporters of thecommodity in question, and have limited
regulations or price controls. Pass-through is
weaker or even non-existent among countries
that are more self-sufficient and have weak
infrastructure. Local grain prices change rapidly
Figure 8 Biggest changes in food inflation

Figure 7. Domestic food prices in developing countries
have not increased as much as international food

Change in local f ood price inf lation, December 2010/ Dec 2009,
percentage points

index, January 2005=100
210
190

Uganda
Ghana
Egyp
India
Fiji
Algeria
TunisiaSouth Af rica
MexicoBangladeshInternational $ food prices(US CPI deflated)

170
150

Lithuania
Indonesia
MoroccoIran
Venezuel
Bolivia
Honduras
Seychelles
El Salvador
Togo

130
110

Developing country food prices (nominal,
Consumer demand weighted)

90Jan-05Jan-06

Jan-07

Jan-08

Finally, although 2010/11 was a bad crop
year for several major exporters ofinternationally traded foods, it was a good
crop year for many developing countries —
actually driving down domestic prices forsome of these goods (notably maize in muchof Africa) even as internationally traded foodprices rose rapidly.

Jan-09Jan-10Jan-11

-30

-25

-20

-15

-10

-5

0

5

Source: World Bank, ILO food price database.

Source: World Bank.

11

10

15

20

Global Economic Prospects June 2011
Box 4. Trends in the global demand for food
Demand for food tends to be relatively stable, responding Global food demand trends, 1960-2030
Population
Grains Edible oils
to slowly evolving factors (principally, population and in1961-70
2.0
2.9
4.6
come growth), and its rate of growth has not accelerated in
1.8
2.3
4.4
the recent past. Indeed, global demand for major food 1971-80
1981-90
1.7
2.3
3.9
groups has been slowing over the past half century. This 1991-2000
1.4
1.3
2.4
trend is expected to continue to do so as global population 2000-08
1.4
1.1
2.7
growth slows, and the increment to per capita demand from 2009-19f
1.4
1.4
2.9
rising incomes declines.

Meats
3.8
3.2
2.7
2.7
2.0
2.1

f) FAO-OECD forecast (meat = simple average ofchicken growth 2.4 percent and other meats 1.7 percent).
Per capita demand for food tends to rises with incomes,
Source: World Bank, FAO, OECD.

The somewhat higher growth rates for grains and edibleoils projected for this decade reflect the diversion of someof these products to biofuels7 — biofuel-related demand forfood products is expected to grow rapidly over 2010-2019.

18

45

135

367

Grain Consumption per capita ( Kg )1,000although after income reaches a certain threshold per capita
food demand tends to level off. For grains (including indi- Per capita grain consumption (direct and indirect)
rect demand to produce meat), most of the world’s popula- rises as income rises
tion has already reached the point where per capita demand
has leveled off. Demand for meat is still rising faster thanis population, but the differential is declining as meat consumption of most of the world’s population approaches
BrazilRussiapeak levels. Only demand for edible oils continues to riseChinamuch more rapidly than population, and is expected to conIndiatinue to do so over the next twenty years or so, as poorer
populations are increasingly able to afford the packaged
and prepared foods that are heavy in edible oil content.

0.4

1.1

2.9
8.1
GDP per capita (1,000 PPP $)

22.0

59.8

Note : Curve fitted on a log scale.

Source: World Bank, FAO.

in response to international prices in only a very
few developing countries, for example South
Africa and Argentina (see the Commodity
Annex for more on food price pass through).

In countries with price controls on food, rising
prices have put enormous pressure on fiscal
budgets (for example Bangladesh, Egypt andIndia). Moreover, several cases where theauthorities sought to raise controlled prices inline with market developments resulted insignificant political turmoil and even rioting (forexample, Egypt, Tunisia, Mozambique, andUganda).

Of course, some countries are much more
dependent on imported food, and therefore moresensitive to fluctuations in international foodprices. Many island states and countries in the
Middle-East and North Africa import large
proportions of their food (import ratios for somegrains exceed 80 percent in 12 of 14 Middle-East& North African countries for which data are
available). Partly reflecting this, the Seychelles
and Togo were among the developing countries(for which data are available) that experienced
the largest increase in food inflation rates
between December 2009 and December 2010
(figure 8). Overall, food inflation in 2010
exceeded 10 percent in 33 of 80 developing
countries for which data are available.

High and rising commodity prices imply
varied terms-of-trade effects acrossdeveloping countries
A sharp increase in fuel and food prices during
the course of 2010 has imposed large changes inthe terms of trade of many developing countries(see below and the commodity annex for moreon the implications of higher food and energy
prices). Gains have been concentrated among oil
exporters, and losses among resource and food-12

Global Economic Prospects June 2011
generally less than 6 percent of GDP, andincluded significant impacts in small islandstates such as Seychelles, Cape Verde and St.
Vincent and Grenadines — all of which are oil
importers and dependent on imported food(figure 9).

Figure 9 Largest terms of trade effects
Estimated, ex ante terms-of-trade effects (% of GDP) in 2010
AngolaOman
Azerbaijan
Nigeria
Iran
Yemen
Venezuela
Algeria

Remittances and tourism are important sourcesof foreign currency, representing inflows of 10
or more percent of GDP for several developing
countries (figure 10). The dollar value ofremittances received by residents of developing
countries increased a modest 5.6 percent in2010. However, because of inflation and dollar
depreciation the local market purchasing powerof these remittances is estimated to havedeclined by 3.6 percent in the year. Flows toSouth Asia and East Asia increased the most (8.2
and 7.4 percent respectively), with inflows toEurope and Central Asia and Latin America andthe Caribbean (the two regions having been hit
hardest in 2009) rising by just 1.3 and 1.7
percent respectively.

Honduras
Nicaragua
Fiji
St. Lucia
Kenya
JordanLebanon
Dominica
St. Vincent and the Grenadines
Cape Verde
Moldova
Seychelles
-10

-5

0

5

10

15

20

Source: World Bank.

poor oil-importing countries. Despite oil prices
expected to average about $107/bbl, terms oftrade impacts for many oil importers are not aslarge as might be expected, because othercommodity prices (food, as well as metals andminerals) are also high and rising, which tends togenerate offsetting effects. The ten countries
experiencing largest positive terms of tradeeffects saw gains exceeding 8 percent of GDP,and were concentrated among oil exporters. The
largest negative effects were smaller in scale,In 2010 world tourism recovered more strongly
than expected following the global recession.
Tourism arrivals increased by an estimated 7
percent and the dollar value of receipts increased
6.6 percent (World Tourism Organization,2011), with emerging economies serving as theengine for growth. Among developing regions,
the Middle-East, East Asia, and South Asia saw
the biggest increases in volumes, up 14-, 13-,

Figure 10 Tourism and remittances are important sources of foreign currency for many developing countries
Tourism receipts in 2010, % of GDP

Remittances in 2010, % of GDP
Kyrgyz Republic
Haiti
LebanonHonduras
Jamaica
JordanPhilippines
Bangladesh
Armenia
Vietnam
MoroccoFijiPakistan
Sudan

Maldives
Seychelles
Cape Verde
LebanonFiji
Jamaica
JordanTunisia
Malaysia
MoroccoThailandEgypt
Costa Rica
Philippines

0

10

20

% of GDP30

Source: World Bank, UN International Tourism Organization

13

0

10

20

30

40

50

Global Economic Prospects June 2011
and 10 percent respectively, with intra-regional
tourism in the Middle-East and North Africa
playing a big role.

Europe and Central Asia, while flows as a shareof GDP for other developing regions have beenmuch more stable.

However, the political turmoil in the Middle Eastand North Africa at the end of 2010 and in thefirst months of 2011 has cut into the tourism
business sharply. As of mid May, 2011 tourist
arrivals have declined sharply in Bahrain, Egypt,
Jordan, Syria and Tunisia. According to theWorld Travel and Tourism Council, first quarter
tourist arrivals in Egypt and Tunisia were off
about 45 percent compared with the like periodof 2010. If tourism receipts decline 18 percent in
Egypt during 2011, that would imply a direct 1.5
percent of GDP foreign currency shortfall.
Jordan, Syria and Tunisia could experience
negative impacts of similar magnitude, while thefall-off in other countries in the region is likely
to be less pronounced.

For 2011 as a whole private capital inflows are
expected to increase only 5 percent, as the morevolatile flows that led the sharp recovery in 2010
are expected to stabilize or weaken. In particular,
portfolio equity flows into developing countries
are projected to decline 20 percent, with the
sharpest falloffs expected in the Middle-East andNorth Africa, reflecting political turmoil in theregion. In contrast, firms in developing countries
continue to rely on international bond markets
for debt financing, as they are faced withongoing tightening in domestic credit markets
and limited recovery in international banklending.
The dollar value of FDI8 is expected to rise by afurther 14 percent in 2011, but will not regain its
pre-crisis level in absolute terms until 2012,
when it is projected to reach $604 billion (vs.
$615 billion in 2008). Overall, net private capital
flows to developing countries are anticipated toreach more than $1 trillion by 2013, but theirshare in developing country GDP will be fallingfrom an estimated 4.4 percent in 2010 to around
3.8 percent at that time, in part reflecting an
expected tightening of short-term debt flows asinterest rates begin to rise and regulatory
conditions tighten (figure 11).

Of course some of this tourism spending willshow up as an increase in tourism in othercountries — although for the moment data do
not indicate which developing countries might
be the most significant beneficiaries. During thefirst two months of 2011, tourism arrivals wereup in all regions except the Middle East (-10percent y/y) and North Africa (-9 percent). Latin
America & the Caribbean and South Asian
destinations saw volumes rise by 15 percent
compared with the same period in 2010, while
arrivals were up 13 percent in both Sub-SaharanAfrica and developing Europe and Central Asia.
Arrivals to East Asia & the Pacific were up 6
percent. Overall, the U.N. World Tourism
Organization expects tourism arrivals to rise by
about 4-5 percent in 2011.

Figure 11 Net private capital flows to developing countries

Capital flows to developing countries haverecoveredST Debt flows
Bank
Bond
Portfolio Equity
FDI$ trillion
1.2
1.0
0.8

Recent developments in finance is described in moredetail in the financial markets annex (http://
go.worldbank.org/II5NRC07Z4).

0.6
0.4

0.2

Capital flows to developing countries recovered
substantially in 2010, reaching about 4.6 percent
of developing country GDP (table 2). Flows
remain well below their peak levels of 2006 and2007, with most of the compression endured by

0.0

-0.2
2005

2006

2007

Source: World Bank.

14

2008

2009 2010p 2011f 2012f 2013f

9
8

7
6
5
4
3
2
1
0

Global Economic Prospects June 2011
Table 2 International capital flows to developing countries rebounds, surpassing 2008 levels$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+debt)
Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Net FDI outflows
Workers' remittances

2003
138.3
2.0

2004
195.2
2.4

2005
318.8
3.3

2006
450.3
4.0

2007
469.1
3.4

2008
440.6
2.6

2009
284.4
1.7

2010e
264.5
1.4

264.1
276.1
180.6
154.3
26.3
83.6
-11.9
-2.5
2.4
-11.8
95.5
38.3
23.1
19.5
-4.4
57.2
-116.9-285.5

342.2
366.3
243.6
206.7
36.9
98.6
-24.1
2.4
-14.7
-11.8
122.7
69.8
34.3
39.7
-4.1
52.9
-137.5-399.9

502.9
567.0
379.2
311.7
67.5
123.8
-64.0
2.7
-40.2
-26.6
187.8
113.3
48.3
70.3
-5.3
74.5
-406.9-414.8656.3 1132.1
725.9 1132.1
497.0
664.9
389.3
529.8
107.7
135.1
159.3
467.2
-69.6
0.0
-0.2
5.2
-26.7
-5.1
-42.6
0.0
228.9
467.2
145.0
283.0
31.7
88.2
117.9
198.5
-4.7
-3.7
83.9
184.2
-458.6 -509.5-647.9 -1091.7

771.1
743.3
561.2
614.4
-53.2
209.9
27.8
7.3
10.0
10.6
182.1
196.1
24.1
176.8
-4.8
-14.0
-733.5-478.2

633.8
557.4
498.1
390.0
108.2
135.6
76.4
17.7
26.5
32.2
59.2
52.8
51.1
3.2
-1.6
6.4
-271.1-647.0

930.2
857.8
633.2
485.4
147.8
297.0
72.4
19.3
16.3
36.8
224.6
104.1
66.5
37.6
0.0
120.5
-524.4-670.3

23.6
137.5

46.1
159.3

61.6
191.8

130.5
226.3

148.7
278.2

207.5
325.0

153.9
307.6

210.0
324.7

2003
3.9
4.1
2.7
2.3
0.4
1.4

2004
4.3
4.6
3.0
2.6
0.5
1.5

2005
5.3
5.9
4.0
3.3
0.7
2.0

2006
5.8
6.4
4.4
3.4
1.0
2.0

2007
8.1
8.1
4.8
3.8
1.0
3.3

2008
4.6
4.4
3.3
3.7
-0.3
1.1

2009
3.9
3.4
3.1
2.4
0.7
0.4

2010p
4.8
4.4
3.3
2.5
0.8
1.2

2011f
219.6
1.0

2012f
159.9
0.6

2013f
163.1
0.6

892.7
674.1
555.0
119.1
218.6

963.5
733.9
603.6
130.3
229.6

1065.3
839.8
696.2
143.6
225.5

218.6

229.6

225.5

348.6

374.5

2011f

2012f

2013f

3.9
3.0
2.4
0.5
1.0

3.8
2.9
2.4
0.5
0.9

3.8
3.0
2.5
0.5
0.8

As a percent of GDP
Net private and official inflows
Net private inflows (equity+debt)
Net equity inflows..Net FDI inflows..Net portfolio equity inflows..Private creditors

Source: World Bank.
Note: e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.

Global imbalances are expected to remain
well below 2007 levels
Reflecting offsetting terms-of-trade effects formost developing countries and modest
improvements in remittance and tourism flows, few
countries are expected to run into extreme current
account problems in 2011, and most developing
countries are expected to be able to financeadditional current account shortfalls that may arise.
Higher oil prices will increase the current accountsurpluses of oil exporting countries, which ex ante
serves to increase global imbalances (which

15

Figure 12. Global imbalances have declined and are expected to remain at much lower than in mid-decade% Global GDP
7

High-income
DevelopingUSA

Oil importers

Oil exportersChina

oil importers

Oil exporters

6
5
4
3

2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: World Bank.

Global Economic Prospects June 2011
rebounded from decade lows in 2009 to reachabout 5 percent of global GDP in 2010). The
combined balances of the United States andChina have halved from 2.6 percent of global
GDP in 2006 to 1.3 percent in 2010 (figure 12).

of May 2011). Following a relatively weak
weather-influenced first quarter GDP results, andsome flagging in the pace of the recovery in thesecond quarter, GDP growth is expected to pickup in the second half of the year, with wholeyear gains of 2.6 percent in 2011 and 2.9 percent
in 2012, and with growth easing to 2.7 percent
by 2013.

Looking forward, a lagged step-up in imports byoil exporting economies; policy tightening in
high-income countries and continued reliance on
domestic demand for growth among developing
countries, are expected to combine and maintainglobal imbalances at levels well below those of
2007, when persistent increases were a cause forgenuine policy concern. The absolute value ofcurrent account imbalances among developing
oil importers (including China) are expected tomoderate slightly as these economies havealready returned to close to full capacity levelsof demand. In contrast, further recovery is
expected in high-income countries, which may
be reflected in a decline in private-sector savingsand therefore increased deficits. However, thiseffect is expected to be offset by increased
public-sector savings from fiscal tightening —with the result that imbalances for this group ofcountries are also projected to decline modestly,from about 3 to 2.8 percent of global GDP
between 2011 and 2013.9

The recovery in Europe continues to facesubstantial headwinds from uncertainty
surrounding sovereign debt in several Euro Area
members, and a wide-reaching but necessary
process of fiscal consolidation. Nevertheless,outturns in Germany and France have shown
increasing strength, with unemployment inGermany now well below pre-crisis levels. But
in many other countries, growth is becoming
constrained by fairly austere fiscal consolidation
programs, ongoing banking-sector restructuring
and by a skepticism regarding the financial
sector that is serving to raise borrowing costs. As
monetary policy has entered a renewedtightening phase additional stresses in thefinancial sector—may become more apparent,
presenting further challenges for these
economies. Overall, after expanding 1.7 percent
in 2010, Euro Area GDP is expected to repeatthat performance in 2011, strengthening to 1.8
percent in 2012 and 1.9 by 2013, as financialsector headwinds to growth begin to fade.

Growth will slow but remain robust
The global recovery has broadened to encompass
more firms, more countries and morecomponents of aggregate demand. Improving
labor market conditions in high-income
countries, and strongly expanding domestic
demand in developing countries augurs well fora continued maturation of the recovery that is
now almost two years old (global industrial
production began picking up in March 2009).

The horrible natural disaster and ensuing nuclear
challenge in Japan will shape economic andhuman developments in that country for years tocome (see box 1). Despite the very real humanand wealth losses associated with the crisis, its
impact on GDP growth is expected to be
temporary. While second quarter GDP could
decline at a 3 percent annualized rate, the pace ofactivity is expected to pick up to a 3 or 4 percent
annualized rate in the final two quarters of theyear — bringing whole year growth to around
0.1 percent in 2011. GDP is likely to increase
to 2.6 percent in 2012, before settling at 2
percent in 2013 — broadly in line with thecountry’s growth potential.

The recovery in the United States has gained
strength over the past 6 months and shows signsof becoming more self-sustaining. Significant
gains in levels of manufacturing and services
activity, business investment have helped to
improve conditions in U.S. labor markets(employment has been growing by more than
115 thousand per month since March 2010, andthe unemployment rate dropped to 9.1 percent as

Overall, global growth is projected to ease from
3.8 percent in 2010 to 3.2 percent in 2011,
before picking up to 3.6 percent in each of 201216

Global Economic Prospects June 2011

Box 5. Synopsis of regional outlooks
The regional annexes to this report contain more detailed accounts of regional economic trends, including
country-specific forecasts (for more details, http://go.worldbank.org/OBY9F2CJV0)
Growth in developing East Asia and the Pacific (http://go.worldbank.org/Q2V3HPR0F0) is projected to slow from 9.6 to
8.5 percent between 2010 and 2011, reflecting the shorter term adverse consequences of the Japanese earthquake
for regional exports, as well as a tightening of both monetary and fiscal policies within the region (figure).
China’s expansion is projected to slow from the its 10.3 percent pace of 2010 to 9.3 in 2011 and around 8.7 percent in each of 2012 and 2013, as the effects of government’s policy tightening take stronger effect. Output inthe remainder of the East Asia region is also projected to slow, from 6.8 percent in 2010 to 5.3 percent in 2011,
before strengthening gradually to 6.4 and 6.5 percent in 2012 and 2013.
Economic activity in developing Europe and Central Asia (http://go.worldbank.org/C4P2GZR0P0) is projected to continue to recover — albeit at slower rates than during 2010—as the very large adjustment costs of the financial
crisis begin to fade. High oil prices should boost demand in regional oil exporters (notably Russia) increasing
remittances and exports for other countries in the region. Continued weakness in the banking sector in several
countries, and household exposures to foreign currency debt remain significant sources of risk. The region is
also among the most exposed to problems that may arise from the Euro-Area fiscal sustainability crisis. Aggregate GDP is expected to ease from the 5.2 pace of 2010 to 4.7 percent in 2011, before a modest easing to 4.5
percent sets in for 2012-13, in-line with underlying fundamentals.
With output gaps for some of the larger countries in Latin America and the Caribbean (http://
go.worldbank.org/1S4SNDR160) largely closed, continued robust growth in several economies will come head-to-headwith increasing inflationary pressures and a tightening of policy. As a result, growth is projected to diminish
from the 6 percent pace of 2010 to 4.5 percent in 2011. Activity is projected to remain solid, but to ease toward 4
percent over 2012-13 as policy measures dig deeper. Exchange rate appreciation due to capital inflows and highcommodity prices has put a dent in competitiveness, also expected to contribute to the softening of growth.
Countries in Central America and the Caribbean will face headwinds from higher commodity prices, offset tovarying degrees by a more favorable outlook for tourism and remittances as labor market conditions improve in
the United States.
The political turmoil in developing Middle East and North Africa (http://go.worldbank.org/IU7FS7QXE0) is projected to
cut into near-term growth for a large number of economies in the region. Output already forgone- and continued
uncertainty are expected to cause growth to slow in the economies most directly touched by the crisis by between 3 and 4 percentage points in 2011 relative to what would have been observed otherwise. Growth in theremainder of the region will be reduced by 1 to 2 points. Many countries are projected to see tourism revenues,
worker remittances, foreign direct investment and other international capital flows decline, further tightening
Developing country growth rates to stabilize at historically elevated rates
Real GDP growth , ch %, 2009 to 2013
12

2009

2010

2011

2012

2013

10
8
6
4
2
0
-2
-4
-6
-8
East Asia andPacific

Europe & Central
Asia

Latin America &Caribbean

Source: World Bank.

17

Middle East &North Africa

South Asia

Sub-SaharanAfricaGlobal Economic Prospects June 2011

Box 5. Synopsis of regional outlooks (cont.)
conditions for regional oil importers. Activity is expected to pick up slowly as turmoil resolves over time, withgrowth among developing countries in the region rising from 1.9 percent in 2011 to 4 percent by 2013.
GDP growth in 2011 in South Asia (http://go.worldbank.org/VFFA8EDQF0) is expected to slow from the robust 9.3 percent pace set in 2010 to 7.5 percent, as policy tightens in response to higher inflation and an unsustainably loose
fiscal policy stance. These negative factors and high import costs due to commodity prices are likely to be partially offset by strong trade, notably in India, which is reorienting its exports toward China and East Asia. Though
investment spending is projected to remain robust (buoyed by infrastructure projects), consumer demand is anticipated to come under pressure due to reduced fuel and food subsidies. Turmoil and economic weakness in the
Middle East and North Africa is expected to be a negative for remittances to the region, further dampening household incomes and outlays. Regional growth should revive toward an 8 percent pace by 2013 on the back of domestic reforms and an improved global environment.
GDP growth in Sub-Saharan Africa (http://go.worldbank.org/PHW504QYG0) is projected to register 5 percent in 2011—
the only developing region projected to enjoy an acceleration of growth in the year—buoyed by favorable termsof trade for oil exporters, and continued large inflows of FDI from China and elsewhere. Activity is expected tocontinue to firm with growth reaching 5.7 percent by 2013. The region has avoided the worst effects of higher
food prices due to strong local crops, but should international prices remain at current or higher levels, local foodprices could begin rising in the second half of 2011 and into 2012, with negative consequences for consumer
demand and poverty. Inflation pressures may go hand and hand with this development, especially as elections are
expected in 13 countries in the region.

and 2013. The slowdown for high-income
countries (from 2.7 percent in 2010 to 2.2
percent in 2011) mainly reflects very weakgrowth in Japan due to the after-effects of theearthquake and tsunami (see earlier box 1).
Growth in the remaining high-income countries
is expected to remain broadly stable at around
2.5 percent through 2013, despite a gradualwithdrawal of the substantial fiscal and monetarystimulus introduced following the financial crisis

to prevent a more serious downturn.
For developing countries growth is projected to
decline from 7.3 to 6.2 percent between 2010
and 2012 before firming somewhat in 2013,reflecting an end to bounce-back factors thatserved to boost growth in 2010 and thetightening of monetary and fiscal policies as
capacity constraints become increasingly binding(see box 5 and the regional annexes to thisFigure 13 Headline inflation pressures have picked up since mid-2010
Median headline inflation rates

Distribution of increase in developing country inflation rates

Headline inflation, ch%, 3m/3m, saar

# of countries

12

14

12

9

10

6
8

3

6

0

4

2

Developing-30

High-income-6-6Jan-05 Oct-05

Jul-06

Apr-07 Jan-08 Oct-08

Jul-09

-4

-2

0

2

4

6

8

10

12

14

Change in year-over-year inflation rate over past 12 months,
percentage points

Apr-10 Jan-11

Source: World Bank.

18

More

Global Economic Prospects June 2011
Figure 14 Regional changes in inflation
Year-over-year inflation

Quarterly inflation (3m/3m saar)

Headline inflation rate, y-o-y percent change

20

18

16

15

12

10

Jan 2009
Jan 2010

1410

Apr 2011 or latest

Jan-09Jan-10Mar 11 or latest

5

8

6

0

4

2

-5
0
High-income

East Asia &Pacific

Europe & Latin America Middle East &Central Asia & Caribbean
N. Africa

South Asia

High-income

Sub-SaharanAfricaEast Asia &Europe & Latin America Middle East & South Asia Sub-SaharanPacific
Central Asia & Caribbean
N. Africa
AfricaSource: World Bank.

document for more details on recent economic
developments and the outlook for low– andmiddle-income countries — including country
specific forecasts).

with inflation having increased by 10 percentage
points or more over the past 12 months in the
Democratic Republic of Congo, Ethiopia, theKyrgyz Republic, Bolivia, and Mongolia. Yearover-year headline inflation increased during thisperiod by 3 or more percentage points in 33 of
the 93 developing countries for which data are
available (second panel, figure 13). However, theextent of the pickup in inflation in most countries
has been modest. Inflation rates in 55 percent ofdeveloping countries remain below their averagerate of the pre-crisis period (January 2000
through August 2008). And inflation is less than
2 percentage points higher than that average in
80 percent of countries.

Rising inflation posesmacroeconomic policy challenges
Recent developments in inflation is described in moredetail in the inflation annex (http://go.worldbank.org/
FA0QD707X4).

The rise in commodity prices, combined with therapid closing of output gaps and strong capital
inflows has contributed to an acceleration of
inflation throughout the developing world.
Headline inflation in developing countries neared
7 percent (year-over-year) in April 2011, a morethan 3 percentage point increase since low points
in July 2009, when concerns of deflation wereparamount. Headline inflation (y-o-y) in highincome countries has also picked up, reaching
2.8 percent in April 2011.

The biggest acceleration has been in the East
Asia and Pacific- and Middle-East and North
African regions, reflecting capacity constraints inthe former and food prices in the latter (firstpanel, figure 14). While on a year-over-yearbasis inflation has eased in South Asia andEurope and Central Asia, monthly data suggeststhat price pressures remain strong in South Asiaand are rising in Africa, with the pace ofincrease in the first quarter of 2011 exceeding 15
percent in South Asia and close to 10 percent in
Sub-Saharan Africa (second panel, figure 14).

Monthly inflation accelerated more starkly,
reaching a 9.1 percent annualized pace amongdeveloping countries in the 3 months ending inJanuary 2011. Since then, the pace of inflation
has eased to around 6.7 percent in April, and to
4.3 percent in high-income countries (first panel,
figure 13).

Rising food and fuel prices have also been
associated with significant increases in food andfuel subsidies—both implicitly as the gap
between market and controlled prices increases

The extent of the increase and its main
determinants varies markedly across countries,

19

Global Economic Prospects June 2011
Box 6 Should developing countries accommodate external price shocks?
Several OECD countries produce estimates of core inflation that either exclude food and fuel prices or exclude
the most volatile components from the overall consumer price index, and prefer to guide monetary policy withthese measures rather than headline inflation. Currently, even as headline inflation is rising rapidly, so-called core
inflation indexes remain low at 1.3 percent in high-income Europe and 1.1 percent in the United States.
Most developing countries do not publish separate core inflation measures and, recent research (Walsh, 2011)
suggests that in some cases, policy in developing countries may be better advised to focus on headline not coremeasures. According to this line of argument, the high weight of food and fuel prices in the overall consumption
basket of developing countries (more than 50 percent in many cases) means that price increases in these goods
spread more easily into other prices than in high-income countries. As a result, accommodating such price increases runs the risk of allowing a second round of price increases to occur — potentially yielding an inflationary spiral.
A second strand of logic argues that because food prices are such a large component of the overall basket, notaccommodating them (even if they do pass through to other prices) would pose too harsh an adjustment on real
wages. In this case, a credible monetary authority might be better-off to announce that they would accommodate
the price increase and allow some second round increases (thereby reducing the real wage shock), but would seek
to firmly re-establish its inflation targets within a well specified period of time.
Of course, the success of such a strategy lies in the credibility of the monetary authority. If inflationary expectations adjust upward despite the monetary authority’s declaration to re-establish inflation targets by a given date,then the long-term costs of bringing expectations back down may exceed the short-term benefits of easing the real
-wage adjustment to permanently higher food prices.

and because of the imposition of new policies toalleviate the impact of the price hikes. Several
countries in the Middle-East and North Africa
increased food and/or fuel subsidies (Algeria,
Egypt, Jordan, Morocco, Syria and Tunisia), withassociated increases in government deficits
exceeding 2 percent of GDP in many instances.
Rising food and fuel prices have also increased

subsidy spending in several Asian economies,
including India, Pakistan and Indonesia.
Responding to the rise in inflation and theclosing of output gaps, authorities in many
developing countries have begun the process ofadjusting macroeconomic policy, which had beenloosened in the wake of the financial crisis, to a

Figure 15 Policy tightening has begun and markets suggest more is to be expected
Rates are on the rise in many developing regions
policy interest rates in percent
14
13

And markets expect further increases

Developing
Asia
Europe & Central Asia
Latin America & the Caribbean
Sub-Saharan Africa/ Middle East & North Africachange in offical policy rate, basis points
500
450

12

400

11

350

10

300

9

250

Market expected between May 20 andend of 2011

200

8

150

7

100

6

50

5

0
Brazil4
01/01/2008

Change since 2009 low

07/01/2008

01/01/2009

07/01/2009

01/01/2010

07/01/2010

01/01/2011

Source: World Bank, Thomson/Reuters, Bloomberg.

20

Chile

Colombia Russia

China

India

Indonesia Malayisa Thailand

Global Economic Prospects June 2011

Figure 16 Gross capital flows to, and credit growth in, developing countries eased toward the end of 2010
billions $, 3 month moving average30

y-o-y Credit growth, CPI def lated

Bond issuance25
20

BrazilChina
Colombia
Indonesia
India
Malaysia
Turkey35

Equity placement

30

Syndicated bank loans

25
20

15

15
10

10

5

5
0

0
Jan-09

May-09Sep-09Jan-10May-10

Sep-102009 Jan

Jan-11

2009 Jul

2010 Jan2010 Jul

2011 Jan

Source: World Bank using Dealogic, IFS.
Note: Data refer to gross flows of new bond and equity issues and syndicated bank loan commitments.

Despite the increase in nominal interest rates,
real rates (nominal deflated by actual inflation)
remain low and even negative in many
developing countries. Expected real rates (which
is what matters for monetary policy) may not be
negative if expectations are that the current
pickup in inflation in transitory. However, ifsome of the recent increase is deemed permanent
then additional monetary tightening may becalled for (see box 6 for a fuller discussion of
how monetary policy in developing countries
should respond to increases in commodity
prices). Indeed, expected inflation has increased
in several developing countries where data exist,
for example in Argentina, Belarus, Brazil, Chile,
Ethiopia, and India among others.

more neutral stance.
Monetary policy interest rates in much of thedeveloping world have been rising (first panel,
figure 15). In Latin America, the median policy
rate has increased from 7.9 percent in March2010 to 9.6 percent by May 2011, and in Asia it
has increased by 106 basis points to 6.31
percent. Reflecting much larger output gaps,
policy rates in Europe and Central Asia havebeen broadly stable (up only 50 basis points
since February 2011). In the Middle East andNorth Africa and Sub-Saharan Africa rates
continue to decline.

Figure 17 Upward pressure on middle-income currencies and reserve accumulation also eased in 2010Q4
real effective exchange rate indices, Jan 2009=100
150
BrazilSouth Africa
TurkeyIndia
Indonesia
Thailand140
China

Annualized rate of increase in USD reserves
50.0
2010Q1

2010Q2

2010Q3

2010Q4

40.0

30.0

130

20.0

120
10.0

110
0.0

100

-10.0

90

-20.0

2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05

East Asia &Pacific

Source: World Bank, IFS.

21

Europe & Central Latin America & Middle East & N.
Asia
Caribbean
AfricaSouth Asia

Sub-SaharanAfricaGlobal Economic Prospects June 2011
As discussed in length in the previous edition of
Global Economic Prospects, efforts to tightenmonetary policy and rein-in credit growth werecomplicated in 2010 by strong capital inflows.
Some of these flows (mainly short-term debt andequity flows) were perceived as having animportant speculative and temporary component.
As a result, many countries (notably several
large middle-income countries with relatively
deep capital markets) sought to resist theassociated upward pressures on their currencies,
putting into place a wide range of administrativeand regulatory measures designed to reduce theattractiveness of short-term financial investmentsor reduce the extent of credit expansion
associated with reserve accumulation.

much of the developing world, East Asia
forming a notable exception (figure 17).

Fiscal policy will likely have to do moregoing forward
Looking forward, policymakers in developing
countries will need to make fuller use of all of
the tools at their disposal to keep inflation undercontrol. While the more unstable capital inflowsthat characterized the third quarter of 2010 haveabated, many of the underlying conditions that
attracted those flows remain in place (low shortterm interest rates in high-income countries;
stronger growth prospects in developing
countries; strong commodity prices, and a longrun tendency for developing–country currencies
to appreciate). Moreover, countries are now
confronted with additional pressures fromgrowing capacity constraints and risingcommodity prices.

Measures employed included sterilizing inflows
through government bond sales, and interest rate
hikes. Many countries employed non-traditional
measures that did not increase domestic interest
rates in order to avoid increasing the returns toforeigners of making short-term investments inthese countries. These included raising reserve
requirements10, and imposing taxes on shortterm foreign capital investments. Turkey evenwent so far as to lower domestic interest rates(and therefore risk a rapid expansion in domestic
credit) in order to discourage foreign capital
inflows.

If countries are to deal with these (and other as
yet unknown) challenges, they may need to takefuller advantage of both fiscal and exchange rate
policies. To this point in the recovery,
withdrawal of the fiscal stimulus that was put inplace during the acute phase of the crisis has
been limited. Although government deficits havedeclined in many developing countries, thismainly reflects improved revenues as activity
has recovered and output gaps returned to near

Partly as a result of these steps, foreign capital
inflows into—and credit growth in—many ofthese countries eased toward the end of 2010 andinto 2011 (figure 16). However, attributing
causality is difficult because renewed concerns
about fiscal sustainability in high-income
Europe; political turmoil in the Middle East andNorth Africa; rising oil prices, and the crisis inJapan may also have been playing a role. Indeed,
profit-taking on the part of investors, andconcerns that perhaps emerging market
currencies and local stock-markets had reachedunsustainably high levels may also have beenfactors at play.11

Figure 18 Modest expected improvement in fiscal
deficits in some developing regions
general govt balance as a share of GDP (%)
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0

Whatever the reason for the reduced inflows,
they were reflected in an easing in the upward
pressure on the currencies of many middleincome countries, and a slowing in the pace ofinternational reserve accumulation throughout

-10.0

2007

2010

2011

2012

2013

High Income East Asia & Europe &Latin
Middle East South Asia Sub-SaharanCountries
Pacific Central Asia America & & N. Africa
AfricaCaribbean

Source: World Bank.

22

Global Economic Prospects June 2011
zero levels. Discretionary cuts to spending havebeen limited. Government deficits have declined
by less than might have been expected given that
output gaps in most countries will be close to, or
above zero—suggesting that almost all of thecyclical component of government deficits has
been eliminated and that remaining budgetary
shortfalls are structural in nature (figure 18).

Similarly, countries that have sustained large
current account surpluses for an extended periodof time may well be better off allowing theircurrencies to float more freely, rather thancontinuing to resist upward pressure—especially when domestic inflationary tensions
are building.

Risks to the global economy

Importantly, even by 2013 no region is
anticipated to see fiscal balances return to the pre-crisis levels of 2007. They will therefore nothave in place the kind of fiscal buffers thatallowed policy in developing countries to
respond counter-cyclically to the financial crisis.
Until such buffers are restored, countries will be
more vulnerable to future domestic or external
shocks.

The recovery is mostly complete in developing
countries, with prospects in individual countries
increasingly dependent on local conditions andmedium-term productivity growth rather than thelarge, global-level forces that dominatedeconomic activity during and immediately after
the financial crisis. While the robust growth
outlined in the baseline remains the most likely
outcome, several tensions and external events
have the potential to disrupt that process.

A more assertive tightening of fiscal policies indeveloping countries would also allow a given
level of macroeconomic tightening to beachieved at lower interest rates. Lower domestic
interest rates would both reduce the financial
incentive for potentially destabilizing short-term
debt inflow, but might also increase investment
rates and overall activity by lowering the cost ofcapital for local entrepreneurs.

On the upside, output could come in morestrongly than anticipated, or the very strong
speculative capital flows that characterized thethird quarter of 2010 could return. Either
scenario could potentially accentuate inflationarypressures in the global economy — both thosestemming from commodity markets and thosecoming from increasingly binding capacity
constraints in a number of emerging markets. In
such a scenario, which pre-supposes that policy
tightening efforts underway are not sufficient torein in demand, the authorities would be obliged
to tighten more aggressively in 2012, provoking
a more pronounced slowdown in 2013.

Some countries should consider introducing
more flexible exchange rate regimes. Whencountries face temporary and or speculative
pressures on their currencies, reserve
accumulation and other strategies to resist
unwarranted exchange rate appreciation (ordepreciation) may well be warranted. However,when those pressures are persistent andenduring, a policy that resists exchange rateadjustment may well be counter-productive.

There are several potential downside risks.

For example, while Brazil faced strong inflowsof short-term debt flows, the authorities werearguably correct in resisting the upward pressure
they caused on their currency. However, Brazil
has also been—and continues to be a major
destination for FDI, which has in large measure
been attracted to the country’s long-term
fundamentals. In this context, the authorities
decision to not resist upward pressures stemmingfrom FDI inflows is equally appropriate.

23A much more severe slowing of the global
economy could come about if the politicalturmoil in the Middle East and North Africa
were to result in a prolonged period of highoil prices — either through increased
uncertainty, or an enduring disruption to
global oil supply.

Conditions in global food markets represent
a more focused risk for the poor indeveloping countries. Another year of poor
harvests could see prices rise still higher —especially if combined with higher oil prices— with potentially serious consequences forGlobal Economic Prospects June 2011
Table 3 A further increase in oil prices due to political turmoil in the Middle-east could cut further into growth(Change in the level of GDP (%) from baseline and change in current account balance (% of GDP)
Impact of a $50/barrel price hike (11q2-12q2) due to uncertainty
Re a l GDP
2010
2011
2012
World
0.0
-0.5
-1.0
Oi l e xporti ng
0.0
0.2
0.5
Oi l i mporti ng
0.0
-0.6
-1.3

2013
-0.4
0.9
-0.7

Curre nt a ccount (% of GDP)
2010
2011
2012
0.0
0.0
0.0
0.0
1.5
1.4
0.0
-0.2
-0.2

2013
0.0
-0.2
0.1

Hi gh i ncome
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

-0.6
-0.4
-0.6

-1.2
-0.6
-1.2

-0.6
0.3
-0.7

0.0
0.0
0.0

0.1
1.4
-0.1

0.2
1.7
0.0

0.2
0.1
0.2

Developing countries
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

-0.1
0.9
-0.7

-0.4
1.6
-1.5

0.0
1.5
-0.8

0.0
0.0
0.0

0.3
1.5
-0.5

0.1
1.2
-0.6

-0.3
-0.4
-0.2

Mi ddl e -i ncome
Low-i ncome

0.0
0.0

-0.1
-1.3

-0.4
-2.4

0.0
-0.6

0.0
0.0

0.3
0.0

0.1
0.3

-0.3
0.1

Ea s t As i a a nd Pa ci fi c
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

-0.8
-0.4
-0.8

-1.7
-0.3
-1.9

-1.0
0.7
-1.2

0.0
0.0
0.0

-0.8
-0.5
-0.9

-1.1
-0.4
-1.2

-0.3
0.3
-0.4

Europe a nd Ce ntra l As i a
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

-0.2
0.1
-0.5

-0.2
0.7
-1.2

0.8
2.0
-0.6

0.0
0.0
0.0

1.6
2.3
0.1

1.8
2.4
0.4

0.1
-0.1
0.1

La ti n Ame ri ca a nd Ca ri bbe a n
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

0.5
1.2
-0.3

0.7
1.8
-0.4

0.5
0.9
0.2

0.0
0.0
0.0

-0.2
-0.4
-0.1

-0.4
-0.9
-0.1

-0.2
-0.1
-0.2

Mi ddl e Ea s t a nd N.Afri ca
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

0.8
1.5
-1.4

1.3
2.4
-2.3

1.1
1.4
0.0

0.0
0.0
0.0

3.3
3.7
0.4

3.2
3.4
1.2

-0.9
-1.2
0.4

South As i a

0.0

-0.9

-1.7

-0.7

0.0

-0.1

0.3

0.2

Sub-Sa ha ra n Afri ca
Oi l e xporti ng
Oi l i mporti ng

0.0
0.0
0.0

1.0
3.7
-0.9

1.7
6.6
-1.6

1.4
4.4
-0.7

0.0
0.0
0.0

3.3
6.2
0.0

2.7
4.4
0.3

-1.3
-3.6
0.2

Source: World Bank.

prices could remain high or even increase further— with serious consequences for global growth.

the poor.
The market nervousness over fiscal
sustainability in high-income Europe —although less acute than in the past, still has
the potential to disrupt growth in developing
countries if it begins to weigh on confidence.

Continued turmoil in the Middle-East andNorth Africa could push oil prices evenhigher
The recent turmoil in the Middle East and North
Africa lifted oil prices to $112/bbl in late April
2011 (World Bank average), a 40 percent
increase on the average price of $79.60/bbl in2010. In the baseline, oil prices, which havesince declined to around $107/bbl, are expected
to gradually moderate toward a long-run
equilibrium price of about $80/bbl in constant2011 dollar terms. This implies annual pricelevels of $107/bbl in 2011 drifting to $96.7/bbl
by 2013. However, if current uncertainties
persist, or a major supply disruption occurs, oilDuring the Iranian revolution and the Iraq/
Iran War, crude oil prices more-than doubled
from $14/bbl in 1978 to $35/bbl by 1981.

When Iraq invaded Kuwait in 1991, oilprices increased sharply from $20/bbl to apeak of $44/bbl five months later, with theaverage price rising by one-third to $28/bbl.

During the extended conflict in Iraq, prices
increased by 40 percent.

The current turmoil in the Middle East and North
Africa has been associated with a $22/bbl
increase in oil prices, from $90/bbl in December
2010 to $112/bbl by late April 2011. Prices
could increase further on additional disruption to
supplies, notably if this involved a larger
exporting country.
Preliminary simulations suggest that a further$50/bbl increase in the price of oil for a period of24

Global Economic Prospects June 2011
1 year (beginning in the second half of 2011, forexample) could shave off 0.5 and 1.0 percentage
points from global output in 2011 and 2012(table 3). This overall result masks significant
differences between countries and regions.

at any price; in the former oil would be available— but at higher cost.

A poor crop or higher oil prices could see
domestic food prices in developing
countries increase further in 2011-2012

Oil exporting countries experience significant
gains (6.6 percent of GDP in Sub-Saharan Africa
and 2.4 percent in the Middle East and North
Africa),12 while oil importing countries
experience losses. The largest losses are
expected to be among oil-importing countries in
the Middle East and North Africa (-2.3 percent)as well as in East Asia and Pacific (-1.9 percent
in 2012), reflecting both the direct effects ofhigher oil prices on incomes in these regions, aswell as their greater reliance on exports to othernegatively affected oil-importing regions(Europe and Central Asian oil-importers benefit
from strong Russian imports).

The surge in international food prices during thesecond half of 2010 provoked concerns of a―second food crisis‖, of similar magnitude to thatof 2007-08. Indeed, international food prices
increased to levels close to their 2008 peaks.
However, effects on the ground have been
mitigated by a number of factors— notably, thefact that not all major grain prices have increased
as much as they did in 2008. International rice
prices remain relatively low, 46 percent lower
than peak prices in 2008 — although still twice
their average level between 2000 and 2007.
Moreover, 2010 was a good crop year for many
developing countries — especially in Africa —so that local prices increased by much less thaninternational prices; and local food price indexesrose by an average of 9.7 percent in the 12months ending December 2010. Of course, muchlarger increases were observed in some
economies with 33 of 80 countries experiencing
food price increases of 10 percent or more in2010.

GDP declines in oil importers reflect real income
losses as the cost of oil and related goods andservices rise, which leads to lower demand,
reduced competitiveness, and output declines —with intensive oil-importing economies
experiencing the biggest declines (for example
Jamaica and Guyana). Negative impacts among
countries with close economic ties to oil
exporters (for example those in Europe andCentral Asia) tend to be reduced by increased
export demand from oil exporters.
In terms of external balances, current accountbalances (as a share of GDP) are expected to riseby up to 6.2 percent of GDP in oil exporting Sub
Saharan Africa, and by about half that much in
the Middle East and North Africa, while in East
Asia and Pacific, external balances decline byabout 1 percent of GDP.

Simulations suggest that if the June 2011/May
Figure 19 Another poor crop or higher oil prices could
push food prices even higher

Higher oil will also affect food prices(Nominal Wheat price, US$/ton)

350
300
250

Should the turmoil result in a large and sustained(say 10-15mb/d) reduction in global oil supply,
adverse effects could be more than twice aslarge. Prices might initially rise as high as $200/
bbl, cutting sharply into household incomes andfirm-level profitability. Moreover, supply
shortages could directly constrain production in
a way that uncertainty-based price rises would
not. In the latter case, oil would not be available

Forecast

Baseline
5% production shortfall
5% production shortfall and 50% incerase inenergy prices

200
150
100

2000

2002

2004

Source: DEC Prospects Group, World Bank.

Source: World Bank.

25

2006

2008

2010

2012
8

Global Economic Prospects June 20112012 crop year is of normal size, theninternationally traded grain prices should decline
in 2012 (significant price relief is unlikely to beobserved until towards the end of 2011, as
information on harvests becomes clearer).
However, if the crop is poor (i.e. 5 percent—or 1
standard deviation—less than normal), thenwheat prices could rise by a further 3.5 percent(figure 19).

GDP in 2011 and gross debt to exceed 230
percent.
At the same time in Europe, despite substantial
steps to reduce deficits in several countries, andthe multiple financial rescue-packages brought tobear, markets remain concerned that one or moreEuro Area economies might have to restructure
its debt. The price of ensuring against default of
the sovereign debt of Greece has surged torecord highs for the Euro Area, and credit default
swap rates for Ireland and Portugal have also
given up earlier declines (figure 20). Even therisk premium for traditional ―safe havencountries‖ such as the United Kingdom andGermany have edged upwards.

Given the importance of oil and natural gas as
inputs to food production, food prices could risean additional 16 percent should oil prices
increase by the $50/bbl outlined in the earlier oil
price scenario.

Persistent euro-area uncertainty, andrising high-income country interest rates
as monetary stimulus is withdrawn, could
reveal further weaknesses in the global
economy.

For developing countries, the situation in Europe
is of concern because a serious deterioration in
financial and economic conditions could weaken
demand for developing country exports. In
addition, banks could be forced to reduce credit
growth, or even repatriate funds from foreign
affiliates — with more direct impacts on credit
and economic growth in developing countries—
notably in Europe and Central Asia.

The fiscal situation in high-income countries
continues to concern markets. Despite recently
announced and anticipated spending cuts, fiscal
policy in the United States remains loose due totax measures introduced or extended in
December 2010. The Congressional Budget
Office (2011) projects a U.S. federal deficit of
9.8 percent of GDP in fiscal year 2011 based on
current policies, and a debt-to-GDP ratio that
could climb to 77 percent of GDP by 2021, fromits current 62 percent of GDP level. In Japan, thefiscal deficit is expected to exceed 11 percent of

A restructuring of the sovereign debt of one ormore European countries could adversely affectthe capital of some Euro-area banks. Data fromthe Bank for International Settlements (BIS)suggests that the sovereign debt of Greece,
Ireland, Portugal and Spain held by Euro-areabanks may represent more than 20 percent of thetier-1 capital of euro area banks. If a
restructuring caused capital adequacy ratios tofall below regulatory thresholds, this could have

Figure 20 Renewed pressure on high-income country debt
5-yr sovereign credit-default swap rates, basis points

1600
1400
1200

GreeceIreland
Portugal
Spain

Italy
LMICs with Median < 200
LMICs with Median > 200

Table 4 Results of ECB stress test
Euro Area
European Union
RussiaChina
Rest of Asia
BrazilMexicoRest of Latin America
Non-EU, Rest of the World

1000
800
600
400
200
0
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: ECB (2011).

Source: World Bank, Thomson/Datastream..

26

2011

2012

-2.0
-2.1
-2.0
-1.0
-1.4
-2.1
-2.0
-2.0
-1.5

-2.0
-2.0
-1.3
-0.1
-0.1
-0.1
-0.5
-0.7
-0.3

Global Economic Prospects June 2011
wider implications, given the extensive crossholdings between banks globally. In such a
scenario, European banks (but potentially otherbanks as well) could be forced to re-consolidate
balance sheet in a second round.

are reflected in a less capital-intensive growth
path—an effect that is incorporated into thebaseline forecast.

In such scenario, banks might be compelled to
draw on resources of affiliates and subsidiaries indeveloping countries (mainly in Europe &Central Asia and Latin America & the
Caribbean), with negative effects on lending andactivity in those regions that extend beyond thepure trade impacts of a slowing in European
growth.

The recovery from the unprecedented global
recession that followed the September 2008
financial crisis has gathered strength, and, despite
significant tensions and hurdles ahead, appears
likely to continue to mature over the coming
three years.

Concluding remarks

While the dynamic of recovery appears wellestablished and has spread from developing
countries to high-income economies, significant
challenges and risks remain. Strong growth indeveloping countries, coupled with politicaltensions in oil producing regions have once again
pushed oil prices to levels where further increases
could significantly curb economic growth.
Monetary policy has responded, but fiscal andexchange-rate policy may need to play a bigger
role if inflationary pressures are to be contained.

Table 4 reports the results of an ECB simulation13
where an increase in risk aversion and an ensuing
decline in investor and business confidence cuts
into European growth by around 2 percentage
points, and generates similar impacts on GDP in
many developing countries as a result of reduced
exports and increased financial costs fromincreased risk premia and falling asset values.
While authorities are taking steps to ensure
against a negative outcome, these persistent risks
are a reminder that the global economy has yet to
fully recover from the excesses of the pre-crisis
financial boom.

High oil prices have contributed to high foodprices, with important negative consequences forreal incomes of the urban poor. So far, the worstof these impacts has been avoided because
domestic food prices in developing countries
have not increased as much as international foodprices. But if the 2011/12 crop year disappoints,
as did the 2008/09 and 2010/11 years, thenpressures on the incomes and nutrition of poorfamilies can be expected to intensify.

Indeed, additional problems and issues may nothave been revealed as yet. The very low longterm interest rates engineered by high-income
central banks through both orthodox and
extraordinary measures such as quantitativeeasing, may have allowed some firms and banks
to survive and prosper in some cases, even if not
all underlying structural problems have been
resolved. As central banks stop intervening in
Treasury-, mortgage- and corporate bond markets
and stricter financial regulations kick-in, longterm interest rates are expected to rise, increasing
financing costs. Such higher costs may expose
vulnerabilities that until now have remained
hidden.

The maturation of the cycle, and the gradualwithdrawal of the extraordinary measures put inplace to prevent a collapse of the global
economy, suggest that both short- and long-term
interest rates will rise. As they do, they are likely
to increase pressure on governments, firms- andbank finances, potentially revealing weaknesses
that have remained hidden, given the readyavailability of cheap money. Should some ofthese weaknesses emerge in economicallysensitive corners of the global economy, they
could bring serious consequences.

Moreover, as outlined in the January edition of
Global Economic Prospects 2010 (World Bank,
2010), higher long-term rates may be associatedwith a temporary slowing of trend growth rates indeveloping countries, as higher borrowing costs

27

Global Economic Prospects June 2011
production is returned to the food cycle as
feed grain.

Notes

8. Relative valuation measures (price-earnings,
price-to-book, price -to-sales, and dividend
yield) in developing countries had been
trading at a substantial discount relative tohigh-income countries during 2009 and partof 2010. However, the discount vanished by
the third quarter of 2010, when developing
countries even traded at a small premium
over high-income countries. Since then, thepace of initial and secondary public
offerings in developing countries (and theirtake-up by high-income investors) has eased.
In addition developing country stock
markets have stabilized.

1. Global export volumes regained pre-crisis
levels, and stood 2.4 percent above pre-crisis
peaks as of February 2011. This has largely
reflected strong gains by developing
countries where merchandise exports stood 9
points above pre-crisis peaks in February.
High-income economies regained August
2008 levels in December 2010, and exports
are now on par with pre-crisis peaks.
2. See World Bank (2011a) for a description of
the methodology used to estimate ―no-crisis‖levels of activity. Note that these capacity
utilization rates are statistically derived andwill differ from officially published sources.
They refer only to industrial production andare distinct from the similar but ―wholeeconomy‖ output gap.

9. New data for China suggest that the decline
in FDI in 2009 was less pronounced (37percent) than earlier thought, and that therebound in 2010 was somewhat stronger (25percent).

3. Grains are the most important source ofcalories in the diet of the poor, providing
between 80 and 90 percent of calories.

10. The IMF in its latest World Economic
Outlook (2011) projects that global
imbalances will rise somewhat over theirprojection period, both reflecting anassumed nominal depreciation of therenmimbi viz-a-viz the dollar and asignificant pickup in Chinese exports as
output gaps in high-income countries
decline.

4. An additional 0.1mb/d of oil production was
shut in March due to unrest and strikes in
Yemen, Oman, Gabon and Côte d’Ivoire, butmarket anxiety attaches the possibility oflarger disruptions to major oil producing
countries, including Nigeria in the run-up toelections in April (about 1mb/d was
disrupted during the 2007 election
campaign).

11. For example, the Chinese Central Bank hasraised its reserve requirements eight times
since November 2010.

5. IMF (2011) argues that loose monetary
policy may have contributed to these
conditions by lowering interest rates andthereby reducing the cost of warehousing
stocks to facilitate speculation when future
prices are higher than spot prices.

12. In the World Bank, Global Simulation
Model (GSM), the initial effect of an oil
price shock mainly impacts on the system as
a terms of trade shock. For oil exporting
countries, there is a gain in real income, as
prices of merchandise exports rise. The
impact is strongest in counties where oil
exports represents a large share of GDP (forexample in Angola and Nigeria), and whereimport propensities are relatively low.
Among oil exporting countries, the import
propensity is significantly higher in Vietnam
and Papua New Guinea, than in Gabon and
Venezuela, RB - thereby reducing the net
GDP impact in the latter for a similar size

6. Stock to-use ratios in major exporting
economies are used here to control for
distortions caused by large fluctuations inrecent years in the stocks of major
producing/consuming countries, but which
do not participate in global commodity
markets.
7. Not all of the food content of maize andsugar used in biofuel production is lost.
About 1/3 of maize that is used in biofuel

28

Global Economic Prospects June 2011
International Monetary Fund. 2011. World
Economic Outlook. April.

income gain.
In high-income oil exporting countries, theoverall GDP impact is negative due tonegative impacts in Canada and the UK,
whose non-oil exports are negatively
affected by slowing global demand.
Excluding these two countries, the impact on
the remained of the high-income oil
exporting countries is positive, due to theirhigh import intensities. A similar factor
explains the negative impact for East Asia
and Pacific oil exporters as the negative
impact on Malaysian non-oil exports
overwhelms the positive impact of higher oilrevenues on Malaysian GDP (excluding
Malaysia, the net impact is positive).

Timilsina, Govinda R. and Shrestha, Ashish.
2010. ―Biofuels: Markets, Targets andImpacts‖. World Bank Policy ResearchWorking Paper. No.6534
TEPCO. 2011. Power Supply and Demand
Outlook in this Summer and Measures (3rd
Release). May 13
United Nations. World Tourism Organization.
2011. ―UNWTO World Tourism Barometer‖.
February 2011. [www.unwto.org]
Walsh, James P. 2011. ―Reconsidering the Roleof Food Prices in Inflation‖. IMF Working
Paper. WP11/71.

13. The ECB scenario assumes a spike in risk
premia on European sovereign debt, higher
short-term and long-term interest rates, and areduction in European business andconsumer confidenceWorld Bank. 2010. Global Economic Prospects:
Finance, Crisis and Growth.
World Bank. 2011a. Global Economic
Prospects: Navigating Strong Currents.

References

World Travel and Tourism Council. 2011
Tourism Impact Data and Forecast. May
2011. [www.wttc.org]

Baffes, John. 2010. ―More on the Energy/NonEnergy Commodity Price Link.‖ Applied
Economics Letters. 17: 1555-1558
Congressional Budget Office. 2011. The Budget
and Economic Outlook: Fiscal years 2011 to
2021. January. Downloaded April 29, 2011
http://www.cbo.gov/doc.cfm?index=12039
Dalsgaard, Thomas, Chirstophe André and Pete
Richardson. 2001. ―Standard Shocks in theOECD Interlink Model‖. OECD Economics
Department Working Paper. No. 306.
European Central Bank. 2011. ―Macroeconomic
adverse scenario for the 2011 EU-wide Stress
test: Specification and results‖. Annex 2 inEuropean Banking Authority. 2011. Overview
of the EBA 2011 banking EU-wide stress test.
http://www.eba.europa.eu/cebs/media/
Publications/Other%20Publications/2011%
20EU-wide%20stress%20test/EBA-ST-2011003--%28Overview-of-2011-EBA-EU-widestress-test%29.pdf

29

Global Economic Prospects June 2011: Subject Annex

Industrial Production Annex
Global industrial production has rebounded in
the fourth quarter of 2010 following the pause inglobal growth in the third quarter, only tomoderate again by the end of the first quarter of
2011. The growth slowdown in the third quarter
appears to have mainly reflected an inventory
cycle, as underlying demand growth (proxied byGDP) continued to expand at a more-than 1.5
percent annualized rate (figure IP.1). In
developing countries output accelerated
beginning in the fourth quarter of 2010, and by
the end of the first quarter of 2011, industrial
activity in developing countries was expanding
at a 13.4 percent annualized pace. In highincome countries industrial production growth
decelerated sharply to 6.4 percent in the threemonth to March, from 15.3 percent in the threemonths to February, on account of a sharp 15.5
percent month-on-month decline in Japaneseindustrial production in March. Excluding Japan,
growth in high-income countries was 7.9 percent
in the three months to March, up from 6.7
percent in the fourth quarter of 2010.

and Pacific (18.7 percent in March before easing
to 15 percent in April), and Latin America andthe Caribbean (10.3 percent). Growth inindustrial production in Europe and Central Asia
regions was 9.8 percent in the three months toMarch before decelerating to 3.8 percent byApril, while production rose to 8.7 percent inSouth Asia in the three months to March, and to
6.8 percent in the three months to February in
the 4 Sub-Saharan African countries reportingdata.
The good performance in industrial production
has been underpinned by buoyant domestic
demand in developing countries and a moderate
recovery in high-income consumer spending.
Slowly improving labor markets in several highincome countries have contributed to a return tosolid retail sales volume growth. At the sametime, the expiration of various incentive
programs in both high-income and developing
countries has contributed to volatility. For
example, Chinese retail sales volumes growthslowed to 11.4 percent by March 2011 from 17.8
percent a year earlier, in part because of the
expiry of new-car sales tax incentives.
Nonetheless, global retail sales has posted
positive annual growth for the last two years,
with gains in developing countries (in a range of
7 to 15 percent annualized) while growth in high-income countries remained subdued (figure

The acceleration in the seasonally adjusted
annualized rate of growth in developing
countries was broadly-based, with the strongest
pace recorded among countries in the East Asia
Figure IP.1 Recent rebound in Industrial production following mid-year pause reflects inventory cycle

Figure IP.2 Retail sales support growthMonthly industrial production growth,% (3m/3m saar)

Quarterly GDP growth, % (saar)

6

percent, y/y

20

GDP left

4

25
10

2

20

0

0

-2

IP right

15

-10

10

-20

5

-4
-6
World real GDP growth, quarterly ch% q/q saar.
Sample of 50 high-income and developing countries

-10

China

High-income

0

-30

-8

Developing countries,
excl China

-5
-40

Q1-08

Q3-08

Q1-09

Q3-09

Q1-10

Q3-10

-10
Jan-06

Q1-2011

Source: Thomson/Reuters Datastream; World Bank.

Nov-06

Sep-07

Jul-08May-09Mar-10Source: Thomson Datastream and World Bank.

31

Jan-11

Global Economic Prospects June 2011: Subject Annex
industrial production reportedly dropped 9.2
percent in the first quarter of 2011 over the same
period of 2010, and on a seasonally adjusted
annualized basis, output contracted 38 percent.
In Egypt industrial production was down 8.3
percent year-on-year in the first two months of
2011, and 51.5 percent on a seasonally adjusted
annualized rate relative to the previous twomonths. Industrial production is likely to begin
to recover only modestly in following months.

IP.2).
Many economies are now close to their pre-crisis
peaks in industrial production, with emerging
economies faring better than high-income
countries (first panel, figure IP.3a). Industrial
production in China is now more than 40 percent
above its pre-crisis peak, and 36 percent higher
for the East Asia region considered as a whole.
Production in South Asia continues to growstrongly, and stands 21.4 percent higher than
before the crisis peak, while Latin America andthe Caribbean, Europe and Central Asia, and the
Middle East and North Africa have yet to exceed
earlier peaks levels.

Accounting for the impact of the Japanese
Earthquake, Tsunami and nuclear crisis
The earthquake and Tsunami in Japan have also
disrupted global industrial production. Current
estimates suggest that damage from the Tohoku
earthquake and Tsunami is significantly larger
than that sustained following the Kobe
earthquake in 1995. The impact of the Kobe
earthquake on Japanese and global economic
activity was relatively modest (a one-monthdecline of 1.6 percent in Japanese industrial
production and of 8.4 percent in exports—
followed by a 14 percent increase—and no
discernible effect on quarterly GDP). If
anything, the boost to private and public
investment associated with the reconstruction
effort was a net positive for GDP growth (tableIP.1).

Manufacturing capacity is now close to or above
trend levels in East Asia & Pacific, Latin
America and South Asia. In these regions therecovery has entered a new more mature phase
where additional investment in productive
capacity will be necessary to sustain growthahead. Ample spare capacity remains in Europe& Central Asia and the Middle East & North
Africa, with gaps estimated to be 14 percent andaround 12 percent respectively. Spare capacity
for the four countries in Sub-Saharan Africa forwhich data is available is also large at 9.2
percent (second panel, figure IP.3b).
To date only limited data (through February) areavailable for industrial production in the MiddleEast and North Africa region. In Tunisia

The current crisis is different because of themuch larger disruption to Japan’s electricalFigure IP.3a Most countries are yet to reach theirpre-crisis industrial production peakFigure IP.3b Industrial capacity utilization in Asiaand Latin America approaches trend rates
median percentage difference from long-term trend andwithin-region country sample-variation

pre-crisis peak = 100

140

60

130

120
110

China
40

Other developing
countries

Other high-income
countries

100

0

USA

90
80

20

2.9

1.4

-9.2
-20

Japan

-11.9

-14.4

-40

70
60
Jan-083.2-60

Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11

South Asia East Asia & Latin Am. & Sub-Saharan Middle East Europe &Pacific
Caribbean
Africa& N. Africa Central Asia

Source: Thomson Datastream and World Bank.

32

Global Economic Prospects June 2011: Subject Annex
affecting exports of automobiles, electronics, andother industrial products. The disaster andrepeated large aftershocks appear to have cut
into the demand side as well. Partly out ofsolidarity for those most immediately affected by
the crisis, many Japanese have cut back on
consumer demand (including electrical demand).
Japanese auto sales declined 30 percent
immediately following the quake, and output
was down 49.2 percent month-on-month inMarch. Disruptions in the auto industry are
expected to last until the end of the second
quarter, and could result in a halving of output.

Table
IP.1 Impacts
theand
1995
and
2011
Table Impactsof the 1995of
Kobe
2011Kobe
Tohokuearthquakes
Tohoku earthquakes
Kobe Tohoku
17-Jan-95 11-Mar-11
Dimension of tragedy- size of tremor (Richter scale)
7.3- Lives lost6434
- Missing- people left homeless
300000- Estimated Property Damage (% of GDP)
2.5
- Initial disruption to power system (% of generating capacity)- Medium-term disruption to power system (% gen. cap.)

9.0
14,435
11,601450000
4-5
7.3
3.8

Source: World
Bank,
variousVariouspress reports
andreports
official estimates.
Source:
World
Bank;
press
and official estimates.

The disruption to industrial production has been
deep, but is likely to be relatively short-lived.
GDP is expected to decline in the second quarterdue to damaged infrastructure, closure of majorindustrial plants, disruptions in energy supply,
shortages, and consumer restraint, before
bouncing back strongly in the third and fourth
quarters, as reconstruction efforts start (see maintext). The all-industry PMI has increased to 46
in May, suggesting a rebound in industrial output
from a very low base. Japanese output is
expected to pick up in H2 2011 (the Tankan
survey showed improved business sentiment for
May after a plunge in April). Nevertheless,activity for the year will be flat, according to thelatest Consensus forecast.

generating and distribution capacity, which has
forced Japanese utilities to institute rolling
blackouts that have contributed to plant
shutdowns. About ½ of the disruption toelectrical generating capacity concerns
geothermic generating capacity and is expected
to be fully restored in May, while lost nuclear
capacity may be permanent. Currently,
generating capacity in the Tokyo area, which
represents about 40 percent of Japanese GDP,exceeds demand levels by almost 30 percent—partly because of voluntary conservation efforts.
At the peak of the crisis capacity was reduced by
40 percent. TEPCO now expects to have 52m
KW hours of capacity in place by the end ofJuly, approximately 84 percent of peak summer
demand. For Japan as a whole, the projectedshortfall represents 3.8 percent of generating
capacity.

International impacts are limited so far but
sectoral impacts are being felt. In the U.S.,
difficulties in securing parts caused total motor
vehicle production to decline 12.2 percent month-on-month in April. A sharp decline in activity
would be expected to have an important impact
on Japan’s main trading partners, both as Japansourced supplies become scarce and as demand
from Japan declines. Emerging Asia will be theregion most affected by the loss in economic
activity in Japan, as these countries trade heavily
with Japan and depend heavily on
manufacturing. The most affected economies
will be the ASEAN countries, followed by Korea
and Taiwan, China. China and India will also beaffected but less intensely (indeed, following thequake, China’s purchasing manager index
actually improved –reflecting domestic
conditions).

March data suggest that the economic impact of
the earthquake and tsunami was larger thaninitially expected. Industrial production declined
a sharp 15.5 percent in March, retail sales
contracted an annual 8.5 percent, and machineryand business equipment sales plunged 17
percent, while overall GDP declined 3.7 percent(saar) in Q1.
After having declined 6.5 points in March to
46.5 the all-industry PMI plunged further in
April to 35 suggesting a sharp decline in output.
This reflects port closures, supply-chain
disruptions and suspended production at major
plants due to uncertain electricity supply—33

Global Economic Prospects June 2011: Subject Annex
Industrial production in the euro area is expected
to perform well, supported by strengthening
consumer spending, robust business confidence
and accommodative monetary policy.
Nevertheless growth is expected to ease thisquarter, as indicated by recent PMI readings,
reflecting a slowdown in global trade expansion,
the effects of a stronger euro, and fiscal austerity
measures, and debt concerns among somemembers. Industrial output is expected to expand
at a rate close to 5 percent in the second half of2011, before easing to a more trend-like pace inthe outer years of the forecast horizon.

Outlook
Both manufacturing and services purchasing
manager indexes1 (PMIs) have been risingstrongly at the beginning of 2011, but have
weakened starting in March reflecting, we
believe, temporary and one-off factors, including
the developments in Japan and weaker than
expected growth in the United States. The lower
PMI readings suggest that industrial production
growth will ease markedly in the current quarter
before reaccelerating in the second half of 2011,
on account of reconstruction efforts in Japan anda lift from lower oil prices. More importantly,
outside Japan industrial production is expected
to grow at an above-trend pace, albeit
decelerating.

Among developing countries the latest PMI
readings suggest robust growth in manufacturing
output in India and South Africa, with more
moderate growth in Russia, Turkey, China, andBrazil.

The sharp retreat in global PMI in March andApril to its lowest level since July 2009 comes
after very strong readings in January andFebruary. Global PMI outside Japan has also
declined, down 4 points to 54.1 by May, areading still consistent with near-trend growth.
The global new orders component excluding
Japan fell an even sharper 4.7 points in April,
but inched up 0.5 points in May. Most
components of the global manufacturing index
declined, and the employment index is now
higher than both the new orders and output
components. The services PMI indexes have also
declined sharply to 51 in April, after having
surged to 59.2 by February but has picked up
again in May to 52.5 (figure IP.4).

Although industrial production growth isprojected to surge in Japan during the second
half of the year due to reconstruction efforts,
elsewhere food and fuel inflation is cutting into
real incomes and is expected to contribute to aneasing in consumer demand growth and aslowing of the industrial expansion. These
influences are already observable in recent data.
The annualized pace of real retail sales growth in
the United States slowed to 5.2 percent in thefirst quarter of 2011 from 9.6 percent in the
fourth quarter of 2010.

Risks to the outlook
The overall outlook is subject to significant
risks, notably the possibility that the situation in
the Middle East and North Africa deteriorates,
causing oil prices to remain high or rise evenfurther. In this scenario rising input costs andweaker consumer spending would likely lead toweaker growth in industrial output in mostdeveloping and high-income economies.

Figure IP.4 Global manufacturing PMI points
to deceleration in the broad global recovery
points
65

60
55
50
45

New orders

35
30
Mar-09Growing capacity utilization ratios in many
developing countries may also restrict growth,
especially if inflationary pressures become moremarked – forcing an even more pronounced
tightening of monetary and fiscal policies
moving into 2012.

Manufacturing output

40

Employment
Aug-09Jan-10Jun-10Nov-10

Apr-11

Source: JPMorgan.

34

Global Economic Prospects June 2011: Subject Annex
Finally, though the disruptive capital inflows to
several middle-income developing countries
have eased, they could return in force –potentially resulting in further appreciation ofcurrencies and additional reductions tocompetitiveness (and therefore growth) of
industry in these countries.

Notes
1. J.P.Morgan, Global All-industry PMI, May
2011 survey.

35

Global Economic Prospects June 2011: Subject Annex

Trade Annex(figure Trade.1).

The outlook for global trade

The rapid pace of trade growth partly reflects thedepth of the decline observed during therecession. Despite faster growth rates, tradevolumes regained pre-crisis peak levels 32
months after the crisis, something achieved inonly 16 months following the previous major
slump in world trade in 2001 (figure Trade.2).
As of March 2011, global trade was 8.9 percent
above its pre-crisis peak, compared with 10.6
percent higher at the same stage in the previous
recovery. And in spite of recovery, global tradevolumes remain below trend levels (the level oftrade would have been if the crisis did not occur
and trade grew at its pre-boom average), thoughdeveloping countries have regained their trendlevels.

International trade has been volatile during thecurrent recovery, reflecting the wider inventory
cycle in global industrial production (see Maintext and Industrial Production annex). The
recovery in trade has been dominated by strong
import demand from developing countries,
which has accounted for more than half of theincrease in global imports. As the recovery
matures, support for trade is shifting from
temporary factors (government stimulus and restocking of inventories) to more sustainable
drivers, notably a rebound in private sector
spending on capital goods and consumer
durables. Looking forward, world trade is
expected to continue expanding at close to 8
percent annual pace, above average in historicalcontext.

Developing country demand is at the heart of
the recovery in global trade. Import demand
from developing countries was responsible formore than half of the growth of global tradeduring the first half of 2010, and again during
the fourth quarter of 2010 and the first quarter of
2011. Like other regions (with the exception of
the United States) developing countries’ support
petered out in Q3-2010, but then rose strongly inthe fourth quarter (while U.S. imports declined).

Trade volumes are surging again. After ablistering pace of growth in the first half of2010, global trade growth ground to a halt in thethird quarter, only to pick-up again strongly inthe fourth quarter. By March 2011 (latest data),
global merchandise trade volumes wereexpanding at a 30 percent annualized rate
(3m/3m, saar), the fastest pace in over a decade
Figure Trade.1 After decelerating in Q3, thetrade recovery has gathered pace again

Figure Trade.2 Recovery in current crisis lags
behind previous crisis

volumes, percent growth
3m/3m saar

Peak volume = 1
1.2

50
40

1.1

30
1.0

20
10

0.9

0
-10
-20
-30

-40

0.8

High Income
Developing
Developing ex. China
World

From peak of April 2008
From peak of January 2001

0.7
0.6

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35-50

Months

2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01

Source: World Bank.

Source: World Bank.

36

Global Economic Prospects June 2011: Subject Annex
For the first quarter of 2011, developing
countries accounted for nearly 50 percent (ofwhich China’s contribution alone was 25
percentage points) of the increase in global
import demand (figure Trade.3).

commodities in recent months, the dollar valueof exports has not recovered as far as volumes,
because many prices remain below their precrisis peaks of 2008. As of January 2011, global
exports were 6.3 percent above their pre-crisis
peak in volume terms, but remained 5.7 percent
below earlier highs in dollar terms. Nevertheless,price developments have favored commodity
exporters, in particular oil. metals and mineralexporters. For example, the terms of trade
improvement for oil exporters in Europe andCentral Asia amounted to about 1.8 percent ofGDP, compared with a deterioration of 1.1
percent for oil importers in the same region(figure Trade.5).

Developing country export performance has
shown considerable heterogeneity. Tradevolume growth in Asia has been extremely rapid.
Buoyed by strong growth in Pakistan and India,
the annualized pace of export growth in South
Asia reached a record 81.7 percent (3m/3m, saar)in February 2011 and moderated to 74.9 percent
in March 2011 (figure Trade.4). Spurred bystrong performance in China, export volumes in
East Asia and the Pacific expanded at a 64.0
percent annualized pace in the 3 months toJanuary 2011 and moderating to 45 percent inMarch 2011. Strong exports in Russia drove
volume growth in Europe and Central Asia to aneight month peak of 15.5 percent (3m/3m saar)by March 2011. And reflecting exchange rate
appreciation, export growth in the Latin America
and Caribbean region lags other developing
regions, having expanded at a 12.2 percent
annualized rate in the three months ending
March 2011.

World trade growth is on more solid footing.
Capital goods exports have continued tostrengthen as the recovery matures, a sign of theincreasingly self-sustaining nature of therecovery (figure Trade.6). During the recession,
capital goods imports fell by more than importsof consumer durables and agricultural products(although less than oil imports), as fallingdemand and increasing uncertainty led
businesses to cut investment and run down
stocks. During the initial phases of the recovery,
growth in capital goods imports was driven bymassive government stimulus programs (most ofwhich had a heavy infrastructure component) as
well as a need for businesses to replenish their

The recovery in the dollar value of exports isless advanced than that of volumes.
Notwithstanding the sharp rise in the price of
Figure Trade.3 Contributions to global importdemand from selected regions and countries

Figure Trade.4 South Asia leads in second phaserebound in global trade
Percent growth, 3m/3m, saar

25
20
15

Europe and Central Asia
East Asia and Pacific
Latin America and Carribbean
South Asia
Middle East and North Africa

100

volume, percent growth 3m/3m saar
30

Rest of Developing countries
China
Germany
USA
Rest of High income countries
Global

80
60
40

10

20

5
0

0

-5
-10
2010M01-20
Jan-102010M08

Mar-10May-10Jul-10

2011M03

Source: World Bank.

Source: World Bank.

37

Sep-10Nov-10Jan-11Mar-11

Global Economic Prospects June 2011: Subject Annex
higher than their pre-crisis peak levels, while
capital goods imports remain 11.5 percent below
pre-crisis peak levels, partly reflecting the much
deeper trough they experienced (capital gooddemand declined 35 percent during the crisis).

stocks. Since that time, these temporary factors
have waned, and imports of capital goods bybusinesses surged in the fourth quarter of 2010.
In the United States, for example, businessspending on equipment and software rose at a
7.7 percent annualized pace in the fourth quarter– although it eased to just 1.8 percent growth in
the first quarter of 2011.

The global recovery also is becoming more
broadly based. High-income country exports
are now growing rapidly, though, consistent withlower potential growth rates, not as quickly as
among developing countries. By March 2011
export volumes for high-income countries wereincreasing at a 28.1 percent (3m/3m, saar) rate,
up from the 2.7 percent (3m/3m, saar) in July
2010. In contrast, developing countries’ export
volumes advanced at 33.4 percent (3m/3m, saar)in March 2011, compared to a decline of 4.6
percent (3m/3m, saar) in September 2010.

Recently, slowly improving labor market
conditions in high income countries haveboosted consumer goods imports, with trade inthese goods exceeding that of capital goods.
Consumer goods imports are now 4.6 percent
Figure Trade.5 The Recovery in Prices has Favored Oil Exporters
Terms of Trade Changes as a Share of GDP, percent

South Asia

Outlook and Risks

Europe and Central Asia Oil exporters
East Asia Pacific

Global trade is expected to continue to growas the recovery matures. Though a moderationof growth from the high first quarter figures is inorder, the expansion in global trade is projected
to remain above pre-crisis averages over theforecast period. Overall, global merchandise
trade is anticipated to grow at about an averageof 7.6 percent over the forecast horizon (20112013). Developing countries, which were at theforefront of the global trade revival, willcontinue to be important sources of demand.
However, with improvements in high-income
country labor markets, ongoing lax monetary
policy, and a rise in business and consumer
confidence, demand from high income countries
is expected to provide increasing support toglobal trade growth.

Sub Saharan Africa Oil Importers
Latin America and the Carribean
Middle East and North Africa
Europe and Central Asia Oil Importers
Sub Saharan Africa Oil Exporters
-2

0

2

4

6

8

10
(%)

Source: World Bank.
Figure Trade.6 Strong recovery in capital goods
imports but still below pre-crisis levels
Values, 3mm imports
1.1

Agriculture

Capital and Industrial goods
Consumer goods

1.0

Oil

Recent business surveys support the view that
global trade will continue to expand, at least for
the near term. Though the Global Purchasing
Manager’s Index, as reported by JP Morgan andMarkit, has fallen from its peak level in March,
it still remained in expansion territory in May,
including the sub-index for new export orders.
Moreover, the latest OECD Composite leading
indicators survey, designed to anticipate turning
points in economic activity relative to trend,
continues to point to expansion in most OECD

0.9

0.8

0.7

0.6

0.5
2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

Source: World Bank.

38

Global Economic Prospects June 2011: Subject Annex
countries even if at a lower pace- this should
inevitably provide support to further trade
growth.

include parts supplies in the semiconductor,
auto, camera recorders and office equipment
industries (figure Trade.7). Already in the U.S,
recent industrial production figures released
show that the total motor vehicles assembled
dropped from an annual rate of 9.0 million unitsin March to 7.9 million units in April mainly on
account of disruptions to part supplies resulting
from the Japan earthquake.

The risk of a faltering in global economic
recovery. Nonetheless, significant risks to thecontinued expansion in global trade remain. The
most significant risk is a faltering of the global
economic recovery. As outlined in the main text,
a key risk to the global recovery is the possibilityof higher oil prices – either due to continued
uncertainty in the Middle East, or because of amajor disruption to supplies. Though thisremains a “tail-probability” event, should it
occur, it could derail the recovery, since higher
oil prices would reduce incomes in oil-importing
countries, cutting into consumer and businessdemand. A further $50/bbl increase in oil prices
could shave global GDP by 0.3 percent in 2011
and 1.2 percent in 2012. These could in turn
reduce global trade by 0.5-1.5 percent in 2011and by between 1.9-6.0 percent in 2012. Otherrisks to the global recovery include a possible
slowdown in growth from a tightening ofmonetary policy in some of the large fast
growing developing economies and a resurgencein the euro area sovereign debt crisis (see maintext).

While in the short-run Japanese industrial
production and exports are likely to fall, in themedium term reconstruction will require a ramp
up in demand for capital goods and for theindustrial metals necessary to repair capital stockand build new infrastructure. This new demand
from Japan could significantly boost exports
from the high-income countries that dominate
global exports of capital goods, as well as fromdeveloping country metals exporters.
Global Imbalances. The onset of the global
crisis accelerated the narrowing of global
imbalances that had already begun in 2006.
Global imbalances (measured as the absolutevalue of national current account balances
divided by global GDP) peaked at 5.6 percent of
global GDP in 2005 and fell to 3.9 percent in2009 and to an estimated 3.3 percent in 2010.
The question is whether this is a short-run
change or a structural change brought about by
the crisis.

Ramifications of the Japan earthquake on
global trade. The recent disaster in Japan is
another source of concern. Japan’s share of
global trade is less than 5 percent, so even a
recession there is unlikely to derail global trade
growth. However, individual countries could besignificantly affected. Non-oil exporting
countries whose exports to Japan account for a
sizeable share of their total exports and GDP, forexample Malaysia, Papua New Guinea, Vietnam,
Singapore, Thailand and the Philippines, will bemost affected. In addition, disruptions in the
global supply chain due to the situation in Japan
could affect trade in many products, which could
have major implications for industry (especiallywhere switching to other suppliers requires
significant re-tooling). Against this backdrop,
industries whose global supply chains are verymuch dependent on critical supply of parts fromthe North East part of Japan (Miyagi prefecture)
are likely to be the hardest hit. These could

Figure Trade.7 Share of Japan’s exports inWorld exports(average 2008-09)
Cargo vessels nes&oth vessels (HS8901090)
Tankers (HS890120)
Machines for making semiconductor devices(HS848620)
Excavators with a 360 revolving superstructure(HS842952))
Tansmissions for motor vehicles (HS870840)
Television, digital, and video camera recorders(HS852580)
Automobiles piston engine > 3000 cc(HS870324))
Parts of printers, copiers and facsimile (HS844399)Automobiles piston engine > 1500 cc to 3000 cc(HS870323)
Parts for spark-ignition type engines nes(HS840991)
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Source: Comtrade39

Global Economic Prospects June 2011: Subject Annex
The future evolution of global imbalances
depends on a constellation of real and financial
forces, including exchange rate movements, theextent to which developing country domestic
demand remains a major source of growth, andthe extent to which high-income countries rein ingovernment deficits and low interest rates as
their economies recover. To the extent thatsurplus countries do not experience real effective
appreciations of their exchange rates, and thatrecovering high-income countries maintaincurrent levels of government dis-saving and lowinterest rates, which encourage low privatesector savings rates, the global imbalances thatcharacterized the early 2000s through 2007
could return.

temporary ones, thereby leading to an increasing
share of trade affected by restrictive measures.

Notes
1. WTO, 2010. Overview of Developments in
the International Trading Environment. WT/
TPR/OV/13, World Trade Organisation,
Geneva.
2. Chad P.Bown and Hiau Looi Kee (2010)“Developing Countries, New Trade Barriers,
and the Global Economic Crisis” in Mona
Haddad and Ben Shepherd (eds), Managing
Openness, The World Bank, Washington,
D.C.

Increased Protectionism. High unemployment
rates, global imbalances, and perceptions of
exchange rate undervaluation among trading
partners puts pressure on governments to take amore protectionist stance on international trade,with the potential to slow the expansion of trade.
These pressures have only heightened in theaftermath of the global recession. The WTO
reports that between November 2009 andOctober 2010, new trade restrictive measurescovering some 1.2 percent of global imports
were introduced.1 New trade restrictions
introduced since the commencement of the crisis
in 2008 have affected some 1.9 percent of total
trade. Though some of the measures were meant
to be temporary, so far only 15 percent of themeasures introduced have been removed. Mostof the measures that have been introduced affecttrade in base metals and products, machinery andmechanical appliances, and transport equipment,
all of which are important in helping to rebuild
productive capacity to help sustain the recovery.
Further, Bown and others (2010), find that
increasingly such measures are being applied
within the context of South-South trade.2 Theyobserve that protectionism has been imposed
disproportionately by developing world
importers on developing world exporters,
notably China. Though the current application ofsuch protectionist measures remains limited, thegreater threat lies in the continued accumulationof new restrictions, without repealing earlier

40

Global Economic Prospects June 2011: Subject Annex

Financial Markets Annex
continued to dominate bonds with about 80
percent of year-to-date volume, with most issues
coming from companies in China, Emerging
Europe and Latin America. Chinese companies
issued a record volume of international bonds inthe first quarter of 2011, partly reacting to theincreased cost and rationing of domestic financefollowing the government’s policies to curb
credit growth. The pace of issuance has slowed
considerably since January, partly reflecting theimpact of increased uncertainty in global
markets.

Recent trends in capital flows
International capital flows to developing
countries have slowed since October…
Gross capital flows (international bond issuance,cross-border syndicated bank loans and equity
placements) to developing countries totaled $175
billion in the first four months of 2011, 24
percent less than the last four months of 2010
(figure FIN.1). Most of the decline was in equity
placement (foreign investment in IPOs andfollow-on offerings), which plummeted by 35
percent. There have been no major IPOs fromdeveloping countries this year, after the record
breaking equity issuance of 2010. International
syndicated bank-loans remained subdued
compared with pre-crisis levels—although there
was a modest rebound in lending to Europe andCentral Asia (notably, Russia and Turkey) and
Sub-Saharan Africa (Nigeria and South Africa).

…as have the hot money flows, easing some ofthe pressures for currency appreciation.
Portfolio investment—equity placement, foreign
investment in existing stocks and foreign
investors’ purchase of local debt securities, also
referred to as “hot money”—has eased since
early 2011 (figure FIN.2). Most of the decline
was in equity placements and foreign investment
in stock markets, as there were considerable
stock-market sell-offs during January andFebruary, aside from the sharp fall in equity
placement.

In contrast to equity placement and banklending, international bond issuance bydeveloping countries was strong in the firstquarter, attaining the highest monthly level onrecord in January. A combination of relatively
favorable pricing conditions and investor’s
continued search for yield led to a near record
pace of borrowing activity. Corporate borrowers

Growing concerns about sovereign debt in highincome countries, inflation, political turmoil in
the Middle-East and North Africa, and highFigure FIN.2 Hot money flows slowed down since
October

Figure FIN.1 Gross capital flows have eased sinceNovemberForeign portfolio investment flows*% of GDP

3-month moving average ($ billion)
Bond issuance

35
30
25
20
15
10
5
0

Jan-09

8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
2007 Q1

Equity placement*

Syndicated bank loans

Jun-09

Nov-09Apr-10

Sep-10Feb-11

2008Q1

2009Q1

BrazilTurkeySouth Africa
India

2010Q1

2011Q1e*Foreign investment in IPOs and follow-on offerings*Equity placement, foreign investment in existing stocks and foreign investors’purchase of local debt securities

Source: Dealogic.

Source: Central Banks and World Bank.

41

Global Economic Prospects June 2011: Subject Annex
commodity prices have combined to slow thepace of portfolio equity inflows to developing
countries. In addition, investors may also haveconsidered that market equity valuations had
reached maximum levels and started to takeprofits. During the first quarter of 2011, there
was a net outflow of nearly $25 billion fromemerging market (EM) equity funds, comparedwith a net inflow of $85 billion in 2010.
Similarly, foreign investors’ interest in emerging
market bonds (both in local and other currencies)
has also diminished considerably since October2010 (figure FIN.3). And the EM fixed income
funds registered a net outflow in February with alittle improvement in March. Most of the decline
was in flows to EM local currency funds, whichhave become quite popular in recent years, andexperienced record inflows in 2010 (see box
FIN.1: Domestic debt market developments inemerging markets). The outflows from both EM
equity and fixed income funds do not necessarily
imply a net outflow in terms of balance of
payments financing, but highlights the easing inthese types of flows to developing countries.

local debt securities rose to a record $4.8 billion
in March. While Brazil increased the tax on
foreign investments twice in October, the fall-off
largely reflected at drop in IPO activity
following the record sale of Petrobras in
September 2010 that attracted large foreign
participation.
Several middle income countries experienced
sharp appreciation of their currencies in 2010
following the surge in capital inflows. With theeasing of these flows during the first quarter of
2011, the upward trend in real effective
exchange rates also moderated (Thailand) oreven reversed (South Africa and Turkey) (figure
FIN.4). Brazil (due to large FDI inflows) andMexico (flows into local debt securities) did notexperience large depreciations. Consistent with
the initial slowing of capital inflows, the pace ofreserve accumulation among developing
countries also slowed from 8 percent in 2010Q3
to 5 percent both in 2010Q4 and 2011Q1.
The fundamental conditions that underpin
capital flows to developing countries remainstrong…

Country specific factors also played an importantrole in the slowing of capital inflows. South
Africa (in November) and Turkey (in December
and January) cut their policy interest rates—
reducing the attractiveness of the carry-tradewith these countries. The impact of the rate cuts
turned out to be temporary in Turkey, however.
After a slow down, foreign purchases of Turkish

Emerging markets entered 2011 with an
improved risk profile, as well as higher growthprospects vis-à-vis the high income countries,
and policy interest rates that were rising. Despitesome recent increases (the ECB raised its
Figure FIN.4 Real effective exchange rate appreciation in selected economies

Figure FIN.3 Inflows to EM fixed income funds
have slowed down since OctoberIndex , January 2010 =100

"Blended" funds$ billion

Local currency funds

6
5
4
3
2
1
0
-1
-2

Hard currency funds

125
120

BrazilSouth Africa
MexicoIndia
Turkey

115
110
105
100
95

Jan-10

Apr-10Jul-10

Oct-102010M01

Jan-11

Source: EPFR Global.

2010M06

2010M11

Source: International Monetary Fund.

42

2011M04

Global Economic Prospects June 2011: Subject Annex
official rate by 25 basis points (bps) to 2 percent
in April 2011), policy interest rates in highincome countries remain low, while those indeveloping countries are rising. The rates inemerging economies are expected to go up
further as these countries tighten monetary
policy in the face of heightening inflationarypressures. This will likely increase interest rate
differentials in favor of developing country
assets—although this effect will be reduced if
and when high-income countries begin
withdrawing quantitative easing measures andtighten more traditional monetary policy.

markets, including Russia and Thailand, making
local bond less attractive—though yields remain
positive in real terms if adjusted for the
expectation of currency appreciation.
…and developing countries continue to struggle
with mitigating the impact of high capital flows.
In an attempt to limit the high levels of capital
inflows and currency appreciation, Turkey
reduced its policy interest rate twice inDecember 2010 (by 50 bps) and later in January
2011 (by 25 bps) bringing the rate to an all timelow. While this move surprised the markets andled to portfolio equity outflows in December andJanuary, cross-border flows to local debt markets
remained strong. Nevertheless, Turkey’s realeffective exchange rate eased by 7 percent
between December and April 2011. Similarly,
South Africa lowered its policy rate by 50 bps on
November 13th, with some impact on portfolio
investment and the real exchange rate. Bothcountries will find it difficult to maintain low
rates however, as they are facing increasing
inflationary pressures.

Policy interest rates for a number of developing
countries have been raised since mid-2009 asstrong economic activity has signaled a rapid
closing of output gaps and inflation has been
moving up. As the inflationary effects of higher
oil prices are more evident, policy makers willundoubtedly look toward tightening monetary
policy. This is especially likely in Asia and Latin
America, where central banks are alreadygrappling with higher inflation amid stronger
growth and record food prices. Market-estimatedchanges in policy rates point to further hikes in
official rates for most of emerging market
countries this year (figure FIN.5). Rising
inflation rates have been pushing real yields
down in countries with increasing inflation. Realyields turned negative in several emerging

Other policy responses to mitigate the short-term
impacts of hot money flows have included theintroduction of capital controls, higher foreign
currency reserve requirements for banks,
minimum holding periods, or withholding taxes
on foreign investment in order to discourage
inflows; and improvements in the enforcementof existing restrictions on cross-border inflows.
For example, Brazil raised its financial
operations (IOF) tax on foreign investment in
fixed income securities twice in 2010. The
impact of these hikes was limited and shortlived, and they were followed by a further
increase in April. Brazil also announced that it
will extend the high tax rate on the renewal offoreign loans with maturities of up to a year,
while a reintroduction of a 15 percent
withholding tax on federal securities is underconsideration.

Figure FIN.5 Accelerating inflation could lead toa further monetary tightening
Change in of f icial interest rates (basis points)

350
300
250
200
150
100
50
0

Change since 2009 low

Market estimated change
between now and end of 2011

Indonesia imposed a 1-month minimum holding
period on central bank money market certificatesin July 2010, and introduced new regulations on
the net foreign exchange positions ofSource: Bloomberg and World Bank staff calculations.

43Global Economic Prospects June 2011: Subject Annex
Box FIN.1. Domestic debt market developments in emerging countries
Domestic debt markets in developing countries have grown markedly over the past decade as many countries
shifted from external to local currency financing to lower the volatility of their debt service given their more flexible exchange rate regimes. This shift is particularly true for government bond issuers as domestic public debt now
accounts for more than 80 percent of the total public
debt for developing countries (box figure FIN.1). In Box figure FIN.1 External and domestic publicrecent years, local-currency bond markets have ex- debt in developing-countries
panded considerably in several countries—among themBrazil, Colombia, China, India, Malaysia, Mexico,% of GDP
South Africa, and Turkey (World Bank 2009). Growing
40
interest from local investors—particularly from pension
funds—has played a key role in the development of do30
mestic debt markets in developing countries.
With extraordinarily easy monetary policy in the highincome countries, international investors are also increasingly drawn to emerging market local currency
bonds, with higher yields and prospects of capital gains
arising from currency appreciation. As a result inflows
to fixed-income funds focusing on developing countries
reached a record $65 billion in 2010, with the overall
allocation biased toward local currency funds (figure
FIN.3 in the text). Despite the recent fall-off, foreignpurchases have continued in Latin America, with Mexico posting record $12 billion inflows through March
this year.

20
10

0
2000

2002

2004

Domestic

2006

2008 2010e

External

Source: JP Morgan.

commercial banks. And Thailand implemented a
15 percent tax on interest income and capitalgains earned by foreign investors. And rather
than new measures, China announced that it will
intensify enforcement of the existing measureson capital inflows.

should be withdrawn when they are no longer
needed; and importantly, that countries shouldbear in mind the costs of using them.

The IMF published a report in April 2011providing a framework for managing the impactof high capital flows (IMF, 2011a). The reportsuggests that, if possible, countries should first
respond to higher capital inflows by letting theirexchange rates appreciate, easing monetary
policy and tightening fiscal policy. If that is notpossible, countries are urged to first use controlsthat do not discriminate between foreign anddomestic investors, for example limits on foreign
currency borrowing by local banks or minimum
holding periods. According to the framework,measures that discriminate against foreign
investment, such as taxes on foreign capital
inflows imposed by Brazil, should be a last lineof defense. At the same time, the report
recommends that the use of controls should be
proportional to the economic risk, that they

Foreign Direct Investment (FDI) inflows gained
momentum in the last quarter of 2010 (figure
FIN.6). FDI flows in early part of 2010 werelikely restrained by uncertainty concerning the
global recovery. This uncertainty has since
eased—especially concerning growth indeveloping countries—and cross-border mergers
and acquisitions (M&A) transactions (which
react more quickly to changing economic
conditions than greenfield investment) indeveloping countries accelerated in the second
half of the year.

FDI inflows have gained momentum since thelast quarter of 2010...

FDI inflows to developing countries increased
by 24 percent in 2010, a relatively modest gain
(less than the rise in other capital flows todeveloping countries) considering its 36.5
percent decline in 2009. The rebound in FDI

44

Global Economic Prospects June 2011: Subject Annex
inflows in 2010 was much stronger than theWorld Bank’s January estimate of 15 percent
growth (Global Economic Prospects 2011a),
mainly because of large revisions by China to its
historic and 2010 FDI numbers (box FIN.2). For
developing countries excluding China, therebound in 2010 was slightly above 10 percent.

The implicit yield on emerging market sovereign
bonds (EM spread + U.S. 10 year treasury yield)
has risen 50 bps since September 2010, mainly
due to upward movements in high-income
country long-term sovereign yields (figure
FIN.7). Long-term interest yields forgovernment bonds rose since early September
2010 in the United States (60 bps), Japan (25bps) and the European Union (74 bps), reflecting
rising government debt, higher inflationary
expectations and perhaps reduced demand as theimpact and extent of quantitative easing slows.

Most of the increase in FDI inflows in 2010
came from higher reinvested earnings. Income
generated by FDI projects in developing
countries increased 26 percent in 2010,
compared to its level in 2009. Multinationals
invested 30 percent of this income back intodeveloping country operations in 2010,accounting for 35 percent of FDI inflows. FDI
was also supported by increased South-Southflows—particularly from Asia. With the sharp
decline of FDI outflows from high-income
countries since the crisis, investment from otherdeveloping countries rose to 34 percent of total
inflows in 2010, up from 25 percent in 2007.

Figure FIN.6 FDI inflows for selected economies$ billion
120

100
80
60
40

Cost of borrowing is on the rise20

Long-term yields in developing countries arefacing pressures from rising long-term rates inhigh-income countries…

0
2009Q1

2009Q3

2010Q1

2010Q3

2011Q1p

Source: The World Bank.
Box FIN.2 China revised up capital account numbers for 2005-2010.
China’s State Administration of Foreign Exchange (SAFE) revised the capital account in their balance of payments report following implementation of a new accounting method. Much of the adjustment is in FDI inflow
numbers, which are revised up between 20-75 percent for the period 2005-2010 (see Box figure). SAFE cited
better accounting for reinvested earnings by multinationals as the main reason for the upward revision. This Box figure FIN.2 FDI inflows to China
portion of FDI does not cross the border, and hence
may not be fully recorded in government reports.
$ billion
According to the new estimates, FDI inflows to China
rebounded strongly by 62 percent in 2010, reaching$185 billion. The largest increase was in the financial
sector (300 percent) followed by the real estate sector(78 percent), reaching $12 billion and $21 billion, respectively. Nonetheless, the manufacturing sector remains the main recipient of FDI inflows to China.
Manufacturing received $70 billion in 2010, 50 percent
more than in 2009. With the revisions, China now accounts for 30 percent of total FDI inflows to developing countries, compared to an estimated one-fourth inprevious statistics.

45

200
150
100

50
0
2005

2006
Old

2007

2008

2009

2010

RevisedSource: China’s State Administration of Foreign Exchange.

Global Economic Prospects June 2011: Subject Annex
Developing country spreads have remained in atight range despite ongoing geopolitical unrest
and economic uncertainties. The events in the
Middle East and North Africa region led to awidening in spreads only within the region andamong the most affected countries. Credit risk
(as reflected in 5-year CDs spreads) for Egypt,
Bahrain and Saudi Arabia widened between 50150 bps immediately after the turmoil in late
January and February, but most stabilized in
March. Meanwhile, concerns related to theEuropean debt crisis reemerged in early March,when International Credit Rating Agencies
downgraded ratings of Greece, Spain andPortugal, citing worries about their ability toreach their fiscal adjustment targets, in somecases linked to political stability concerns. CDs
spreads for these economies rose following thedowngrades.

in high-income countries. Spreads fordeveloping countries might also widen, as thetrend decline in risk premiums partly reflects thevery low policy rates and quantitative easing in
high-income countries (Hartelius et al 2008).
These easy monetary conditions have suppressed
the price of risk in both high-income anddeveloping countries, and prompted a search foryield similar to that observed in the pre-crisis
period. Developing country spreads are sensitive
to U.S. Treasury yields. A jump in Treasury
yields, for example because of a sudden phaseout of quantitative easing, could spark a sharp
widening of spreads on emerging market debt. A
more gradual policy tightening is likely to resultin a more modest and short-lived widening of
spreads.
Tighter financial regulation may also contributeto higher long-term interest rates, and will likely
increase the cost of capital, potentially hindering
trade finance in the medium term.

While Japanese stocks plummeted following the
March 11 earthquake, the impact of the crisis on
world financial markets has been limited.
Developing countries were little affected byincreases in risk aversion owing to thedifficulties in Europe and Japan—sovereign
bond spreads for the emerging markets as agroup remained within a tight range through theend of April 2011 (figure FIN.8).

Changes in the financial regulatory landscapethat have been implemented, and that are being
discussed both at the national and global level,
would tend to raise the cost of bank lending andshould be reflected in higher long-term interest
rates. In the United States, the June 2010 DoddFrank bill forbids future government bailouts ofbanks; places limits on risk-taking by financial
institutions, and introduces new clearing and...and are expected to go up further.
Going forward, emerging market yields are
expected to increase amid rising long-term yields

Figure FIN.8 EMs spreads have remained in atight range despite the rising geopolitical risk

Figure FIN.7 The implicit yield on EM sovereign
bonds is up
Percent
12

EMBIG Spread (basis points)

Yield on 10-year US treasury note

380

Implicit yield on EM sovereign bonds

360
340

10

320
8

300
Bond spread(EMBIG composite index )

6

280
260

4

240

2

220

0

Jan-03Jan-05Jan-07

Jan-09Apr-10Jan-11

Jul-10Source: JP Morgan.

Source: JP Morgan.

46

Oct-10Jan-11

Apr-11

Global Economic Prospects June 2011: Subject Annex
trading requirements for CDS markets. A revisedinternational agreement (Basel III) seeks tostrengthen banks’ resilience to systemic stresses,
by raising capital requirements and imposing
stricter definitions of what constitutes bankcapital. While the proposals incorporate agenerous phase-in period, with capital ratios to
be raised gradually, and linear phasing out of
ineligible securities between 2013 and 2019,
there remains uncertainty related to theimplementation of these requirements acrosscountries. The impact of Basel III on tradefinance is expected to be significant (box FIN.3
Impact of Basel III: Trade finance may become acasualty).

rate of growth of potential output in the economy
will slow.
Simulations suggest that higher capital costs
could lower developing country GDP growth by
between 0.2 and 0.7 percentage points over a
period of between 3 and 5 years. Global
Economic Prospects 2010 estimated that thesubstitution away from capital intensive
techniques would reduce potential output indeveloping countries over the medium term by
between 3 and 5 percent and potentially by asmuch as 8 percent—depending on how muchlong-term interest rates rise.
Developing countries can mitigate the costs ofthe tightening of global financial conditions
through strengthening regional and domestic
institutions.

Higher borrowing costs could reduce both thelevel and the growth of GDP.
Higher capital costs due to increased long-term
interest rates and less abundant capital are likely
to cause firms to invest less, which will reduce
the amount of capital employed in the economy
and lower GDP levels from what they would
have been had capital costs remained low.
During the transition period from a high capital
usage regime to a lower capital usage regime, theInefficiency of domestic financial sectors
resulting from corruption, weak regulatory
institutions, poor protection of property rights,
and excessive limits on competition can makeborrowing costs in developing countries 1,000
bps higher than in high-income countries.
Improvements in the policies and institutions

Box FIN.3. Impact of Basel III: Trade finance may become a casualty
The Basel Committee on Banking Supervision, which sets rules that national banking regulators implement, announced a comprehensive reform package in September 2010 that raises capital requirements and, for the firsttime, sets global standards for overall borrowing, known as leverage, and liquidity. The “Basel III” rules are designed to make banks more resilient and prevent a repeat of the financial crisis, but several provisions combine to
make trade finance, already a low-margin business, much less profitable. Basel III’s implementation could haveunintended consequences for trade financing through the proposed leverage ratio, which would require banks to
set aside 100 percent of capital for any off-balance-sheet trade finance instruments, such as letters of credit. This isfive times more than the 20 percent credit conversion ratio used for trade finance in Basel II. New capital regulations would also require banks to set aside capital for one year for any instrument, even though that security may
carry a maturity of under a year. Most trade finance instruments have maturities of about 90 days: this would triple
the capital cost of such instruments.
Such higher capital requirements are likely to depress trade finance. According to Standard Chartered Bank, the
new regulations would lead to trade finance becoming 15 to 37 percent more expensive, with volumes falling by 6
percent—which implies a $270 billion a year reduction in global trade and a 0.5 percent fall in global gross domestic product. Developing countries would be particularly affected by a fall in trade finance. Trade finance is an
important source of working capital, particularly for small and medium-sized enterprises. And developing countries rely heavily on international banks for trade finance. In 2010, the largest rebound in capital flows was in short-term debt, which reached $122 billion, and was for the most part trade finance (World Bank 2011).
There is some question as to whether this rise in capital requirements is necessary for trade finance, which is usually collateralized and has low default risk. The International Chamber of Commerce has published a study thatexamined the trade finance activity of nine global banks from 2005 to 2009, which together arranged 5.2 million
transactions accounting for $2.5 trillion. It found that only 1,140 of those transactions defaulted. Of the 2.8 million
transactions arranged during the crisis in 2008 and 2009, only 445 defaulted (0.02 percent).

47

Global Economic Prospects June 2011: Subject Annex
governing the financial sector can thus have asignificant impact on domestic borrowing andcapital costs in developing countries. Suchchanges have the potential to outweigh any
negative effect of higher costs for internationallysourced capital. Simulations suggest that if
developing countries continue to improvepolicies and other fundamentals, so that theirinterest spreads fall by an average of 25 bps ayear, they would more than offset the long-term
effects of the financial crisis—potentiallyyielding a 13 percent increase in long-term
potential output and increases in potential output
growth of about 0.3 percent per year by 2020.
Developing countries may also further increase
domestic savings by following closely theircomparative advantages in their industrial
upgrading and diversification (Lin 2007).

come to an end. However, bank lending is
expected to remain lower than pre-crisis levels
due to approaching regulatory changes.
Other capital inflows that led the initial reboundin 2010 have started to stabilize (or even decline)
as the expected monetary tightening in highincome countries and inflationary pressures inemerging markets dampens demand for
emerging market assets. Short-term debt andportfolio investment flows in particular, may
face considerable weakening or sudden reversals(table FIN.1). When quantitative easing in
advanced countries is phased out and global
liquidity conditions begin to tighten (or risk
aversion rises), developing country local bondmarkets could be adversely affected, as carrytrade related flows to developing countries slow.
Similarly, there may be a contraction in shortterm debt flows by 2013 with speculative flows
falling, and with trade-related portion hinderedby regulatory changes.

Prospects
Despite their recent moderation, international
capital flows to developing countries areprojected to rise further over the forecast period.

Downside risks for the outlook are still
considerable, however. First and most immediateis the European debt crisis. While its impact on
developing countries has been limited andtemporary so far, an unexpected or disorderly
resolution of the debt problem might prompt
broad-based risk-aversion in global financial
markets driving capital flows toward safe-havenassets. This could lead to a sharp reversal incapital flows to developing countries, with apotentially disproportionate impact on countries
in developing Europe and Central Asia, whose
economies are more closely tied to those in highincome Europe. Second, international capital
flows are sensitive to the policy stance in highincome and developing countries. If high-income
countries shift toward tighter policy more
quickly, or if markets become increasingly
concerned by the buildup of debt and central
bank liabilities, longer-term interest rates may
begin to rise quickly—raising the cost of capitalfor developing countries and likely weakening
flows faster than expected. In fact, a recent IMF
study shows that an unanticipated 5 bps rise in
U.S. real interest rates might cause a 1/2
percentage point (pp) reduction in net flows(inflows minus outflows) in the first quarter andCross-border flows to developing countries areprojected to increase further in nominal terms
over the medium-term, but at a slightly slower
pace than GDP growth, reaching $1.1 trillion(3.8 percent of GDP) by 2013 (figure FIN.9).
Much of the increase is expected to be in FDI
inflows. FDI inflows to resource rich economies
and to developing countries with rapidly
expanding domestic markets are expected torecover more firmly in 2011. Bank flows mightalso rise as the deleveraging cycle has largely
Figure FIN.9 Further increase in capital flows

Source: The World Bank.

48

Global Economic Prospects June 2011: Subject Annex
1.25 pps cumulative reduction in two years (IMF
2011b). The impact is projected to be larger incountries with higher financial linkages with
United States.

import bills and current account deficits. In
addition, developing countries issued
international bonds valued at $180 billion in
2010, and entered 2011 with $855 billion in
short-term debt. As a result, external financing
needs (current account projections andamortization of external debt) for developing
countries increased from $0.8 trillion (3.5
percent of GDP) to $0.9 trillion (3.9 percent ofGDP).

With higher oil prices and increased debtfinancing requirements, several oil importing
economies will remain vulnerable to suddenchanges in global markets
Although the impact on credit risk was limited,the events in the Middle East and North Africa
resulted in a sharp increase in oil prices. And
many oil importing countries now face higher

While international debt market conditions havebeen robust so far in 2011, high externalfinancing needs make countries vulnerable toTable FIN.1 Net capital flows to developing countries$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+debt)
Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Net FDI outflows
Workers' remittances

2004
195.2
2.4

2005
318.8
3.3

2006
450.3
4.0

2007
469.1
3.4

2008
440.6
2.6

2009
284.4
1.7

2010e
264.5
1.4

342.2
366.3
243.6
206.7
36.9
98.6
-24.1
2.4
-14.7
-11.8
122.7
69.8
34.3
39.7
-4.1
52.9
-137.5-399.9

502.9
567.0
379.2
311.7
67.5
123.8
-64.0
2.7
-40.2
-26.6
187.8
113.3
48.3
70.3
-5.3
74.5
-406.9-414.8

656.3
725.9
497.0
389.3
107.7
159.3
-69.6
-0.2
-26.7
-42.6
228.9
145.0
31.7
117.9
-4.7
83.9
-458.6-647.91132.11132.1
664.9
529.8
135.1
467.2
0.0
5.2
-5.1
0.0
467.2
283.0
88.2
198.5
-3.7
184.2
-509.5-1091.7

771.1
743.3
561.2
614.4
-53.2
209.9
27.8
7.3
10.0
10.6
182.1
196.1
24.1
176.8
-4.8
-14.0
-733.5-478.2

633.8
557.4
498.1
390.0
108.2
135.6
76.4
17.7
26.5
32.2
59.2
52.8
51.1
3.2
-1.6
6.4
-271.1-647.0

930.2
857.8
633.2
485.4
147.8
297.0
72.4
19.3
16.3
36.8
224.6
104.1
66.5
37.6
0.0
120.5
-524.4-670.3

46.1
159.3

61.6
191.8

130.5
226.3

148.7
278.2

207.5
325.0

153.9
307.6

210.0
324.7

2004
4.3
4.6
3.0
2.6
0.5
1.5

2005
5.3
5.9
4.0
3.3
0.7
2.0

2006
5.8
6.4
4.4
3.4
1.0
2.0

2007
8.1
8.1
4.8
3.8
1.0
3.3

2008
4.6
4.4
3.3
3.7
-0.3
1.1

2009
3.9
3.4
3.1
2.4
0.7
0.4

2010p
4.8
4.4
3.3
2.5
0.8
1.2

2011f
219.6
1.0

2012f
159.9
0.6

2013f
163.1
0.6

892.7
674.1
555.0
119.1
218.6

963.5
733.9
603.6
130.3
229.6

1065.3
839.8
696.2
143.6
225.5

218.6

229.6

225.5

348.6

374.5

2011f

2012f

2013f

3.9
3.0
2.4
0.5
1.0

3.8
2.9
2.4
0.5
0.9

3.8
3.0
2.5
0.5
0.8

As a percent of GDP
Net private and official inflows
Net private inflows (equity+debt)
Net equity inflows..Net FDI inflows..Net portfolio equity inflows..Private creditors

Source: The World BankNote:e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.

49

Global Economic Prospects June 2011: Subject Annex

References:

Figure FIN.10 External vulnerability

International Monetary Fund (2011b), “World
Economic Outlook: Tensions from the TwoSpeed Recovery: Unemployment, Commodities,
and Capital Flows” April 2011, Washington DC.

Portfolio and Banking (%GDP) 2010

sudden reversals in capital markets and to apossible increase in borrowing costs. Countries
such as Russia, Brazil, Indonesia and Turkey aresusceptible to these types of risks (the first three
because of high debts, the last because of its highdebt and large current account deficit). Theserisks are further accentuated when a large shareof external financing comes in the form of
relatively volatile portfolio equity and debt flows(Brazil, Indonesia, and Turkey) (figure FIN.10).

Hartelius, K., K. Kashiwase, and L.E. Kodres(2008), “Emerging market Spread Compression:
Is it Real or is it Liquidity?”. IMF working paper
08/10, January, Washington DC.
International Monetary Fund (2011a), “Recent
Experiences in Managing Capital Inflows—
Cross-Cutting Themes and Possible Policy
Framework”, Washington DC.

6

PH 4
CN 2
-50

MY

0

-2 0
-4

BR
TH

IN

RU PE

ZA

TR

ID

Lin, Justin Yifu
(2007) “Economic
Development and Transition: Thought, Strategy
and Viability,” Marshall Lectures (Cambridge
University), October 31-November 1, 2007.

PL

50

100

BG

-6
-8
-10

World Bank (2009), “Global Development
Finance 2009: Charting a Global Recovery”,
Washington DC.

CL

External financing needs to FX reserve
ratio (%)

World Bank (2011), “Global Economic
Prospects: Navigating Strong Currents” January
2011, Washington DC.

Source: International Monetary Fund and World
Bank.

50

Global Economic Prospects June 2011: Subject Annex

Global Commodity Markets Annex
following the loss of 1.3mb/d of Libyan oil
exports (and smaller losses elsewhere). Fears offurther disruptions in major oil producing
countries have also underpinned prices. The lossof Libyan light/sweet crude tightened distillate
markets, which were further aggravated by theloss of distillate exports from Japan following
the earthquake that damaged refineries. OPEC‘s
spare capacity is mainly medium-sour crude,
thus the challenge will be to replace light/sweet
crude to manufacture sufficient distillate to meetincreasingly stringent low-sulfur regulations.
Crude oil prices are expected to remain elevatedin the near term until product markets are inbetter balance to meet summer demand, andfears of further crude oil disruptions subside.

Overview
Commodity prices have surged since their lows
during the depth of the financial crisis (figure
Comm.1). Since end-2008, energy prices havemore- than doubled, but still remain well below
their former peaks. Metals prices are up almost
170 percent while agriculture and food prices are
77 and 60 percent higher, respectively.
The 2010/11 spike in commodity markets has
been driven by a recovery in demand andnumerous supply constraints. Adverse weather(droughts and heavy rains) in many regions has
affected several agriculture markets, as well as
coal and metals production. Political unrest,
mainly in North Africa and the Middle East, hasresulted in a loss of oil supply—and fears offurther disruptions have pushed oil prices evenhigher. And in so far as these commodity
indexes reflect dollar prices, the depreciation of
the dollar has also contributed to their rise.
Between July 2010 and April 2011, the dollar
has depreciated 12.9 percent against the euro and7.7 percent against a broader group of trading
partners.

Metals and minerals prices recovered sharply in2009 due to strong demand and restocking in
China. While Chinese demand growth slowed in2010 it was offset by stronger growth elsewhere,
mainly in the OECD. By February, prices ofmetals exceeded their May 2008 peak by 4
percent, with tin and copper reaching all-timehighs due to supply constraints. Other metals
markets have been less supply constrained, inparticular aluminum, where China is a net
exporter. Prices are expected to strengthen
further in 2011 as demand recovers, notably
from China.

Crude oil prices, which were stable during thefirst three quarters of 2010 (averaging $77/bbl),
began to rise as demand growth accelerated andstocks fell late in the year. In 2011, prices rose
sharply and exceeded $116/bbl in April

Agricultural prices began to rise sharply in mid2010 due to adverse weather conditions (notably
drought conditions in Central Europe which saw
Russia‘s wheat crop decline by 25 percent), andin the case of raw materials, strong demand.
High energy prices have also played a role, bothby diverting agricultural land to biofuel
production, but also as higher fuel and fertilizer
prices pushed up production costs.

Figure Comm.1 Key price indices$US nominal, 2000=100
500

400
300
200
100

EnergyMetalsOverall, agricultural prices increased 45 percent
between June 2010 and February 2011 and as of
May 2011, they were 6.4 percent above their
June 2008 peak. By May, raw materials prices
were 33 percent above their 2008 peak due toFood0
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Source: World Bank.

51

Global Economic Prospects June 2011: Subject Annex
record high prices for cotton and rubber onstrong demand and supply shortfalls. Beverage
prices were almost 30 percent above peaks
owing to weather-related shortages of Arabica
coffee supplies and political disruption of cocoa
supplies in Côte d‘Ivoire. High sugar prices havepushed the ―other‖ food category to 12 percent
above its earlier peak. Grains and edible oils
prices remain below their former peaks on
improving supply conditions for many of thesecommodities, although stocks remain relatively
low.

further aggravate markets. Given low stocklevels, agricultural (and especially food) prices
will remain sensitive to adverse weather
conditions and energy prices. Moreover, atcurrent or higher oil prices, biofuels production
becomes an increasingly attractive use of landand produce, likely increasing the sensitivity offood to oil prices. Downside risks mainly entail
slower demand growth and more favorable
supplies.

Most commodity prices are set to remain high in2011 and to weaken only modestly through to2013, reflecting continued robust demand, lowstocks and ongoing supply constraints in somecases. Crude oil prices are expected to average$107/bbl in 2011 and weaken slightly over 201213, assuming that political unrest in North Africa
and the Middle East is contained. Metals prices
are expected to rise by 20 percent in 2011 on
persistently strong demand, led by China, andweak supply response for some metals, notably
copper and tin. Food prices in 2011 are expected
to average 20 percent above 2010 levels as well,on the assumption of a normal crop year and nofurther rises in oil prices (table Comm.1).

Crude oil prices were fairly stable through thefirst three quarters of 2010, averaging $77/bbl,
reflecting ample stocks and OPEC production
restraint amid strong demand growth (3.3
percent or 2.8mb/d for 2010) versus an average
1.3mb/d over the past decade. In the fourth
quarter of 2010, prices began to rise due to an
acceleration in demand growth to 3.8 percent
and declining stocks; prices averaged $90/bbl in
December.

Energy: overview and outlook

Oil demand in high-income OECD countries
which had been declining since the fourth
quarter of 2005, advanced by 1.2 percent or
0.6mb/d; while demand in non-OECD countries
increased 5.7 percent or 2.3mb/d–with Chinesedemand representing about 1mb/d. In the firstquarter of 2011, global oil demand was 2.3
percent higher than a year earlier, with year-over-year growth rates expected to ease to near 1.5
percent (1.3mb/d) consistent with the long-term
trend of the past decade (figure Comm.2).

The risks to this price forecast are mostly to theupside. The spread of political unrest in the
Middle East and North Africa could push crude
oil prices much higher in the shorter term,
especially if there is disruption to a major oil
producer. Stronger demand from China could
boost metals prices by more than currently
expected, and continued supply constraints could

Figure Comm.2 World Oil demand

Table Comm.1 Key nominal price indices(Actual and forecasts, 2000=100)
Actualmb/d43

Forecast

2005

2006

2007

2008

2009

2010

2011

2012

2

Energy

188

221

245

342

214

271

362

345

1

Non-Energy

149

190

233

275

209

267

321

284

Agriculture

133

150

180

229

198

231

277

230

Food

134

147

185

247

205

224

265

222

-1

Other

Beverages

137

145

170

210

220

254

286

238

-2

Other Asia

Raw Materials

131

160

175

196

169

237

304

247

179

275

339

336

222

337

406

395

-3

China

Metals & Minerals
Fertilizers

163

169

240

567

293

280

349

283

-4

OECD

MUV

110

112

117

125

118

121

127

123

0

1Q03

1Q05

1Q07

Source: IEA and World Bank

Source: World Bank

52

1Q09

1Q11

Global Economic Prospects June 2011: Subject Annex
Most of the increase in oil demand was met fromincreased production by non-OPEC producers
and through reductions in inventories. OPEC
output growth in recent months has been limited
as the cartel has sought to support prices at
below their recent amplified levels.

exports. Some damage to facilities and oil fields
occurred, and it is widely expected that exports
will be curtailed for some time. In addition morethan 0.1mb/d of crude oil production was shut
down in March from unrest and strikes in
Yemen, as well as smaller volumes in Oman,
Gabon and Côte d‘Ivoire—all non-OPEC
countries. Just as importantly, oil prices were bid
up by fears of larger supply disruptions in major
OPEC oil producers.

Non-OPEC output increased 2.0mb/d since2008, reflecting both the exploitation of new
fields and more intensive production fromexisting ones made more profitable by higher
prices. The biggest increases came from theUnited States, Russia, China, Brazil, Colombia,
Kazakhstan, Azerbaijan, Canada, and Oman, as
well as from a sizeable increase in biofuels.
Partially offsetting these gains were large
production losses in the North Sea and Mexico.

The supply response from other OPEC countries
has been limited—mainly because of weak
demand for the medium-sour crude that OPEC
has in spare capacity (the lost Libyan production
is light, sweet and distillate-rich crude oil), andbecause the supply disruption occurred during
the seasonal downturn in demand due to refinery
maintenance.

OPEC production increased 1.9mb/d since April
2009 (prior to the loss in Libya), but still remains
below its peak levels of 31.9mb/d in mid-2008.1
Most of the increase has taken place in Saudi
Arabia, Iraq, the UAE, and Nigeria (figure
Comm.3).

Nevertheless, the pickup in global demand has
drawn-down OPEC‘s spare capacity (excluding
Libya, Iraq, Venezuela and Nigeria) to 4mb/d,down from more than 5mb/d at the end of 2010.
Because of the loss of Libyan distillate-richsweet crudes, distillate markets worldwide hastightened. As refinery demand picks up in thesecond quarter to meet summer demand, further
upward pressure on high-quality crudes is likely.

Despite a drawdown of inventories, global
stocks remain high—though outside of theUnited States, inventory levels at the end of
winter were at the lower end of their 5-year
range (figure Comm.4).

Outlook

Political turmoil adds to price volatility
The spikes observed in 2011 mainly reflect
political developments in North Africa and the
Middle East, which resulted in the loss of 1.6mb/
d in Libyan oil production and 1.3mb/d in

Oil prices are expected to remain elevated aslong as physical supplies are disrupted and fears
persist of larger disruptions from political unrestin oil producing countries. The loss of Libyan
light sweet, crude will continue to affect productFigure Comm.3 World oil production

Figure Comm.4 OECD oil inventories and oil pricemb/ddays forward consumption

55

$/bbl

65

130

50

110
60

Non-OPEC

45

90

Inventories

40

55

70
50

35
50

30

45

25
Jan-00Brent (right axis)

OPEC

30

Jan-02Jan-04Jan-06

Jan-08Jan-1010
1Q00

Jan-12

Source: IEA

4Q02

Source: IEA, World Bank

53

3Q05

2Q08

1Q11

Global Economic Prospects June 2011: Subject Annex
markets, especially as increasingly stringent
regulatory rules on refined products further
intensify demand for light, sweet crude.

2013. Yet, individual prices may move within awide range from each other, as has been the caseduring the past six months (box Comm.1).

In the baseline projection, oil production isassumed to normalize toward the end of 2011,
and oil prices are anticipated to decline gradually
toward $80/bbl in real terms by 2020. Thisimplies a nearer-term price profile of $107.2/bbl
in 2011, easing only modestly to $98.7/bbl by

At these prices, there are no resource constraints
far into the future. At $80/bbl in real terms,
production of Canadian tar sands are profitable
and reserves from this source are second only tothose of Saudi Arabia in crude oil. Such elevatedprices should also serve to both foster production

Box Comm.1 Different prices for different fuels
The recent run up in crude oil prices has been associated with an unusual divergence between the price of West
Texas Intermediate oil (WTI) and Brent and Dubai crude oil prices. Historically, WTI has traded at a premium of
about $1.30/bbl to Brent, but toward the end of 2010 the WTI price began falling below the Brent price because ofa build-up in crude-oil inventories in Cushing Oklahoma, the delivery point for WTI oil in NYMEX futures contracts. Currently WTI oil is trading at about 90 percent of the Brent price (box figure Comm.1a).
The increase in inventories was mainly due to the inflow of Canadian crude through the new Keystone pipeline,
and has little outlet except through refinery processing in Cushing. Bottlenecks are likely to continue until new
pipeline capacity to the Gulf coast is available (2013), and from Alberta to the Pacific coast (2015).
The other major price divergence, which has been more durable, has been between oil prices and natural gas
prices. Whereas the former have increased nearly fourfold since 2000, natural gas prices linked to oil (in Europe
and Japan) have increased only 160percent, while those in the fully competitive U.S. market are essentially unchanged. Relatively lower natural gas prices reflect increases in supply from both new liquefied natural gas (LNG)
capacity and unconventional shale gas. LNG capacity, which allows gas to be transported by sea, is projected toincrease more than 50 percent between 2009 and 2013. In the United States, natural gas from shale-gas reserves
has been growing rapidly due to new extraction techniques, which have not only pushed down U.S. natural gas
prices, but also reduced prospective global demand for LNG.
Growing supplies of unconventional gas are expected to keep U.S. natural gas prices well below oil prices. Already, U.S. natural gas now costs less than coal. Contract prices in Europe and Japan, which are tied to oil prices,
are expected to come under downward pressure as end-users increasingly push to tie these prices more closely tospot prices for natural gas (box figure Comm.1b).
Over time, these large gaps between oil and natural gas prices can be expected to induce shifts in consumption
from oil to natural gas, reducing demand for oil, and as a result reducing price pressures.
Box figure Comm.1a Brent/WTI price differential

Box figure Comm.1b Energy prices

US$/bbl$/mmbtu

$20

25

$15

20

$10

15

$5

10

$0

5

-$5

0

Crude oil

LNG Japan
Europe Gas

Jan-00

Apr-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Dec-10 Mar-11

Source: World BankUS GasCoal Australia

Jan-02Jan-04

Source: World Bank

54

Jan-06

Jan-08Jan-10Jan-12

Global Economic Prospects June 2011: Subject Annexof alternative renewable energies and induce
demand-side substitution toward other lessexpensive forms of energy.

natural gas and nuclear power. A combination of
reduction in the share of nuclear and the likely
environmental pressures in crude oil and coal
may indeed exert additional pressure in energy
prices over the longer term.

The main impediments to supply growth areabove-ground policies and conditions, i.e.,
taxation, access, environmental constraints, andgeopolitical risk.

Metals: overview and outlook
Metals and minerals prices have recovered
strongly in the last two years due to robust
demand, with the aggregate price index in May
2011 up 155 percent since its recession-induced
lows of December 2008. Strong price increases
were observed in markets that experienced
supply constraints. For example, copper and tinreached all-time nominal highs in 2011 (up 220
and 200 percent, respectively from their 2008/09
lows) (figure Comm.5). Most metals prices haveat least doubled, but price increases were more
moderate for those where supplies were ample asin the case of aluminum.2

Risks to the oil outlook
On balance, short term risks are on the upside
likely to emanate from further supply
disruptions. Large supply-shocks can havesignificant impacts on oil prices and economic
activity, as in the past. Environmental issues
may curb non-OPEC production growth in biosensitive or resource-intensive areas, e.g.,
offshore, oil sands, and shale-rock fracturing(these sources account for more than one-third ofglobal oil supplies).
OPEC production policies can also affect pricelevels. In the past, the group has taken
aggressive action to rein-in production when
prices fall, but has taken only limited action
when prices rise, choosing instead to accept thewindfall gains.

Figure Comm.5 Copper and aluminum prices$/ton
10,0008,000

CopperAluminum

6,000

An additional risk to energy prices is the longer
term impact of the Fukushima nuclear accident.
Nuclear energy has played a key role in global
energy consumption. Its contribution increased
from of 1.6 percent during the 1970s to 6.3
percent during 2000-08 (table Comm.2). During
this period crude oil‘s share declined from 44.7
to 35.0 percent. In effect, the decline in crude oil
was compensated almost equally by increases in

4,000

2,000
0
Jan-00

Jan-02Jan-04Jan-06

Jan-08Jan-10Jan-12

Source: .World Bank.
Figure Comm.6 World metals consumption

Table Comm.2 Shares of global energy consumption(percent of total)'000 tons
40,0001971-80 1981-90 1991-2000 2001-08
Crude Oil (total)

44.7%

38.3%

36.6%

35.0%

Natural Gas

16.3%

18.2%

19.9%

20.8%

Coal and Coal Products

24.5%

25.5%

23.7%

24.9%

Nuclear

1.6%

4.8%

6.5%

6.3%

Combustible Renewables and Waste

10.6%

10.7%

10.5%

10.0%

Hydro/Other

2.3%

2.5%

2.8%

2.9%

30,00020,00010,000OECD

ChinaRest of world

2006

2008

0
2000

Source: IEA and World Bank

2002

2004

Source: World Metal Statistics

55

2010

Global Economic Prospects June 2011: Subject Annex
The recovery in metals during 2009 was led bylarge restocking in China, world‘s largest metal
consumer (figure Comm.6). As can be seen foraluminum (which accounts for nearly half ofworld consumption of the six base metals),
China‘s demand growth surged in 2009, withsignificant volumes for restocking, providing the
key driver to prices. Demand in China slowed in2010 but this was offset by strong demandelsewhere, particularly in developed countries,
also for restocking (figure Comm.7).

required for new mines. Because of years of low
prices and limited expansion, the industry also
suffered shortages of skilled labor, equipment
and materials during the upturn—which havepushed up costs. In addition, technical problems,
strikes, and geopolitical risk prevented new
projects form moving ahead quickly.
Looking forward, supply is expected to be moreelastic—partly because of higher prices, whichhave boosted the industry‘s large cash flow, andis expected to generate record capital
expenditures in 2011.

Most metals inventories in 2011 are relatively
high, and have increased as China‘s importdemand has slowed (figure Comm.8). For somemetals, prices are in ‗contango‘ (future prices
above near-by prices) and a large portion ofstocks are tied up in warehouse financing
arrangements and not available to the market—
which gives an appearance of market tightness
and has helped support prices. Inventories are
expected to remain high until China‘s importdemand strengthens.

In the copper sector, where supply has beenvery tight, development of new ‗greenfield‘ and‗brownfield‘ projects is expected to deliver
sufficient capacity to meet moderate demand
growth over the medium term. Much of theincremental supply will be in South America andin Africa‘s copper belt, i.e., Zambia and the
Democratic Republic of Congo. High copper
prices have also increased recycling and induced
substitution toward other, cheaper products(mainly aluminum and plastics). These trends
are expected to push the copper balance into
surplus later in 2012 and beyond.

OutlookOver the past decade, global metals markets
have struggled to meet the strong demand
particularly from China, especially in the copperand nickel markets (box Comm.2). As a result
prices have increased to ration demand andbalance the market.

The global market for aluminum is expected
to remain in surplus for the foreseeable future.
The addition of new capacity and prospects forthe reactivation of idle capacity threatens prices
in the near term. New plants in China, India, theMiddle East and Russia are expected to exploit
low-cost power sources and minimize theupward pressure on aluminum prices fromThe causes of the supply shortfall are numerous.
Inadequate investment early-on has played arole, especially given the long lead times

Figure Comm.8 Copper prices and LME stocks

Figure Comm.7 Aluminum consumption growth
thousand tons

$/ton

750

'000 tons

12,0001,000

600

LME stocks (right axis)
Other

China

10,000500

500copper price
400

8,000

250

300

0

6,000

200

-250

4,000

-500

-750
Jan-07100

2,000
Jan-08Jan-09Jan-10Jan-11

Jan-050
Jan-06

Source: Datastream

Source: CRU

56

Jan-07

Jan-08Jan-09Jan-10Jan-11

Global Economic Prospects June 2011: Subject Annex
higher oil prices. A key uncertainty for supply
concerns Chinese authorities‘ efforts to restrain
power consumption in the sector, which may
slow the pace of new aluminum plants or resultin the closure of older plants.

projects elsewhere, are coming on line that are
the lagged result of earlier price hikes. In
addition, supply will be bolstered by recovering
production from strikes in Canada and the steady
growth of nickel pig iron in China. One potential
uncertainty for the nickel industry comes fromnew plants ‗High Pressure Acid Leach‘ (HPAL)
processes, a complex technology that has
resulted in severe production problems in thepast.

The nickel market is expected to move into
surplus this year and beyond as a wave of new
capacity hits the market. Several large-scale
projects in Brazil, Madagascar, New Caledonia,
and Papua New Guinea, as well as smaller

Box Comm.2: China, global metal demand, and the super-cycle hypothesis
Chinese demand has been the key driver of metal demand over the past decade (see figure Comm.8). China isclearly in an extremely metals-intensive phase of its development. Compared with other developing countries atsimilar income levels, the metals intensity of China‘s GDP is well above average (for example, China‘s copperand aluminum intensity were 1.8 and 4.1 kgs per $1,000 of real GDP for 2007-09, compared with world averagesof 0.4 and 0.7, respectively.)
Between 2000 and 2010 Chinese consumption of the main base metals (aluminum, copper, lead, nickel, tin, andzinc) rose by 16 percent per annum. Consumption for the rest of the world was flat for the decade. Currently China
accounts for 41 percent of global refined metal consumption (box figure Comm.2a).
Indeed, metal consumption by China during the past decade has been so strong that it effectively reversed theglobal metal intensity (metal consumption per unit of GDP), a turnabout that continues today. For example, global
metal intensity in 2010 was the same as in the early 1970s (box figure Comm.2b). On the contrary, food and energy intensities continued their downward trend.
Many observers looking at the extremely robust demand for commodities over the past decade, and the rapidly
rising metals intensity of the Chinese economy, argue that commodity demand will continue to outstrip supply
resulting in a super-cycle where prices stay very high for an extended period (perhaps for a few decades). Suchrisk seems particularly acute if China continues to increase its metals intensity, or if other developing countries
begin to follow a metals intensive development strategy – something that has not as yet occurred.
Super-cycles of this nature have taken place in the past rather albeit infrequently (e.g., the industrial revolution in
the United Kingdom. and the early 1900s in the United States). Several authors have argued that some metals(especially copper and iron ore) may be going through a super-cycle period because of Chinese demand (see Heap
2005 and Jerrett and Cuddington 2008).
If such a super cycle endures, high prices will be needed to curb demand and generate sufficient supplies to bringthe market into balance, and also to stimulate alternative technologies and materials.
Box figure Comm.2a Global metal consumption
growth, 2000-10

Box figure Comm.2b Global commodity intensity
Commodity
intensity index'000 tons
20,000Rest of world

16,000

China

OECD

1.05

12,000

0.95

8,000

Metals
Food

0.85

4,000
0.75

0

Energy-4,0000.65

AlumCopperLead

NickelTin

Zinc

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Source: World Metal Statistics and World Bank

Source: World Bank

57

Global Economic Prospects June 2011: Subject Annex
Overall, metals prices are expected to rise in2011 compared with 2010, owing to increasing
demand, but are expected to ease thereafter, as
new capacity comes on line and keeps markets insurplus. A key risk to the forecast is continued
difficulties within the industry delivering
adequate supply to the market, whether related tooperations, technology, labor, or government
policy.

30 percent of the increase in wheat prices
during the 2007/08 price spike was due toinsulating trade measures.
Grain prices, especially maize and wheat, began
rising in the summer of 2010 when it became
apparent that wheat production in Eastern
Europe and Central Asia and was going to beseriously affected by the heat wave running
through the region at that time. In the event,countries in the region—which between 20052009 accounted for almost a quarter of world
wheat exports—were only to supply half of thatamount. Later maize prices rose as it became
clear that the U.S. crop would disappoint. As aresult, the maize stock-to-use ratio declined to
0.15 from the 0.18 average of 2007-09.

Agriculture: overview and outlook
By early 2011 most agricultural prices either
reached or exceeded their summer 2008 peaks.
In April 2011, the agricultural price index
averaged 12 percent above its June 2008 peak,
while the food index has just matched its 2008
peak. Beverages (tea, cocoa, and coffee) and raw
materials are 31 and 57 percent above their 2008
highs.

By April 2011, maize prices had surpassed their
June 2008 highs by 12 percent while wheat
prices were just 4 percent short of their 2008
peak. Rice prices, however, have been relatively
stable, trading in a band of $450-$550/ton during
the past two years—a wide band by historicalstandards but narrow when comparing rice toother commodities during 2008.

Yet, the 2010/11 price spike differs from the one
in 2007/08 in a number of respects.
1. It is more uniform in terms of commodities
involved, in that it includes most foodcommodities (grains and edible oils, except
for rice), beverages, and raw materials. The
2007/08 spike (led by crude oil andfertilizers) saw food and grains prices
increase, largely reflecting the surge in rice.

Edible oils prices rose more than 40 percent in
the first quarter of 2011 from a year earlier,almost reaching their June 2008 all time highs in
February 2011. In addition to suffering sporadic
weather-induced production shortfalls(especially soybean oil in South America andpalm oil in South-East Asia) and diversion forbiodiesel production in Europe, a key factor
behind the price rally has been strong demand.

2. The current increase is less steep in the sensethat the percent change in 2011:Q1 from ayear ago are much smaller than occurred in
2008:Q2 when measured over the same
period (figure Comm.9).

Figure Comm.9 The price spikes of 2007/08 and 2010/11

3. The supply conditions for grains that led to
the 2010/11 spike were less binding than theconditions that led to the 2007/08 spike. The
rice market has been very stable—rice is athinly traded commodity and politicallysensitive for food security, especially in East
Asian countries.

EnergyNon-energy

2010/11

Agriculture

2007/08

Food

GrainsBeverages

Raw material
Metals

4. The recent price spike did not trigger as broada policy reaction—apart from the Russian
wheat export ban in the summer of 2010.
Martin and Anderson (2011) estimated that45 percent of the increase in rice prices andFertilizer

0

Source: World Bank

58

50

100

150

200

Global Economic Prospects June 2011: Subject Annex
Unlike grains, where demand tends to berelatively stable after incomes reach a certain
level, per capita demand for edible oils continues
to rise even in high income countries, as a rising
share of food consumed is prepared inprofessional establishments and in packaged
form, both of which are oils consuming
processes.

anticipated to remain almost unchanged.
Soybean and palm oil prices are expected to be
18 and 22 percent higher, respectively.

Beverage prices increased in 2010/11, unlike in2008 when their prices were relatively stable.
The coffee market—especially arabica coffee—
experienced tight supplies and strong demand
while the hike in cocoa prices reflected politicalinstability in Côte d‘Ivoire (which accounts foralmost 40 percent of global cocoa supplies).

Figure Comm.10 Global balance of key grains

A number of assumptions underpin this outlook.
First among these is that crude-oil prices
stabilize and begin to decline. Second, it isassumed that the 2011/12 crop year is a normal
one. Actual outturns will depend importantly on
40%

900

Maize

800

30%

700
20%
600

The cotton market suffered from tight supplies(in addition to a partial export ban imposed byIndia to protect its domestic textile industry).
Strong demand, especially by middle income
countries, contributed to high price as well.
Cotton prices experienced, perhaps, the sharpest
increase in history of the sector; they exceeded$5.00/kg in March 2011, up 350 percent fromtwo years ago. And natural rubber prices
reached historic highs due to weather-related
supply disruptions in South-East Asia rubber
producing countries (accounting for almost all
global production), strong tire demand fromemerging markets, and high oil prices (natural
rubber competes with synthetic rubber) a byproduct of crude oil.

10%

500

0%

400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Stock-to-use ratio - Lef t axis

40%

Production (1000 MT)

500

Rice

30%

450

20%

400

10%

350

0%

300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Stock-to-use ratio - Lef t axis

Despite high oil prices, fertilizer prices—a key
input to the production of food commodities—
declined 5 percent in 2010 due to ample supply
and relatively stable natural gas prices (nitrogen
fertilizer is made directly from natural gas).

40%

Production (1000 MT)

700

Wheat

30%
600
20%

Outlook

500
10%Agricultural prices increased 17 percent in 2010,
slightly exceeding their 2008 levels. They are
expected to gain an additional 20 percent in
2011; such increase assumes that prices will easesomewhat during the second half of 2011.
Specifically, for 2011 wheat and maize prices
are expected to average 34 and 45 percent higher
than 2010 levels, while rice prices are

0%400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Stock-to-use ratio - Lef t axis

Production (1000 MT)

Source: U.S. Department of Agriculture (May 11, 2011
update).
Note: years refer to crop years (e.g., 2011 refers to 20011/12

59

Global Economic Prospects June 2011: Subject Annex
oil prices and weather. Either another poor crop
year or a further hike in oil prices could result insignificantly higher prices for many
commodities.

and (iii) via competition for land and produce
from biofuels—maize in the United States,
edible oils in Europe and sugar cane in Brazil(Box Comm.3). Indeed, agriculture is more thanfour times more energy intensive an activity thanmanufacturing, with the ratio varying acrosscountries depending on crops raised andintensity of fertilizer use (figure Comm.11).

During its first assessment for the 2011/12 crop
year (published in early May), USDA projectedthat global production of maize will rise 6.4
percent, wheat by 3.3 percent and rice by 1.4
percent (figure Comm.10). Yet, because ofcontinued tight inventory positions, the USDA
argued that prices may remain ―volatile withtight exportable supplies of corn and wheat. In
contrast, the rice world supplies are relatively
abundant.‖ The report also noted that uncertainty
continues to cloud these projections because ofdelayed maize plantings in the United States,
reduced U.S. winter wheat production, continued
dryness in the EU, and wet conditions in Canada.

Econometric estimates suggest that for every 10
percent increase in energy prices, food prices
will rise by between 2 and 3 percent (Baffes2009). In fact, this is almost exactly what has
been observed: with the 223 percent increase in
the average oil price between the period 19862002 and 2003-2010 is associated with a 50
percent increase in the average food prices index(figure Comm.12).

Risks to the food price outlook

Energy is a particularly important determinant ofagricultural prices and hence an important riskfor higher food prices. While low stocks andpoor crops were the major factors underpinning
last year‘s price hikes, the nearly 60 percent
increase in food prices since the 1990s has more
to do with the 3-fold increase in energy pricesthat has occurred during that time.

In an effort to evaluate the sensitivity of foodprice forecasts to the quality of future crops andoil prices, several simulations were run. Table
Comm.3 reports results based on a reduced form
econometric model that explains grain prices as afunction of cost factors (including oil), andweather events (proxied by deviations of output
from trend increases and stock-to-use ratios toallow for non-linear effects when stock levels arelow). Other variables include exchange rates,interest rates, time trend as a proxy for technicalchange, and income growth.

Energy feeds into food prices through three main
channels: (i) as a cost of production (fuel for
agricultural machinery and transporting produce
to markets); (ii) indirectly through fertilizer andother chemical costs (e.g., nitrogen-based
fertilizers are made directly from natural gas),

This work suggests that a weather-induced

Figure Comm.11 Energy intensity of agriculture
and manufacture

Figure Comm.12 Energy and agricultural prices:
1986-2010

Cost of energy component measured in 2007, percent

nominal indices, 2000=100
400

WORLD
HIGH INCOME
DEVELOPING
SSA
US
CanadaEU-12
China
Brazil
India
TurkeyEnergyManuf acture

300

Agriculture

223 % up
200

Agriculture
100

50 % up
0

0

5

10

15

1986

20

1989

1992

Source: World Bank

Source: GTAP preliminary release 0, version 6.

60

1995

1998

2001

2004

2007

2010

Global Economic Prospects June 2011: Subject Annex
production shortfall on the order of 5 percent(equivalent to one standard deviation reduction
in global output) can be expected to induce anincrease in grain prices of between 2 and 8
percent. And a 50 percent increase in crude oil
prices above the baseline of $107/bbl, would
induce grain prices increases on the order of 6
and 14 percent. Under a scenario where the
2011/12 crop year proves disappointing and oil
prices rise by $50/bbl, grain prices could rise
between 9 and 22 percent above the baseline
scenario.

importing countries as well as poverty
implications for consumers who spend a
substantial part of their disposable income on
food. Consider, for example, that the 2010/11
grain price increases may have pushed as manyas 44 million people into poverty according toWorld Bank latest estimates (World Bank,
2011a).
In addition to higher prices, volatility incommodity prices, especially food commodities,
is an issue of increasing concern. For example,
during the November 2010 summit, leaders of
the G-20 requested that all international financial
institutions and research organizations to workwith key stakeholders ―to develop options forG20 consideration on how to better mitigate andmanage the risks associated with the pricevolatility of food and other agriculturecommodities, without distorting market
behavior, ultimately to protect the mostvulnerable‖ (see G-20 Report on Price Volatility2011).

If any of these scenarios materialize, it will haveimportant budgetary implications for foodTable Comm.3 Food Prices: History, baseline, andupside risks ($US per ton)
Year

Wheat

Maize

Rice

Soybeans

Palm oil

2006

192

123

305

269

478

2007

255

164

326

384

780

2008

326

223

650

523

949

2009

224

166

555

437

683

2010

224

186

489

450

901

2011

300

270

500

530

1,100

2012

250

230

480

450

900

Historical Prices

Although it is analytically challenging todistinguish factors that affect price volatility
from those affecting price levels, the increasingrole of investment fund activity during the past
few years (sometimes referred to as the―financialization of commodities‖) is often cited
as a key factor behind the price variability
observed during the past few years. It has been
estimated that as of the end of 2010 as much as$380 billion was invested in commodities, three

Baseline

5% production shortfall (compared to baseline)
2011

306

279

518

547

1,186

2012

255

238

497

464

970

5% production shortfall and 50% increase in energy prices (compared to baseline)
2011

336

294

573

602

1,337

2012

280

251

550

511

1,094

Source: World Bank
Box Comm.3 The role of biofuels

The mandated increase in the quantity of high-income crops and cropland dedicated to biofuel production (chiefly
ethanol-based corn in the United States, and edible oil-based biodiesel in Europe) and the more or less simultaneous rise in food prices, suggests another mechanism by which energy prices are affecting food prices.
During 2010/11, 28 percent of the U.S. maize crop went to biofuel production (in fact, 40 percent of the US maizecrop went for biofuel use; however, 30 percent of that went back to the feed industry, resulting in a net of 28 percent). Although that corresponds to about 11 percent of global maize production, it‘s magnitude is comparable to
the global exports of maize. Indeed, most studies concur that the U.S. biofuel mandate was the largest demand-side
factor in the run up of grain prices during the 2007/08 price spike (Timilsina and Shrestha 2010).
Perhaps more important than their historic role in shaping the rise in food prices—to the extent that important foodcrops like maize are economically viable alternative sources of energy―their comportment will cease to be that ofa typical agricultural product, where price fluctuations are mainly the result of supply shocks (demand remaining
relatively stable), and become more like an industrial commodity, especially at current high energy prices. For
example, estimates suggest that maize-based ethanol and edible oil-based biodiesel biofuels may become profitable even without mandates at oil prices between $80-$100/bbl (U.S. Government Accountability Office 2009).

61

Global Economic Prospects June 2011: Subject Annex
quarters of which in energy markets, comparedto less than $20 billion at the beginning of thedecade.

post-financial crisis low price) and 2010:Q4, (themost recent data available for 35 countries). In
addition to maximizing the numbers of countries
included in the sample, the period was chosen inorder to capture most of the 2010/11 food pricespike.

The relationship between investment fundactivity and commodity prices is a hotly debated
topic. Some have argued that such funds havesufficiently large weight to unbalance the market
thus impairing the price discovery mechanism(e.g., Soros 2008, Berg 2011). However, others
have praised these investment vehicles claimingthat they inject liquidity in commodity markets(e.g., Verleger 2010, Sanders and Irwin 2010).
Despite such contrasting views, the empiricalevidence is, at best, weak.

During this period, the real (U.S. CPI-deflated)
U.S. dollar-based World Bank food price index
increased 34 percent. Yet, the results show
that—with the exception of Asian countries
where real wholesale prices moved in synch withworld prices—in both Latin America and the
Caribbean and Sub-Saharan Africa regions, real
Figure Comm.13 Price changes—2009:Q1 to2010:Q4

As was discussed in the January 2011 edition of
GEP (World Bank 2011b, p. 26), ―Despite the‗smoking gun‘ … most studies have failed toestablish a link between these investment andrise in commodity prices.‖ The report also notedthat more recent academic papers and analysis
are increasingly leaning towards the view thatthese new investment vehicles may have been
responsible for at least part of the post-2005
volatility in commodity prices. Indeed, a numberof academic studies have shown just that (see,for example, Singleton 2011, Silvennoinen andThorp 2010, Tang and Xiong 2010).

Africa
Benin
WORLD
Sudan
BurundiCape Verde
Djibouti
Mali
Cameroon
Nigeria
UgandaNiger
Mozambique
Burkina Faso
Rwanda
Kenya
Chad
-40

-20

0

20

40

60

80

100

80

100

Latin America and the Caribbean
ArgentinaWORLD
BrazilPanamaMexicoPeru
Colombia
Dominican Republic
Bolivia
GuatemalaNicaragua
Honduras

Movements in domestic food prices
The discussion so far has focused on pricemovements in US$ terms. However, whatmatters most to consumers is the price they pay
for their food basket. It is not uncommon forprices paid by consumers to differ considerablyfrom international prices, at least in the shortrun. Reasons include exchange rates movements,
trade policies that often insulate domestic
markets, large distances of domestic trading
centers form ports adding considerably tomarketing costs, quality differences, anddifferent composition of the food basket.

-20

0

20

40

60

Asia
Bangladesh
ThailandWORLD
Azerbaijan
India

China

Figure Comm.13 depict changes in domestic
wholesale prices of key food commodity priceindices (weighted by the country‘s caloric intake
from such commodities). The period chosen isbased on a comparison between 2009:Q1 (theArmenia
Cambodia

Belarus-505Source: World Bank

62

10

15

20

25

30

35

40

Global Economic Prospects June 2011: Subject Annex
prices either increased modestly or declined. It
should be noted that results do not necessarily
imply that domestic price movements moveindependently of world prices. The apparent
weak correlation between world and domestic
prices most likely reflect low pass-through.

commodity angle. From a country policy
perspective, the results suggest that, to the extent
possible, policy responses should not focus
entirely on short run price movements observedin international markets. Instead policies should
target specific commodity sectors and, above all,target the portions of the population with thehighest probability of being affected.

To identify the degree of pass-through, an errorcorrection model was used to estimate the passthrough price elasticities for wheat, rice, andmaize. The countries included in the analysis
were categorized into three groups: little passthrough, where less than 10 percent ofinternational price variability is transmitted into
domestic prices, moderate pass through, withtransmission between 10 and 40 percent, andhigh pass-through, with more than 40 percent
transmission (figure Comm. 14).

The policy dimension of low pass-throughLow pass-through may reflect the fact that somecountries insulate their domestic food (and fuel)markets by introducing or increasing existing
subsidies or taxes. In addition to theirdistortionary impact on both domestic and world
market level, subsidies in these countries may
face fiscal sustainability issues. Indeed, taxpayer-funded subsidies in OECD countries increased
considerably—between 2000-04 and 2005-09,
transfers from taxpayers to consumers ofagricultural products increased by more than 25
percent (from $24.6 to $31.0 billion). From afiscal sustainability perspective, however, more
important are fuel subsidies which during 2010
reached globally an estimated $250 billion, up
from $60 billion in 2003 (Coady et al 2010).

A number of interesting results emerged fromthe analysis. First, more countries exhibited very
little pass-through compared to moderate or highpass-through combined; this is consistent withthe results discussed earlier. Second, price passthrough is higher in rice than maize and wheat.
Third, countries that exhibited high pass-throughin one commodity are likely to have high passthrough in the other commodities as well (e.g.,
Argentina, South Africa, Thailand, Uganda).

From a policy perspective, addressing insulating
trade policies should be a priority, for at least
two reasons. In addition to constraining domestic
supply response at the time it is most needed,such policies amplify the cycles in world prices,thus destabilizing global markets with negative
consequences to countries that play by the rules
and, more importantly, the ones that do not havethe fiscal space to protect the poorest segmentsof their populations.

To summarize, pass-through results based on
both econometric estimates and the ones basedon simple price change calculations gave a rather
mixed picture from both a country and a
Figure Comm.14 Domestic prices of key commodities do follow world price signals in many countries
Number of countries
25

less than 10%

between 10% and 40%

higher than 40%

Other avenues to pursue should include adequate
funding for research and development in order toarrest the decline in productivity growthobserved during the past decade as well as
minimizing post-harvest losses, very common inpoor countries, especially in Sub-Saharan Africa.
Policies and investments addressing the likely
impact of permanent shifts in weather patterns,
and improving food aid are areas of concern as
well. Detailed policies and investment strategies
addressing some of these issues were discussed

20
15
10
5

0
Rice

Maize

Wheat

Source: World Bank

63

Global Economic Prospects June 2011: Subject Annex
at the Development Committee meeting during
the 2001 joint World Bank/IMF Spring meetings(World Bank 2011c).

Correlation Dynamics.‖ Mimeo, Queensland
University of Technology and University ofTechnology, Sydney.
Singleton, Kenneth J. (2011) ―Investor Inflows
and the 2008 Boom in Oil Prices.‖ Mimeo,
Graduate School of Business, Stanford
University.

References
Baffes, John (2010). ―More on the Energy/NonEnergy Commodity Price Link.‖ Applied
Economics Letters 17: 1555-1558.

Soros, George (2008). ―Testimony before the U.S.
Senate Commerce Committee Oversight:
Hearing on FTC Advanced Rulemaking on Oil
Market Manipulation.‖ Washington, DC, June 3.
http://www.georgesoros.com/files/SorosFinal
Testimony.pdf

Berg, Ann (2011). ―The Rise of Commodity
Speculation: From Villainous to Venerable.‖ In
Safeguarding Food Security in Volatile Global
Markets, ed. Adam Prakash. Food andAgriculture Organization of the United Nations:
Rome.

Tang, Ke and Wei Xiong (2010). ―Index
Investment and the Financialization ofCommodities.‖ Mimeo, Renmin University
and Princeton University.

Coady, David, Robert Gillingham, Rolando
Ossowski, John Piotrowski, Shamsuddin
Tareq, and Justin Tyson (2010). ―Petroleum
Product Subsidies: Costly, Inequitable, andRising.‖ IMF Staff Position Paper.
International Monetary Fund: Washington DC.

Timilsina, Govinda and Ashish Shrestha (2010).
―Biofuels: Markets, Targets, and Impacts.‖
Policy Research Working Paper 5364.
Washington, DC: The World Bank.

Heap, Alan (2005). ―China—The Engine of a
Commodities Super Cycle.‖ Citigroup Smith
Barney, New York City.

US Government Accountability Office (2009).
Biofuels: Potential Effects and Challenges ofRequired Increases in Production and Use.
Report GAO-09-446. Washington, D.C.

G-20 Report on Volatility (2011). ―Price
Volatility in Food and Agricultural Markets.‖
Policy report with contributions by FAO,
IFAD, IMF, OECD, UNCTAD, WFP, theWorld Bank, the WTO, IFPRI, and the UNHLTF. May 3.

Verleger, Phillip (2010). ‖Don‘t Kill the Oil
Speculators.‖ International Economy: The
Magazine of International Economic Policy
Winter 2010, 64-66.

Jerrett, Daniel and John T. Cuddington (2008).
―Broadening the Statistical Search for Metal
Price Super Cycles to Steel and Related
Metals.‖ Resources Policy 33: 188-195.

World Bank (2011a). Food Price Watch. April
14.
World Bank (2011b). Global
Prospects: Navigating Strong
Washington DC: World Bank.

Martin, Will and Kym Anderson (2011). ―Export
Restrictions and Price Insulation during
Commodity Price Booms.‖ Policy ResearchWorking Paper 5645. Washington DC: The
World Bank.

Economic
Currents.

World Bank (2011c). ―Responding to Global
Food Price Volatility and its Impact on Food
Security.‖ Development Committee Paper,
DC2011-0002. Washington DC: World Bank.

Sanders, Dwight R. and Scott H. Irwin (2010). ―A
Speculative Bubble in Commodity Futures
Prices? Cross-Sectional Evidence.‖ Agricultural
Economics 41:25-32.

World Bank (2009). Global Economic
Prospects: Commodities at the Crossroads.
Washington DC: World Bank.

Silvennoinen, Annastiina and Susan Thorp (2010).
―Financialization, Crisis, and Commodity

64Global Economic Prospects June 2011: Subject Annex

Notes
1. OPEC countries account for 72 percent of
the world‘s known oil reserves (Oil and Gas
Journal, Dec. 6, 2010). However, OPEC‘s
production share of total world liquid fuels isjust below 40 percent and its share of crude
oil production is 33.5 percent. With OPEC‘s
spare capacity at about 6 mb/d (December2010) and substantial known reserves, the oilmarket does not appear afflicted by resource
scarcity. Indeed, oil production continues togrow in both OPEC and non-OPEC regions.
2. The divergence between copper andaluminum prices during the past decade has
been driven mainly by China, world‘s largest
copper importer. Because of various
operational and project development
problems, the industry has struggled to keep
pace with demand. Meanwhile China hasdeveloped substantial aluminum smelting
capacity and is a net exporter of aluminum.
Bauxite, the raw material to produce
aluminum, is one of the most abundant
minerals.

65

Global Economic Prospects June 2011: Subject Annex

Inflation Annex
Rising commodity prices have made a major
contribution to the increase in headline inflation
rates, which are close to- or have breached theupper limit of central banks’ targeted bands inmany countries.

number of developing countries over the past
year. More than half of developing countries
now have annual inflation in excess of 5 percent,with one in five countries reporting inflation inexcess of 10 percent. Meanwhile the share ofcountries with inflation rates in the range of 2.5
percent to 5 percent has also increased.

However local food prices in developing
countries have not increased as much as
international food prices. Notwithstanding the 47
percent increase in the dollar prices ofinternationally traded food commodities between
June 2010 and February 2011, local food priceindexes in developing countries have risen by
only 7.9 percent over the same period. In part,
this discrepancy reflects the depreciation of thedollar; the wider range of food commodities
consumed locally; and weak pass through ofinternationally traded food prices to local prices.
In developing countries in Sub-Saharan Africa
and South America the pass through was lessthan 10 percent in: 67 percent of countries for
rice, 69 percent for maize, and 70 percent forwheat. Government subsidies, price controls,
weak infrastructure, and low import dependency
impede pass through, while it tends to be higher
in countries with closer links to international
markets and limited government intervention(e.g. South Africa).

Headline inflation accelerated by more than 3
percentage points in one in four developing
countries between March 2010 and March 2011,
compared to more than one in five during theprevious year (figure INFL.2). One in fivecountries have also seen inflation decline bymore than 1 percentage point over the March2010 to March 2011 period.
However, the extent of the pick up in inflation
for most countries has been relatively modest,with inflation rates in more than half ofdeveloping countries still below average
inflation recorded in the pre-crisis period(January 2000 through August 2008). Inflation isless than 2 percentage points higher than that
average in 80 percent of countries.

Annual inflation rates have increased in a large

Inflation in high-income countries is rising
but remains at relatively low levels. Prices inhigh-income OECD countries were 3.2 percent
higher in April 2011 than a year earlier, an

Figure INFL.1 Headline inflation has accelerated indeveloping countries over the past year

Figure INFL.2 Change in inflation rate over the
past year# of countries
60# of countries

30

50

25
20

40

15

30

10

20

5

10
0

0

0

2.5

5

7.5
y/y, percent

March-11

10

-1

More

March-10

Source: The World Bank.

012percentage points
March-11 March-10

Source: The World Bank.

66

3

More

Global Economic Prospects June 2011: Subject Annex
increase of 1.3 percentage points. The energy
price component of the CPI index was up 10.4
percent, down slightly from the 10.6 percent
increase recorded in March, while the food pricecomponent was up 3 percent (year-on-year in
April, 2011) (figure INFL.3). In the euro area,
headline inflation was 2.8 percent (y-o-y) in
April, well above the 2 percent ECB targeted
rate, in part due to rising energy prices. In the
United States, headline inflation was 3.2 percent
by April, pushed higher by energy prices up 19
percent and a weaker dollar (down by more-than
9 percent in nominal effective terms since June2010). Headline inflation was up yet morestrongly in other high-income countries,
including Australia, Canada, Korea and Sweden.

The rise in headline inflation in high-incomeOECD countries has had a limited impact on
inflationary expectations to date, and core
inflation has increased gradually to 1.9 percent
as of April 2011, from 1.1 percent in the yearearlier period (to 1.3 percent in the United Statesand 1.5 percent in the euro zone).
Headline inflation in developing countries has
accelerated recently to 6.9 percent by April
2011, from a 6 percent in April 2010, asinternational food and fuel prices stabilized
recently. Food inflation exceeded 9 percent by
February 2011 in developing countries.1 Medianheadline inflation for these countries was slightly
lower at 5.6 percent, reflecting the fact that
inflation momentum in some of the larger
middle-income countries, whose inflation rates
have larger weights in the overall index is close
to 6.9 percent (figure INFL.4). In developing
countries, rising food and fuel prices, and insome cases tightening manufacturing capacity
and lagging policy normalization, havecombined to push headline inflation higher. But,
most recently, monthly inflation rates have eased
in both high-income and developing countries.

Figure INFL.3 Core inflation in high-incomeOECD countries remains contained as inflationary expectations remained anchoredMedian, ch% (y/y)

8

25
20

Food

15

4

10
5

0

0

All items
Core inflation

Inflation momentum is strong. From a threemonth over three month perspective, the pace ofannualized inflation in both high-income anddeveloping countries has been accelerating until
just recently and exceeded year-over-year-5

Energy-10-4Jan-00 Sep-01 May-03 Jan-05 Sep-06 May-08 Jan-10-15

Source: OECD.

Figure INFL.5 Headline inflation pressures havepicked up since mid-2010 but are easing

Figure INFL.4 Inflation accelerates in most developing regions on higher food and energy prices

Headline inflation 3m/3m saar

16

Annual headline inflation, median

16
14
12

Middle East andNorth Africa

12

Sub Saharan Africa
South Asia

8

10

4

8

Europe andCentral Asia

642

Latin America andthe Caribbean

Sep-07

May-08Jan-090East Asia andPacific0-2
Jan-07Developing
High income

Sep-09

May-10-4-8
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09

Jan-11

Source: The World Bank.

Source: The World Bank.

67

Jul-10Global Economic Prospects June 2011: Subject Annex
measures. At the global level, the annualizedpace of monthly inflation was 5 percent (3m/3msaar) in the three months to April 2011, withprices rising at a 4.3 percent annualized rate inhigh-income countries and a 6.7 percent rate indeveloping countries (figure INFL.5). Although
this momentum measure of inflation is lower inhigh-income countries than in developing
countries, it has accelerated more quickly in high-income countries (up 4.7 percentage points
versus 1.8 percentage point). This stronger
acceleration likely reflects quicker pass-throughof higher international fuel prices in high-income
countries, and is observed despite the lower
weight of food and fuel in the CPI basket inthese economies (figure INFL.6 and figure
INFL.7a). More recently however momentum

has eased in developing countries, with a broadbased deceleration across income groups andregions. Among developing regions, the easingof inflationary pressures is most pronounced in
the East Asia & Pacific, and the Europe &Central Asia regions. The deceleration is lesswell established in South Asia and in Latin
America and the Caribbean, while monthly
inflation is rising in the Middle-East & North
Africa and Sub-Saharan Africa(figureINFL.7b).
In addition to the inflationary pressures comingfrom higher international commodity prices
capacity constraints in many middle-income
countries have added to price pressures. In
Brazil, headline inflation accelerated to 6.5
percent in April, while in China inflation was
more than 5.3 percent (y-o-y), up 2.2 percentage
points from a year earlier, as food inflation
spiked to over 10 percent. Recent decisions toallow domestic gasoline and diesel prices to rise
could push inflation as much as 0.5 percentage
points higher. In India, year-on-year inflation
continues to remain elevated and has surprised tothe upside in March and April 2011 (9 and 8.7
percent respectively) due to accelerating nonfood inflation and higher energy prices, and asurge in coal prices in April. There have been
sharp upward revisions for three consecutive
months, suggesting that actual inflation in Marchand April could be even higher.

Figure INFL.6 Weight of food in the CPI basket
Parts per 100

High income

SAS
MNA
ECA
EAP
0

10

20

30

40

50

Source: IMF.

In Thailand, core inflation surprised to the

Figure INFL.7a Headline inflation rates, ch%,year-on-year

Figure INFL.7b Headline inflation rates
Headline inflation rates, ch%, 3m/3m saar

Headline inflation rates, ch%, year-on-year
16

20

12

15

Jan 2009

Jan-09Jan-108

Jan 2010
Apr 2011 or latest

Apr 11 or latest

10

5

4
0

0
High-income East Asia & Europe &Pacific
Central Asia

Latin
America &Caribbean

Middle East South Asia Sub-Saharan& N. Africa
Africa-5
High-income

Source: The World Bank.

East Asia &Europe & Latin America Middle East & South Asia Sub-SaharanPacific
Central Asia & Caribbean
N. Africa
AfricaSource: The World Bank.

68

Global Economic Prospects June 2011: Subject Annex
upside in May as well, rising to 2.5 percent yearon-year, suggesting that higher energy and foodprices are starting to have second round effects,
while tighter labor markets are also putting
upward pressure on producer prices. In
Indonesia, annual headline inflation stood at 6.2
percent in April, before easing to 6 percent inMay, while core inflation rose to a 19-monthhigh of 4.6 percent in April and remained at thatlevel in May. While policy is being tightened in
all of these countries, both fiscal and monetary
policy remain accommodative, leading to higher
risks that headline CPI changes seep into core
inflation, given strong domestic demand andelevated capacity utilization rates (see Walsh,2011 for a discussion, suggesting that
commodity prices should not be excluded fromcore measures of inflation in developing
countries).

turn may increase pressure on wages, especiallyin the emerging economies, where labor markets
are tightening (figure INFL.7). If policy
tightening fails to bring inflationary expectations(figure INFL.8) down, we could see thebeginnings of an inflationary spiral.
Figure INFL.8 Expectations for inflation rates
twelve months forward are rising
Percent

8

Brazil40

Argentina

35

30

Mexico

4

25
20
15

USA

Chile

UK

0
Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12

Outlook
Prospects for inflation in developing countries
will vary depending on industrial capacity
utilization rates, exchange rate movements andthe policy stance. However, risks to inflation areto the upside, and inflation could overshoot theupper limits of central-bank targeted ranges in a
number of countries-- that show signs ofoverheating and where monetary and fiscal
policy tightening are behind the curve. Even if
the prices of internationally traded food and oil
stabilize in the second half of 2011, domestic
food and fuel prices are expected to continue torise in many developing countries, reflecting
delayed pass-through to local markets andincreased pressures from higher fuel prices fromthe costs of fertilizers and transportation. As
outlined in the main text, in the current
economic context it is entirely possible that bothfood and fuel prices rise further.

10
50

Source: Datastream, Banco central do Brasil.

Notes
1. For example, the weight of food in the CPI
basket is 40 points of 100 parts in SouthAsia, and over 30 in East Asia and Pacific(median value for Thailand, Malaysia, and
the Philippines) and MENA. Data for SubSaharan African countries is not available
but for example in Ghana the weight of foodin the CPI basket is 44, while in Coted’Ivoire it is 24.8. In comparison in highincome countries the median weight of foodin the CPI basket is 16 parts per 100 parts.

Headline CPI momentum suggests that inflation
will accelerate further in most developing
regions, in particular in South Asia, Sub SaharanAfrica, the Middles East and North Africa; andto a lesser degree in Latin America, Europe andCentral Asia and East Asia and the Pacific.
Moreover, high food and fuel prices are starting
to impact inflationary expectations, which in

69

Global Economic Prospects June 2011: Regional Annex

East Asia and the Pacificthe region where GDP had contracted in 2009.
Real GDP is estimated to have grown by 7.8 and7.2 percent respectively in these countries in2010, driven equally by domestic demand(supported by expansionary fiscal and monetary
policies) and external demand. In thePhilippines, a surge in consumer and business
optimism, in part due to the presidential
elections, and stronger and more robust growth
in worker remittances were additional factorsthat underpinned the country’s fastest growth inmore than three decades. Much of the region’s
rebound reflected the solid macroeconomic
foundations that existed before the crisis:
plentiful fiscal space, low external andgovernment debt, and strong balance sheets ofcompanies and commercial banks.

Recent developments
High frequency indicators suggest that growth in
the East Asia and Pacific region growth has
started moderating as most economies in theregion are operating at—or near full capacity,
and a gradual withdrawal of monetary and fiscal
stimulus combined with a moderation in growthof high-income countries will dampen growth
going forward. Real GDP growth of 8.3 percent
a year is anticipated over 2011-13 for East Asia
(rates of 8.5, 8.1, and 8.2 percent respectively).
This follows growth of an estimated 9.6 percent
in 2010. Excluding China, the rebound was evenmore pronounced, increasing from 1.5 percent in2009 to an estimated 6.8 percent in 2010; but
growth is expected to stabilize at slightly lower
rates of around 5.5 percent over 2011-2013.1
A strong recovery in GDP, production andtrade. The post-crisis rebound in 2010 was
faster than the recovery from previous crisis
episodes in East Asia, including after the 199798 Asian financial crisis (figure EAP.1). It wasalso broadly based, with five countries indeveloping East Asia growing by 7 or more
percent during 2010, including Thailand andMalaysia, the only middle-income countries in

The pace of recovery in GDP (which wasparticularly strong during 2010) is forecast to
slow over 2011-2013. This growth cycle has
been accentuated by the evolution of industrial
production activity, but with importantdifferences in the depth of post-crisis troughs
within the region, and the extent to which output
has recovered to pre-crisis levels or growthtrends (figure EAP.2). As of April 2011industrial production levels in the region stood

Figure EAP.1 The post-crisis rebound in 2010 was fasterthan the recovery from East Asian crisis

Figure EAP.2 China leading recovery in industrial production

East Asia crisis, 1997 = 1 and Global crisis, 2008 = 1

Percent, 3m/3m saar

1.6

1.5

80
GDP f ollowing the 1997-98 Asian f inancial crisis

60

GDP f ollowing the 2008-09 Global f inancial crisis
1.4

40

1.3

20
1.2

0
1.1

China
-20

1.0

EAP (excl China)
Thailand-40

0.9

Indonesia

0.8-60
1997/2008

1998/2009

1999/2010

2000/2011

2001/2012

2002/2013

2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01

Source: World Bank.

Source: World Bank.

71

Global Economic Prospects June 2011: Regional Annex
34.2 percent higher than the 2008-peak (definedas the maximum monthly industrial productionlevel attained during calendar 2008) (figure
EAP.3). Compared with the level of productionthat would have been observed in the absence ofa boom and bust cycle between 2005 and 2009,
the region’s production is now about 3 percent
above underlying trend levels (figure EAP.4).
Thailand represents an important exception tothis trend, as industrial production there has
struggled to catch up with underlying trend
growth due to structural impediments.

robust capital inflows. However, with the
exception of Indonesia, the real appreciation has
been more or less in line with real changes in the
Chinese Renminbi, hence the impact on external
competitiveness has been relatively limited.
As in the case of industrial production,commencing from the final quarter of 2010,
trade entered a second rebound phase. This
interval differs somewhat from the previous
rebound, in that recovery is being driven less bytemporary factors (stimulus, restocking etc.) andmore by stronger consumer demand (includingfrom high-income countries). Latest figuresindicate that, although economic growth might
be slowing somewhat, export growth rates were
nearly as strong as the exceptional paceexperienced in phase I of the recovery.

The regions’ good performance in production
has been supported by buoyant domestic demandin most developing countries, moderate recovery
in high-income consumer spending, andrestocking that started at the end of 2010. Even
though there is a lot of noise in the JanuaryFebruary data due to the Chinese Lunar New
Year, there are indications that growth isslowing, as Chinese retail sales softened in
February – largely on the back of weaker auto
sales as incentives were withdrawn. East Asia is
operating near full capacity, which means
industrial production growth is bound tomoderate to potential growth rates; while further
downside pressures may arise from monetary
tightening in countries where inflationarypressures are building, such as in China andIndonesia. Several countries (e.g. Indonesia,
Malaysia and Thailand), also experienced strong
currency appreciation as a result of rapid andChina’s export performance is to a large degree
shaped by high-income country import demand,
while the rest of developing East Asia’s exports
tends to respond to Chinese demand (figures
EAP.5 and EAP.6). The Japanese economy
remains a very important trade partner for thedeveloping East Asia region and the impact of
the Japanese earthquake/tsunami/nuclear crisis is
expected to cut into growth more sharply than
the 1995 Kobe disaster, as electricity disruption
and the pull-back in consumer spending that has
been associated with the first weeks of thecurrent post-crisis period will negatively impact
on Japan’s growth. Retail sales during March
were down 8.5 percent from a year ago,

Figure EAP.3 Industrial production has surpassed previous peaks

Figure EAP.4 But remains below trend in Thailand
Percent

Percent
50

40
30

15.0
EAP

10.0

China
Thailand

5.0

Indonesia

0.0

20

-5.0

10

-10.0

-15.0

0

-20.0
-10

-25.0

EAP
China
Thailand

-20

-30.0

-30

-35.0

Indonesia

2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07 2010M12 2011M05

2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07 2010M12 2011M05

Source: World Bank.

Source: World Bank.

72

Global Economic Prospects June 2011: Regional Annex
machinery and business equipment sales were
down 17 percent. For the car industry,
disruptions are expected to last until the end of
the second quarter, potentially reducing output
by one-half. So far, regional impacts have been
limited, with slower growth in the initial quarterof at most 0.5 percentage points for countries
with closest trade ties (Malaysia, Vietnam andThailand). As discussed in the main text and in
the industrial production annex, the impact of
this disaster could be substantial and potentiallylong(er) lasting.

economies are concerned, U.S. import growth
has recently tapered off, but fortunately, demandconditions in Europe have been improving (seetrade annex). Notwithstanding the global
recovery and demand for Chinese goods, theChinese trade balance declined rapidly from asurplus of $40 billion in January 2009 to deficitof about $2.1 billion in February 2011, but
recovered to a surplus of $22.6 billion in April
2011. With demand in high income countries
returning toward levels consistent with output
following the global crisis, the Chinese current
account surplus is expected to remain at much
lower levels than in the recent past (figure
EAP.7).

As far as demand in other high-income
Figure EAP.5 Chinese exports strongly correlated withhigh-income country import demand

Inflationary pressures building. Consumer
price inflation accelerated in East Asia during
the second half of 2010, due to a surge in foodand other commodity prices, robust domestic
demand and the lagged effects of a still loose(though tightening) monetary policy (figure
EAP.8). International food prices (seecommodities annex) have increased significantly
as have local prices of vegetables and otherproduce. For example, despite a drop ininternational rice prices, local rice prices haverisen in Indonesia and Lao PDR. Nonetheless,with international food prices forecast to ease
toward the second half of 2011 and into 2012,
food inflation should slow later in the forecast
period. But even with (food) inflation forecast to
slow, prices will remain high, negatively

Percent, 3m/3m saar
80

Chinese exports

High-income countries imports

60

40

20

0

-20

-40

-60
2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01

Source: World Bank.
Figure EAP.6 Chinese imports (mostly processing and/or consumption related) drives East Asia and thePacific (excl China) exports

Figure EAP.7 Chinese current account surplus to stabilize at lower levels as global imbalances subside

Percent, 3m/3m saar

Percent

100

Chinese imports

1280

EAP (excl China) exports

4.0
Chinese Current Account Balance (% of GDP)

10

60

3.0

Global output gap (RHS)

8

2.0

6

1.0

4

0.0

2

-1.0

0

-2.0

-60

-2

-3.0

-80

-4

40
20
0
-20
-40

2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01

-4.0
1990

1992 1994

1996

1998

Source: World Bank.

Source: World Bank.

73

2000 2002

2004

2006 2008

2010

2012

Global Economic Prospects June 2011: Regional Annex
impacting on the poor—because of food’s
substantial weighting in the region’s consumer
basket.

billion in 2010, with the bulk of the inflow
destined for China (table EAP.1). Net FDI
inflows to China increased by 62 percent in2010, with the surge driven by buoyant growthprospects, strong investor sentiment and large
interest differentials between China and highincome countries. According to revised estimatesfrom China’s State Administration of Foreign
Exchange (SAFE), FDI inflows into China
rebounded strongly from $114 billion in 2009 to$185 billion in 2010. The largest increase was in
the financial sector (300 percent) followed by thereal estate sector (78 percent), reaching $12
billion and $21 billion, respectively.
Manufacturing remains the main recipient of
FDI inflows into China. The sector received $70
billion in 2010, 50 percent more than in 2009.
With the revisions, China now accounts for 30
percent of total FDI inflows to developing
countries compared with one-fourth previously.
Aggregate portfolio flows to the region remained
relatively stable between 2009 and 2010, but
private debt flows more-than doubled from $58
billion in 2009 to $116 billion in 2010, partly
reflecting private borrowers in the real-estate
sector turning to external lenders after been shutout of domestic credit markets as the authorities
tightened domestic credit conditions.

Although non-food inflation has remainedmoderate, there is a risk in some countries that if
the current loose monetary policy setting
continues for an extended period, inflationarypressures from food may instigate a wage-pricespiral, which over time could push up non-foodinflation, hamper competitiveness and slow
growth.
Moderate improvement in fiscal balances.
Historically, counter-cyclical fiscal policy
management has been well executed, with fiscal
balances tending to moderate the business cycle(figure EAP.9). In the current context, however,fiscal balances in the region improved by only
0.2 percent of GDP during 2010. Discretionary
expenditures added to boost demand during thecrisis have by and large not been withdrawn, due
to concerns about the strength of the global
recovery, and adherence to earlier spending
commitments. As a result, almost all of the small
improvement in fiscal balances has been cyclicaland related to improved revenues, while roughestimates suggest that structural fiscal balances
have actually deteriorated during 2010.
Sharp rebound in foreign direct investment.
Net foreign direct investment (FDI) inflows toEast Asia increased by more-than 60 percent
from $138 billion in 2009 to an estimated $225
Figure EAP.8 Food inflation exerting upward pressure
on total inflation

Pace of exchange rate appreciation has
slowed. Despite exchange rate market
intervention, and measures to deter inflows andFigure EAP.9 Counter-cyclical fiscal management has
been well executed, but more tightening might have been
needed in 2010

Percent (y-o-y)20

15Percent

EAP: Fiscal balance (% of GDP)

1.0

EAP: Food

6

EAP: Output gap (RHS)

EAP: Non-Food

0.55

EAP: Total

0.0

4

-0.5

3

-1.0

2

-1.5

1

-2.0

0

-2.5

-1

-3.0

-2

-3.5

-3

10

5

0

-5

Source: World Bank.

-4

-4.0
1990

2005M01 2005M10 2006M07 2007M04 2008M01 2008M10 2009M07 2010M04 2011M01

1992

1994

1996

Source: World Bank.

74

1998

2000

2002

2004

2006

2008

2010

Global Economic Prospects June 2011: Regional Annex
encourage capital outflows, the region’s
currencies appreciated sharply during 2010. As
capital inflows have slowed somewhat since latein that year (see Finance Annex), the pace of
nominal appreciation for the recipients of thelargest capital inflows has also subsided.
However, with inflation on the rise, realappreciation pressures remain, albeit also
subsiding somewhat. Thus far, currency
appreciation has not hampered the recovery, as
the region continues to benefit from strong
productivity growth.

global financial and economic crisis normalizes.
The projected slowing in growth mainly reflects
economies operating at or near full capacity andan expected gradual tightening of monetary andfiscal policies over the coming 18-24 months,
which should temporarily slow growth toslightly below potential, before GDP
reaccelerates marginally again towards potential
growth by 2013.
The direct contribution of net trade to overall
GDP growth is anticipated to be only marginally
positive over the forecast period – a sharp
turnaround from negative 4.1 percent in 2009,
but significantly smaller than the 2.6 percent net
trade contribution observed over the 2005 –2008 boom period. These earlier net trade
benefits were largely associated withunsustainable global excess demand, particularly
in high income countries. As global economic
activity normalizes and global disequilibria
unwind, the net trade contribution to regional
growth is forecast to be smaller going forward.

Medium-term outlook
Growth in the East Asia and Pacific region is
projected to remain strong, with GDP gains
easing from 9.6 percent in 2010 to 8.5 and 8.1
percent in 2011 and 2012 respectively, before
increasing somewhat to 8.2 percent by 2013(table EAP.2). The region has benefitted fromthe global economic recovery and the baseline
forecast provides for further benefits –particularly as activity in high-income countries
that were severely affected by the 2008-09

Aggressive policy stimulus underpinned private

Table EAP.1 Net capital flows to East Asia and the Pacific$ billions
2003
Current account balance
69.8
as % of GDP
3.1
Financial flows:
Net private and official inflows
76.4
Net private inflows (equity+private debt) 83.6..Net private inflows (% GDP)
3.7
Net equity inflows
69.3..Net FDI inflows
56.8..Net portfolio equity inflows
12.5
Net debt flows
7.1..Official creditors-7.2....World Bank
-1.5....IMF-0.5....Other official-5.2..Private creditors
14.3....Net M-L term debt flows-9.8......Bonds
1.8......Banks-8.5......Other private-3.1....Net short-term debt flows
24.1
Balancing item /a-6.4
Change in reserves (- = increase)-139.8
Memorandum items
Workers' remittances
32.3

2004
87.9
3.3

2005
174.8
5.8

2006
297.5
8.2

2007
426.3
9.3

2008
467.2
8.1

2009
360.8
5.8

2010e
358.3
4.8

127.0
132.2
5.0
89.7
70.4
19.3
37.3
-5.2
-1.9
-1.6
-1.7
42.5
9.1
9.6
1.7
-2.1
33.4
22.2
-237.1

209.0
212.3
7.0
168.1
142.4
25.7
40.9
-3.2
-0.6
-1.6
-1.0
44.2
9.3
10.1
1.6
-2.3
34.8
-166.1-217.7

238.4
247.7
6.8
207.9
151.7
56.2
30.6
-9.3
-0.4
-8.5
-0.4
39.9
14.8
3.9
12.2
-1.3
25.1
-240.8-295.1

303.9
307.8
6.7
233.9
198.8
35.1
70.0
-3.8
-0.3
0.0
-3.5
73.9
18.5
0.7
18.1
-0.3
55.4
-189.2-541.0

210.5
211.6
3.6
206.6
213.9
-7.3
3.9
-1.1
1.2
0.0
-2.3
5.0
16.2
0.2
18.3
-2.3
-11.2
-245.3-432.4

226.5
222.8
3.6
168.2
138.4
29.9
58.3
3.7
2.2
0.1
1.4
54.5
-0.8
8.4
-8.7
-0.5
55.4
-52.5
-534.8

378.2
374.5
5.0
262.2
225.2
37.0
116.0
3.7
1.8
0.1
1.8
112.3
22.9
16.4
6.5
0.0
89.4
-397.0-339.5

40.0

50.3

57.4

71.0

85.4

86.2

92.5

Source: World Bank.

75

2011f
320.2
3.6

2012f
358.9
3.6

2013f
401.1
3.5

371.1
4.2
282.1
255.1
27.0

383.7
3.8
300.7
267.7
33.0

413.5
3.6
342.5
305.5
37.0

89.0

83.0

71.0

98.8

106.7

Global Economic Prospects June 2011: Regional Annex
consumption, which advanced by an estimated
7.1 percent in 2010. With policy expected to
become a bit tighter, household consumption
growth is likely to remain at around 7 percent in2011, before recovering to around 8 percent
towards the end of the forecast period. Similarly
government spending contribution to growth will
wane somewhat, as policy stimuli arewithdrawn, while private investment spending
eases in response to slower aggregate demand.

backed stimulus package that boosted
investment.2 However, growth momentum
slowed throughout 2010, with year-on-year
growth falling from 11.9 percent in the firstquarter to 9.6 percent in the third quarter, before
picking up somewhat to initial estimates of 9.7
percent in the first quarter of 2011. The
contribution of net external trade to GDP growth
eased in the fourth quarter. Export volumes
outpaced import volumes substantially in thefirst three quarters of 2010, but as domestic
demand accelerated, import volumes have risen,which along with high oil and other imported
commodity prices has reduced the Chinese tradebalance. The slowing GDP growth trend is
expected to continue, with growth viewed toChina’s real GDP expanded by 10.3 percent in2010, up from 9.1 percent in 2009 (table EAP.3).
Stronger growth was driven by rising activity inmost segments of the economy, in part as a resultof loose credit conditions and a governmentTable EAP.2 East Asia and the Pacific forecast summary(annual percent change unless indicated otherwise)
98-07a2008

GDP at market prices (2005 US$) b
GDP per capita (units in US$)PPP GDP c
Private consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

7.9
7.0
7.8
5.9
7.9
9.3
13.6
11.8
1.4
4.4
5.2
-2.1

8.5
7.6
8.4
7.5
8.6
9.1
7.1
4.6
1.6
8.1
7.8
-0.5

Memo items: GDP
East Asia excluding China
China
Indonesia
Thailand

4.6
9.1
4.1
4.5

4.7
9.6
6.0
2.5

2009

Est.
2010

Forecast2011 2012

2013

7.4
6.6
7.4
7.3
6.6
19.2
-10.1
-1.8
-4.1
5.8
2.0
-3.1

9.6
8.7
9.6
7.1
7.1
11.9
21.9
18.8
2.2
4.8
4.6
-2.8

8.5
7.7
8.5
7.0
6.8
11.0
11.4
12.6
0.4
3.6
5.5
-1.9

8.1
7.3
8.0
7.3
6.7
9.2
10.5
10.9
0.6
3.6
4.5
-1.3

8.2
7.4
8.5
7.7
6.6
9.9
12.0
13.3
0.3
3.5
4.2
-0.9

1.5
9.1
4.6
-2.3

6.8
10.3
6.1
7.8

5.3
9.3
6.3
3.7

5.6
8.7
6.5
4.2

5.7
8.8
6.5
4.3

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Estimate.
f. Forecast.
Source: World Bank.

76

Global Economic Prospects June 2011: Regional Annex
slow to 9.3 percent in 2011, as stimulus spendingcomes to an end and policy tightening leads to a
slowdown in growth in property investment.
And as strong growth acceleration in highincome countries moderates, it will dampen
China’s export growth. But consumption should

be buoyed by rising employment and wages,
even as higher (food) inflation will suppress
purchasing power to a degree. Growth of 8.7 and
8.8 percent is anticipated for 2012 and 2013
respectively. Such slower growth (whencompared to the average 11.2 percent over 2005-

Table EAP.3 East Asia and the Pacific country forecasts(annual percent change unless indicated otherwise)
98-07 aCambodia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
China
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Fiji
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Indonesia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Lao PDR
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Malaysia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mongolia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Papua New Guinea
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Philippines
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Thailand
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Vanuatu
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Vietnam
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

2008

2009

Est.
2010

Forecast
2011
2012

2013

8.8
-4.2

6.7
-10.2

-1.9
-8.3

6.7
-11.0

6.5
-11.8

6.5
-10.9

6.6
-11.0

9.1
4.4

9.6
9.6

9.1
6.0

10.3
5.1

9.3
3.6

8.7
3.8

8.8
3.8

2.0
-6.3

0.2
-18.3

-3.0
-8.4

0.6
-6.8

1.3
-7.9

0.7
-7.7

1.2
-8.2

4.1
3.1

6.0
0.0

4.6
1.9

6.1
0.9

6.3
1.4

6.5
0.5

6.5
0.1

6.4
-10.6

7.3
-18.7

6.4
-13.5

8.4
-8.6

8.6
-9.4

7.6
-10.6

7.3
-11.1

5.1
12.5

4.7
17.5

-1.7
16.5

7.2
13.6

4.8
14.2

5.0
13.5

5.1
13.9

6.4
-2.9

8.9
-12.9

-1.3
-9.0

6.1
-15.2

10.3
-15.1

7.6
-13.6

22.9
1.9

1.7
3.3

6.7
8.8

4.5
-8.5

7.6
-6.5

5.8
0.0

5.1
-2.3

5.3
-2.7

4.4
0.7

3.7
2.2

1.1
5.5

7.3
5.0

5.0
4.2

5.4
3.2

5.5
1.7

4.5
4.7

2.5
0.8

-2.3
8.3

7.8
4.8

3.7
3.6

4.2
3.2

4.3
3.6

2.5
-9.3

6.3
-9.0

4.0
-8.1

4.5
-7.3

4.1
-6.4

4.2
-6.6

4.3
-7.1

6.6
-1.4

6.3
-11.9

5.3
-6.3

6.8
-4.0

6.0
-2.7

6.8
-3.7

7.2
-3.9

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly
differ at any given moment in time.
Samoa; Tuvalu; Kiribati; Korea, Democratic People's Republic; Marshall Islands; Micronesia,
Federate States; Mongolia: Myanmar; N. Mariana Islands; Palau; Solomon Islands; Timor-Leste;
and Tonga are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Source: World Bank.

77

Global Economic Prospects June 2011: Regional Annex
2010), is largely due to weaker contributions
from net exports (when compared to the boom
period) and slower investment growth.

6.1 percent in the year as a whole and by 6.9
percent year-on-year in the fourth quarter, thefastest quarterly growth pace in six years. Private
consumption will remain a major driving force
over the forecast period, while investment
strength is set to be supported by the shift ingovernment spending towards capital
expenditures and the real impact of the recent
FDI upsurge.

Consumer price inflation in China reached 5.4
percent (y-o-y) in March 2011, before declining
marginally to 5.3 percent in April. About twothirds of this increase was attributable to foodprices, which have been driven by problematicweather domestically and by hikes ininternational food prices. Going forward,
upstream price pressures may continue to build
because of the hikes in oil and industrial
commodity prices. As discussed in the
Commodity Annex, international food prices are
forecast to moderate. The baseline forecast
therefore incorporates a moderation in food priceinflation in the coming 12 months, which should
offset the rise in non-food inflation, resulting ina slowdown in headline CPI inflation.

Quarterly growth in the Thai economy
rebounded strongly in the second half of 2010,
helping to register growth of 7.8 percent in theyear. But with the rebound in the past, the paceof growth is expected to slow to a more subdued
3.7 percent in 2011. Although domestic politicaluncertainty will continue it is not expected togreatly influence the growth outlook. Japanesemultinational corporations plays a significant
role in the Thai economy, and the impact of theJapanese earthquake on auto and electrical andelectronics supply chains (these two sectors
account for over 40 percent of Thai exports)
could hamper Thai exports and overall economic
performance. Rising commodity prices –particularly those of agricultural produce - haveraised export earnings, while the rising farmincomes have supported growth in domestic
demand. But fuel (diesel) and fertilizer costs
have also risen sharply, thereby eroding theincome gains, while rising costs have put upward
pressure on inflation. In order to accelerate
growth to structurally higher levels, Thailand

Indonesian inflation also started to rise in mid2010, as consumer prices reflected food supply
shocks and an accommodating policy stance(figure EAP.10). Inflation in domestic grain
prices, primarily rice, reached almost 30 percent
year-on-year in December 2010. Headline
inflation moved up to 7 percent while the rate ofincrease of prices in a "poverty basket" of goods
consumed by the poor rose to 13 percent. With
the onset of the harvest season and imports ofrice by the State Logistics Agency, domestic riceand food prices have declined. Bank Indonesia
has also embarked on a process of normalizing
rates, following earlier increases in reserve
requirements, and the rupiah has continued toappreciate. While headline inflation has comedown, core inflation has been increasing
gradually. Inflation is anticipated to rise to an
average of 6.3 percent in 2011, slightly above
Bank Indonesia’s 4-6 percent target range.

Figure EAP.10 Food price increases have contributed
to rising inflation in Indonesia
Percent (y-o-y)25

20Indonesia: Food
Indonesia: Non-Food
Indonesia: Total

15

10

Indonesia was less severely affected by the 2008
-09 global recession than many East Asian
countries largely because of a relatively limited
exposure to external trade shocks (plus thecommodity focus of the export mix) along withstrong initial conditions and supportive monetaryand fiscal policy responses. Economic growth
accelerated in 2010, with real GDP expanding by

5

0

-5

-10
2001M01

2002M09

2004M05

2006M01

Source: ILO, World Bank.

78

2007M09

2009M05

2011M01

Global Economic Prospects June 2011: Regional Annex
will have to raise the share of fixed investment
in GDP, and improve education outcomes.

supported by strong FDI, and a strong revival inexports as global demand recovered. Looking
forward, GDP growth is forecast to average 6.7
percent over 2011-2013. But despite theencouraging growth outlook, policymakers will
face stiff challenges in the near term, as they willneed to ensure that the recovery remains on track
as expansionary fiscal measures are withdrawn
amidst building inflationary pressures. The
consumer price index has risen by more than 10
percent year-on-year in the past four months,
with the most recent (February, 2011) figure at
12.3 percent. Although the Central Bank (StateBank of Vietnam) tightened monetary policy in
February 2011, increases in subsidized retailprices for fuel and electricity are likely tocontinue to put upward pressure on inflation, as
will the recent devaluation of the dong.

Economic growth in Malaysia is expected toremain strong and on a sustainable growth pathin the forecast period. After real GDP gains of
7.2 percent in 2010, growth is expected to comein around 5 percent per annum over 2011-2013.
Fiscal policy played a key role in the post-crisis
recovery, but GDP growth sputtered in the third
quarter of 2010 as domestic demand growthslowed – largely due to intensified fiscal
consolidation efforts, which dampened public
consumption. Fixed investment spending alsocame under pressure, reflecting public
expenditure cutbacks as well as uncertainties
about economic prospects. Private consumption,
however, remained strong, underpinned by avibrant job market, high commodity prices andconsumer lending. Although inflationarypressures have been rising in Malaysia, CPI
gains remain moderate, and monetary policy
continues to renormalize. Continued current
account surpluses and a positive interest rate
differential with the United States over theforecast period should support the ringgit.

Growth in Cambodia is expected to remainstrong, as the country’s exports benefit from
European Union preferential tariffs, while
consumption picks up and investment benefits
from the continued rebound in FDI. Growth inFiji, which has become increasingly dependent
on tourism, has been disappointingly slow overthe last four years, and the government needs tomove ahead with several structural reforms toaccelerate growth. In Lao PDR, real growth isforecast to remain robust over the forecast
period, with both natural resources (hydropowerand sustained mining extraction) andmanufacturing sectors to drive growth over theforecast period. Papua New Guineas’ strong
economic performance since 2007 is forecast tocontinue, albeit at slower rates than the estimated
7.6 percent in 2010 over the forecast period withgrowth averaging 5.4 percent over 2011-2013,
with growth benefitting from resurgent minerals
production and investment in new projects.

The Philippine economy rebounded sharply in2010, as GDP expanded by 7.3 percent - thefastest pace since the mid-1970s, with bothindustry and services recording strong growth.
The pace of economic expansion is expected toslow to 5.0 percent in 2011, as global growthmoderates, and to average 5.4 percent over 2012
and 2013. Growth will benefit from increased
remittances from Filipinos working overseas
which will support private consumption. Despite
the remarkable growth turnaround, domestic
unemployment remains structurally high, andthere have been some (though inadequate) trickle-down benefits to the poor, with the depth ofpoverty and income distributions improving
between 2006 and 2009.

Risks
Despite a generally optimistic assessment for
East Asia’s economic prospects, and though theregion’s improved immune system has passed
the test during the global financial crisis, there
are still a number of risks that have the potential
to derail the growth outlook.

After growing 5.3 percent in 2009, Vietnam’s
economy expanded 6.8 percent in 2010—thefastest pace in 3 years. The rapid recovery has
been bolstered by robust domestic demand,
which benefitted from a healthy increase inremittances, higher levels of investment

79

Global Economic Prospects June 2011: Regional Annex
Developments in the Middle East havecontributed to higher oil prices and still have thepotential of further disruption on commodity
price volatility than is currently appreciated in
the baseline. And given the links between energy
and food prices, these developments in the
Middle East could have implications that extend
well beyond energy.

countries, most notably in China. This iscontributing to social tensions and those left
behind represent a significant waste of humanpotential. Policies to broaden access to higher
levels of education, facilitate labor mobility, andconnect leading and lagging regions will serve tosimultaneously stem rising inequality andaccelerate the pace of economic development
and poverty reduction.

In several countries rising food and fuel prices
and the pass through to inflation remains a
concern – particularly if these increases spillover to other sectors. Already, inflation is now
above central bank targets and/or official
projections in China and Indonesia, while it has
surged to double digits in Vietnam. Althoughmonetary stimulus is gradually been withdrawn
in the region, there is a risk that inflationarypressures may be building faster than provided
for in the baseline.

Over the longer term the region faces
fundamental challenges related to environmental
sustainability, energy security and climatechange. As a result of fast economic growth andrapid urbanization over a prolonged period oftime, energy consumption has more than tripledover the past three decades and is likely to
double in the next 20 years. As a result, theregion is home to some of the world’s mostpolluted cities. To sustain growth, policy willneed to actively encourage a shift towards theusage of clean(er) energy by increasing energy
efficiency, low-carbon technologies in power
generation and the building of low-carbon cities.

As authorities in the region tighten monetary
policy and interest rates rise, many currencies
will continue to experience pressure forappreciation. And still strong capital inflows(albeit lower than recent highs) in response tohigher interest rate differentials could lead toexcess credit expansion, complicating the task of
combating inflationary pressures.

Notes:The region’s public finances have emerged fromthe global downturn in relatively good shape.
But the strong rebound in growth and the rapid
closing of output gaps to the extent that domestic
demand surpasses potential output in many
countries is putting additional stress on monetary
authorities in combating inflationary pressures.
Furthermore, an over-reliance on the region’scentral banks to rein-in inflation is likely to
attract even more (potentially destabilizing)
capital inflows. A better balance between
monetary and fiscal policy tightening will not
only be more effective in preventing overheatingof some economies, but will also be lessdisruptive to economic activity in tradable
sectors.
Among the longer term risks, (see March 2011
East Asia and Pacific Update for a more detailed
discussion), inequality is on the rise in several

80

1

For a more detailed discussion and acomplete overview of regional and country
developments, see ―Securing the present,
shaping the future‖, East Asia and Pacific
Economic Update 2011, Volume 1. The
World Bank, March 2011.

2

China is discussed in more detail in the
China Quarterly Update—see ―Quarterly
Update‖ The World Bank, April 2011.

Global Economic Prospects June 2011: RegionalAnnex

Europe and Central Asia
GDP growth in developing Europe and Central
Asia1 rebounded to an estimated 5.2 percent in2010, following a 6.5 percent contraction in2009 (table ECA.1 and figure ECA.1). Limited
credit growth, the deleveraging of householdsector balance sheets and continued industrial
sector restructuring following the easy-credit
excesses of the boom period are expected tocontinue weighing on GDP. Because of that,
output is projected to expand at a relatively
subdued (by developing countries’ standards)
growth rate of 4.7 percent in 2011 and averaging
4.5 percent during 2012 and 2013. These
aggregate figures hide significant variation
across countries within the region, with thosemost affected during the above-average credit
growth period performing least well, while
resource-rich economies are benefitting fromhigh commodity prices.

Figure ECA.1 A deep recession followed by a relatively modest recovery
Yearly percent GDP Growth (in volume terms)
10.0

8.0

6.0

4.0

2.0

0.0

-2.0
Europe and Central Asia
-4.0

High Income Countries
Developing Countries

-6.0

-8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: World Bank.

Table ECA.1 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)
GDP at market prices (2005 US$)GDP per capita (units in US$)PPP GDP c
Private consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

bMemo items: GDP
Transition countries eCentral and Eastern Europe f
Commonwealth of Independent States g
RussiaTurkeyRomania

98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

5.4
5.4
5.6
6.3
2.5
8.8
7.2
10.2
-0.3
2.6
11.2
-2.1

4.0
3.9
4.5
6.6
3.2
6.6
3.1
8.7
-2.0
0.6
12.4
1.7

-6.4
-6.5
-6.6
-5.7
1.8
-16.7
-7.3
-24.3
6.4
0.7
3.5
-5.4

5.2
5.2
5.0
3.9
1.1
7.6
9.5
9.2
0.4
0.9
7.8
-3.2

4.7
4.7
4.5
4.9
2.8
9.5
6.6
9.2
-0.5
-0.1
10.9
-0.5

4.4
4.3
4.5
4.3
2.6
8.4
5.9
7.3
-0.3
-1.8
5.8
-0.2

4.6
4.5
4.5
4.1
2.1
8.1
6.3
6.9
0.0
-1.4
6.4
-0.4

6.2
4.7
6.5
6.3
3.7
4.3

5.3
6.1
5.2
5.2
0.7
7.1

-7.0
-7.1
-7.0
-7.8
-4.8
-7.1

3.8
0.0
4.5
4.0
8.9
-1.2

4.2
2.4
4.5
4.4
6.1
1.6

4.1
3.8
4.2
4.0
5.1
3.7

4.3
4.0
4.3
4.1
5.3
4.0

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Transition countries: f + g below.
f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo,
Lithuania, Macedonia, FYR, Montenegro, Romania, Serbia.
g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz
Republic, Moldovia, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.
h. Estimate.
i. Forecast.

Source: World Bank.

81

2012

2013

Global Economic Prospects June 2011: RegionalAnnex
increase in Lithuania for the 12 months ending
March 2011 to a 5.3 percent contraction in
Kazakhstan (for the 12 months ending April2011).

Recent developments
The recession in Europe and Central Asia wasmuch deeper than elsewhere in the developingworld, because substantial trade and financial
market linkages with high-income Europe.
Overall, regional industrial production, which
had been growing at a 6.2 percent pace in thefour years before the crash, fell 10 percent in2009–more than three times as much as in otherdeveloping regions. Partly as a result of this,
output only regained pre-crisis levels at the endof 2010, versus mid-2009 for the rest of thedeveloping world.

Much of the initial impetus for recovery inEurope and Central Asia reflected the region’s
strong export performance, that saw realmerchandise exports expanding at a 25 percent
annualized pace during the final three months of2010. Lithuania and Romania, exporters of
manufactured goods to the EU market, recorded
some of the fastest growth rates (a more than 40
percent increase during the final 3 months of2010), while economies in the Southern
Caucasus and Central Asia sub-region, such as
Armenia and Uzbekistan, reported the slowest
export growth rates (figure ECA.3).

As of the first quarter of 2011, industrial
production in the region was expanding at a 9.3
percent annualized pace. If sustained, such an
expansion should begin to close the still large 20
percent gap between current activity levels andthose that might have been observed if the boom
and bust not occurred. Progress at the subregional level has been mixed, with Russian(which represents over 50 percent of the region’s
total industrial product) growth of 8.3 percent
during 2010 underperforming the regional
aggregate, and well below the impressive
performance of Turkey, up 13.2 percent in 2010
(figure ECA.2). As a whole, seasonally adjusted
industrial production in the region grew almost
8.0 percent, ranging from an over 19 percent

The acceleration in regional trade reflects the
Figure ECA.3 Regional exports outpaced otherdeveloping countries, reflecting growing market
share in high-income and Chinese markets
Exports index, in constant USD, seasonally adjusted (2008:06=100)
130

120

110

100

90

Developing Countries
Europe and Central Asia

80

Figure ECA.2 Only by end-2010 industrial production regained pre-crisis activity levels and remains well below earlier trends

High Income Countries
World

70

60

2008M06

2008M09

2008M12

2009M032009M06

2009M09

2009M12

2010M03

2010M06

2010M09

Industrial production index, in constant USD, seasonally adjusted (2008:06=100)
120

Share of total Europe & Central Asia exports to specific markets
50

115
45

110

2005
40

Jan-Nov 2010

105
35

100
30

95
25

90
20

Developing countries (ex. ECA)

85

15Europe and Central Asia
80

Romania

10

Russia75

5Turkey70

2008M06

2008M09

2008M12

2009M032009M06

2009M09

2009M12

2010M03

2010M06

2010M090

2010M12EU

Source: World Bank

Sources: World Bank.

-of which, to Germany

Source: World Bank, IMF.

82

China

2010M12Global Economic Prospects June 2011: RegionalAnnex
global recovery, but also the increased trade ties
of several countries in the region towards fastergrowing economies inside and outside theregion. Between 2005 and 2010, the share of theexports of countries going to the Commonwealthof Independent States2 (CIS) and Russia wasbroadly stable, while shares going to Turkey, theEU (notably, Germany) and China increased
significantly (by more than 55 percent in thecase of China: figure ECA.3).3

Despite the depth of the recession and themassive disruption to the construction industry
and still large industrial sectors of the regional
economy, unemployment rose relatively little
from 7 percent in 2007 to a peak of 9.3 percent
in 2009 and has fallen relatively rapidly, coming
in at 8.6 percent at the end of 2010, a
nevertheless still elevated level that makes it aongoing cause for concern. The regional
aggregate is significantly influenced bydevelopments in Russia, Turkey and Ukraine(figure ECA.5), which represent two thirds ofthe region’s total population. Unemployment inthese countries rose by 2.6 percentage points
between 2008 and 2009, before falling by 1.5
percentage points between 2009 and 2010. In
the remaining countries of the region
unemployment averages 15.6 percent of thelabour force (ranging from close to full formal
employment in places like Belarus andTajikistan4 to as much as 45 percent
unemployment in Bosnia and Herzegovina).
Developments in these countries have beenequally varied, but there not only the average
unemployment rate was considerably higher
previous to the crisis, it actually rose somewhat
during 2010.

This overall pattern has particular sub-regional
dimensions. The EU is a more important trading
partner for the western CIS, the Southern
Caucasus and countries like Albania, Bosnia andHerzegovina, FYR Macedonia, Kosovo,Montenegro and Serbia, while China is arelatively more relevant trade partner forcountries in Central Asia (albeit the EU still
remains, on aggregate, the largest trade partnerof this sub-region).
The combination of growing exports volumes
and rising commodity prices, especially oil, has
contributed to a large fall in the region’s trade
deficit, from $3.6 billion at end 2010 to $0.7
billion in early 2011. Higher oil prices werereflected in a sharp increase in the trade surplusof oil exporters, from $10 billion in August 2010
to $14 in December, and a deterioration among
oil importers, from a $-13 to $-16 billion trade
deficit over the same period (figure ECA.4).

As observed elsewhere (see main text and
Financial annex), private capital inflows into
Europe and Central Asia, which were strong inthe second and third quarters of 2010 eased in
the fourth quarter of that year and into 2011 (forFigure ECA.4 Rising commodity prices improve
oil exporter’s trade balances

Figure ECA.5 Unemployment down
Umployment, percent

3 month moving average of trade balance, billions of $
25
20

18

Oil importers
16

Oil exporters

Romania
RussiaTurkey

15
14

10
12

5

10

0
-5

8

-10
6

-15
4

-20
2

-25
2000M01

M6 2008 M8 2008 M10 2008 M12 2008 M2 2009 M4 2009 M6 2009 M8 2009 M10 2009 M12 2009 M2 2010 M4 2010 M6 2010 M8 2010 M10 2010 M12 2010 M2 2011

2002M01

2004M01

2006M01

2008M01

2010M01

Source: World Bank

Sources: World Bank.

Sources: IMF.

83

Global Economic Prospects June 2011: RegionalAnnex
the year as a whole they were still up 88 percent,table ECA.3). The decline in portfolio flows wasmost evident in Turkey, and roughly coincidedwith the authorities’ decision to lower interest
rates in an effort to deter capital inflows being
attracted by high-interest rate differentials, while
restricting credit growth by simultaneously
raising reserve requirements. Russia experienced
significant outflows, despite high and risingenergy prices (figure ECA.6). FDI flows
increased the most in Ukraine, reflecting therecapitalization of banks, while they declined
more in Kazakhstan and Romania. Significant
improvements will likely be delayed until theregional recovery matures further and until there
are substantial improvements in the region’s
investment climate.5

prices fades (figure ECA.7). However, the recent
rise in oil prices is likely to yield a second
acceleration, which may be exacerbated byplanned increases in regulated prices in Belarus
and Ukraine (and, in the case of Belarus, by adevaluation of the currency).
Remittances are both an important source of
foreign currency for several countries in theregion and an important source of income forhouseholds, and therefore an important
determinant of domestic demand. Remittances
are around 10 percent of GDP for countries like
Armenia and Bosnia and Herzegovina, andbetween 18 and 35 percent of GDP for Albania,
the Kyrgyz Republic, Moldova and Tajikistan.
After falling by almost a quarter between 2008
and 2009, they rose by a meager 1.3 percent in2010. Looking forward, high commodity prices
and stronger growth in migration destination
countries are expected to contribute to a 7.5
percent increase in remittances in 2011 and a
9.4 percent increase in 2012 (table ECA.2).

Rising food prices following the extreme
drought in the summer of 2010 contributed to a
pickup in inflation in the region during 2010.6
Food prices rose at a 12 percent annualized pacein the three months ending September 2010,
which contributed, with a lag, to an accelerationin overall inflation to a 7.6 percent annualized
rate in the fourth quarter of the year. Year-overyear, all-goods inflation picked up from 6.3
percent in June 2010, to 7.6 percent in the fourth
quarter of the year. Inflation now exceeds 10
percent in almost forty percent of the countries
in the region, but it has been easing as the
inflationary impact of the 2010 higher foodFiscal and monetary policy
Monetary authorities in the region have
responded to the uptick in inflation by tightening
monetary policy via both higher interest rates(Belarus, Russia, three times in the case of thelater, and four times already in the case of theformer) and increased reserve requirement(Turkey). Despite rising policy rates, foreign

Figure ECA.6 Hot money flows easing

Figure ECA.7 Inflationary impulse from foodprices appears to be easing

Net foreign portfolio investment flows, % of GDP
5.0

Rate of inflation
18

4.0

Turkey3.0

RussiaAll 3m/3m saar
All Year-over-year

16

Food y-o-y

2.0

14

1.0

12

0.0

10

-1.0

Food 3m/3m saar

8

-2.0

6

-3.0
4

-4.0
2

-5.0
2007 Q1

2007 Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1e0

2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01

Source: World Bank, CBR.

Source: World Bank.

84

Global Economic Prospects June 2011: RegionalAnnex
Table ECA.2 Workers’ remittances, compensation of employees, and migrant transfers, credit (US$ million)

Workers' remittances, compensation of employees, and migrant transfers, credit (US$ million)
All developing countries
Europe and Central Asia
% of developing countries

2003
137,500
11,5978.4

2004
159,258
15,99810.0

2005
191,779
23,262
12.1

2008324,972
45,832
14.1

2009
307,569
35,43311.5

2010p324,71435,87911.0

2011f
348,576
38,68111.1

2012f
374,501
42,308
11.3

20.4%
45.4%

2006
2007
226,297 278,181
28,39739,33212.5
14.1
Growth (%)
18.0%
22.9%
22.1%
38.5%

All developing countries
Europe and Central Asia

23.9%
8.2%

15.8%
37.9%

16.8%
16.5%

-5.4%
-22.7%

5.6%
1.3%

7.3%
7.8%

7.4%
9.4%

LDCs (UN-classification)
Fragile States
Small States
Source: World Bank

13.9%

12.9%
26.5%
12.6%

11.0%
8.4%
-1.3%

18.5%
8.2%
22.8%

32.8%
-2.1%
31.3%

5.2%
-9.1%
-11.4%

5.8%
7.5%
8.4%

10.9%
6.7%
7.8%

7.3%

22.9%
12.6%
27.8%

capital inflows to the region have declined andupward pressure on exchange rates eased (figure
ECA.8). Domestic bank credit has started to
grow again, but so far at moderate rates.

digit deficits in post-conflict Kyrgyz Republic. A
few countries bucked the deficit reduction trend(figure ECA.8), like Belarus, but the country’s
stock of public debt to GDP is still low, ataround 25 percent in 2010 (the largest share in
the region is to be found in the Kyrgyz Republic,
at 63 percent). Bulgaria also experienced anincrease in the cash fiscal deficit, neverthelessfiscal adjustment in that country continued
through a reduction in previously accrued andunpaid obligations.

The rebound in commodity prices during thecourse of 2009 and 2010 helped to reduce
government deficits among regional energy
exporters from -5.4 percent of GDP in 2009 to 2.4 percent in 2010. Declines among importers
were also noticeable, as increased activity helped
restore government coffers at the same time as
initial attempts towards discretionary fiscal
consolidation were announced (especially among
EU members). These broad aggregates hidesignificant differences at the national level,
where government balances range from double
digit surpluses in Azerbaijan to almost double

Outlook
GDP in developing Europe and Central Asia
grew an estimated 5.2 percent in 2010, a modest
rebound given the steep decline in activity thatpreceded it, but one which nevertheless served to

Figure ECA.8 Exchange rates begin to fall, at the same time that the budgetary position becomes moresustainable
Budget balance as a % of GDP

Nominal exchange rate to the USD (index, January 2009=100)

20.0

125

120

115

110

Georgia
Moldova
Romania
Russian Federation
SerbiaTurkey

15.0

10.0

2009
2010

105

5.0

100

95

0.0
90

85

-5.0

80
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2
2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011 2011

-10.0
Azerbaijan

Source: World Bank, IMF.

85

Kazakhstan

RussiaUzbekistan

Lithuania

Romania

TurkeyUkraineBelarus

Bulgaria

Global Economic Prospects June 2011: RegionalAnnex
reduce unemployment and improve fiscal
positions. Ongoing household and bankingsector restructuring is expected to continue toconstrain growth, with GDP projected to expandby 4.7 percent in 2011, and by around 4.5
percent in 2012 and 2013. While these growth
rates are close to estimates of the region’s
potential growth rate, growth is not likely to bestrong enough to make significant inroads into
the spare capacity generated by the crisis. As aresult, unemployment, although declining, isprojected to remain relatively high throughout
the projection period.

export volumes is expected to continue
outpacing imports among oil importing
countries.
Higher commodity prices will increase current
account balances for commodity-rich countries
in the region, while having the opposite effectamong importers. However, revenues areprojected to leak into additional spending andimports relatively quickly such that by 2013
current account surpluses of oil exporters, whichreached 5.5 percent of GDP in 2010, areprojected to return to 2.3 percent of GDP.
Current account deficits among oil importers areprojected to exceed -6 percent of GDP in 2011
and to improve only slightly to around -5.7
percent of GDP in 2013.

Overall, the external sector is projected tocontribute between -0.5 and 0 percent to overall
growth during the projection period. Among oil
exporters, the additional revenues from higher
prices are expected to boost domestic demandand imports, such that in volume terms theexternal sector subtracts somewhat from growthin the economy. On the other hand, given strong
growth in other developing regions and the
projected firming of the recovery in high-income
Europe, the pick-up in regional manufacturing

Higher commodity prices should boost
government revenues in resource-rich countries
in the region, reducing government deficits from
-2.5 of GDP in 2010 to a surplus of 1.1 of GDP
by 2013. At the same time, improving activity
levels and ongoing fiscal consolidation measures
are projected to reduce government deficits in oil

Table ECA.3 Net capital flows to Europe and Central Asia
$ billions
Current account balance
as % of GDP
Financial flows:
Ne t private and official inflows
Ne t private inflows (e quity+private de bt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Workers' remittances

2003
20.3
2.0

2004
36.7
2.8

2005
48.5
2.9

2006
37.6
1.8

2007
-14.1
-0.5

2008
13.3
0.4

2009
14.1
0.5

2010e
22.3
0.7

81.0
85.8
8.5
25.3
23.8
1.5
55.8
-4.7
-0.2
-2.0
-2.5
60.5
34.0
7.3
27.1
-0.4
26.5
-52.3
-49.1

99.9
107.2
8.0
43.7
41.9
1.8
56.2
-7.3
1.0
-5.9
-2.5
63.5
52.2
14.4
39.0
-1.3
11.3
-67.7
-68.8

127.8
156.2
9.3
57.8
51.1
6.7
70.0
-28.4
-0.7
-9.8
-18.0
98.4
80.0
16.6
64.7
-1.3
18.4
-89.3
-87.0

218.2
248.9
12.0
104.6
92.3
12.3
113.6
-30.7
0.2
-5.8
-25.1
144.3
108.9
32.3
77.5
-0.8
35.4
-84.2
-171.6

410.4
413.5
15.5
160.2
133.2
27.0
250.2
-3.0
0.2
-5.0
1.8
253.3
177.5
55.9
122.6
-1.0
75.7
-170.2-226.1

262.1
251.0
7.6
145.0
160.1
-15.1
117.1
11.1
0.7
6.2
4.2
106.0
121.3
16.2
105.7
-0.6
-15.3
-333.3
57.8

89.8
57.6
2.2
90.0
85.1
5.0
-0.2
32.2
2.8
20.2
9.3
-32.5
5.3
-1.7
7.3
-0.4
-37.7
-77.9
-26.0

132.1
108.4
3.5
83.4
76.4
7.0
48.7
23.7
2.2
10.5
11.0
25.0
24.0
13.5
10.5
0.0
6.9
-107.2
-47.2

11.6

16.0

23.3

28.4

39.3

45.8

35.4

35.9

Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.

Source: World Bank.

86

2011f
-8.3
-0.2

2012f
-76.9
-1.8

2013f
-69.6
-1.4

146.9
4.0
96.9
90.9
6.0

176.1
4.1
116.1
107.1
9.0

190.4
3.9
135.4
124.4
11.0

50.0

60.0

55.0

38.7

42.3

Global Economic Prospects June 2011: RegionalAnnex
importers from -4.4 percent of GDP in 2010 toabout -2.1 percent of GDP in 2013.

countries have so far not been affected byconcerns about high-income Europe fiscal
sustainability, contagion via financial sector
links remains a possibility — placing a premiumon restoring an adequate degree of fiscal space totheir public finances.

Russia, the largest regional economy, is set togrow by around 4.2 percent yearly over theforecast period, fueled in part by higher oilrevenues. Improving employment prospects areprojected to bring unemployment down toaround 6 percent in 2013 and this, together withhigher oil revenues, should be reflected in alarger contribution from domestic consumption
and investment demand to growth. Parliamentaryelections in late 2011, and Presidential ones
during the first quarter of 2012 may result insome election-year spending that could reduce
the large but mainly cyclically induced expected
improvement in the general government balance.
The limited diversification of the economy andconstraints to the increase of energy-related
exports remain key medium-term challenges thatare expected to prevent output from expanding
much more than 4 percent per annum over the
projection period. As a result, much of theadditional oil-revenue is expected to fuel anincrease in demand that will be met by increased
imports, so that the country’s current accountsurplus is projected to decline to around 1.4
percent by 2013.

The countries of the Western part of theCommonwealth of Independent States (Belarus,
Moldova and Ukraine) are projected to grow by
an average of 4 percent between 2011 and 2013.
However, these economies face significant
potential downside risks, given their large
current account deficits (Belarus and Moldova),
and their relatively undiversified economies(and, in the case of Belarus, by its over-relianceon the Russian market for its exports). Ukraine
is also susceptible to external shocks, notably
from higher energy prices. Medium-term growthis expected to be constrained to around 4.3
percent because of weak productivity growthtied in part to the undiversified nature of theeconomy and lack of competition.
In Central Asia, GDP in Kazakhstan (over two
thirds of the sub-regional GDP) is set to expandby around 5.7 percent yearly during the next
three years on the back of high commodity
prices and deepening links with other developing
Asian economies. The sub-region will do evenbetter, growing by 6.1 percent. Strong
commodity prices should contribute to improved
public and external balances among the subregional resource exporters — Kazakhstan,
Turkmenistan and Uzbekistan (Tajikistan is also
a significant cotton exporter). The Kyrgyz
Republic and Tajikistan are projected to makeinroads into their large external and fiscal
deficits, thanks in part to significant remittances
receipts and official aid, linked in the Kyrgyz
Republic to post-conflict reconstruction efforts.

Growth in Turkey, the second largest developing
economy in the region, which rebounded
sharply in 2010 when the economy grew by 8.9
percent, is forecast to grow by a still robust 5.5
percent average over the forecast period.
Turkey's large current account deficit, and its
high oil import bill, at around 5 percent of GDP,
represent a source of vulnerability, should
investor sentiment sour or oil prices rise (seescenario in main text).
Growth among the European Union’s members
in developing Europe (Bulgaria, Lithuania andRomania) is projected to accelerate to around 3.4
percent during the projection period, aided by
the relatively diversified nature of these
economies, significant EU and IMF support
programs, and the recovery in the euro area.
Lithuania is also projected to benefit from therobust performance of the Polish economy (nowa high-income country). Although these

Albania, Bosnia and Herzegovina, FYR
Macedonia, Kosovo, Montenegro and Serbia are
anticipated to grow by around 4.5 percent during
the next three years, supported by their close
economic ties with the recovering EU, including
significant financial and technical support.
Despite improved growth, these economies are
expected to continue to suffer on average from87

Global Economic Prospects June 2011: RegionalAnnex
Table ECA.4 Europe and Central Asia country forecasts(annual percent change unless indicated otherwise)
Albania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Armenia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Azerbaijan
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
BelarusGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Bulgaria
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Georgia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Kazakhstan
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Kosovo
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Kyrgyz Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Lithuania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Moldova
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Macedonia, FYR
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Romania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Russian Federation
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
SerbiaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Tajikistan
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
TurkeyGDP at market prices (2005 US$) b
Current account bal/GDP (%)
UkraineGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Uzbekistan
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

5.5
-6.2

7.7
-14.6

3.3
-16.0

3.5
-12.4

4.0
-10.8

4.5
-9.5

5.0
-7.9

9.6
-8.6

6.8
-11.6

-14.1
-15.8

2.1
-13.9

4.6
-11.6

4.3
-10.3

4.2
-9.3

14.2
-7.2

10.8
35.6

9.3
21.6

5.0
25.7

4.2
25.8

4.1
22.4

4.4
21.5

6.9
-3.9

10.2
-8.6

0.2
-13.0

7.6
-15.6

2.5
-9.3

3.0
-9.1

4.0
-9.3

4.8
-8.7

6.2
-22.9

-5.5
-8.9

0.2
-1.0

2.9
-2.1

3.4
-2.4

3.9
-2.7

6.6
-9.8

2.3
-25.3

-3.8
-11.2

6.4
-9.6

5.5
-10.8

5.3
-9.7

5.0
-8.1

8.3
-2.7

3.3
4.7

1.2
-3.8

7.0
2.9

5.7
5.2

5.5
4.4

5.8
3.9

6.9
-22.8

2.9
-25.0

4.0
-24.8

5.7
-28.8

5.2
-29.3

4.9
-26.9

3.9
-8.4

8.4
-14.6

2.3
2.0

-1.4
-3.6

5.0
-10.8

6.0
-9.2

6.4
-5.0

5.8
-8.5

2.9
-12.3

-14.7
4.4

1.3
1.9

3.8
-1.0

3.9
-2.6

3.5
-2.5

4.1
-8.4

7.8
-17.3

-6.0
-9.3

6.9
-10.5

4.2
-10.7

4.5
-10.3

4.8
-10.8

2.6
-5.3

4.8
-12.8

-0.7
-6.7

0.8
-2.9

2.9
-4.9

3.7
-5.1

4.2
-4.7

4.3
-7.0

7.1
-11.9

-7.1
-4.3

-1.2
-4.2

1.6
-5.1

3.7
-5.4

4.0
-5.7

6.3
9.5

5.2
6.2

-7.8
3.9

4.0
5.0

4.4
3.5

4.0
0.5

4.1
1.4

3.3
-7.4

5.5
-17.6

-3.1
-6.9

1.8
-7.1

3.0
-7.3

5.0
-6.5

5.5
-5.7

8.1
-3.8

7.9
-7.6

3.8
-5.9

6.5
2.2

5.7
-4.3

5.0
-6.4

5.0
-6.1

3.7
-2.4

0.7
-5.7

-4.8
-2.2

8.9
-6.6

6.1
-7.7

5.1
-7.3

5.3
-6.9

5.9
3.2

2.1
-7.1

-14.8
-1.5

4.2
-2.0

4.0
-3.1

4.5
-3.4

4.6
-3.6

5.2
7.8

9.0
13.0

8.1
3.1

8.5
8.3

8.0
13.2

7.8
11.1

7.5
11.4

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Bosnia and Herzegovina, Turkmenistan, Montenegro are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Source: World Bank.

88

Global Economic Prospects June 2011: RegionalAnnex
very large and persistent formal unemployment,
limited state capacity and relatively fragile fiscal
and external positions (covered by remittancesand FDI inflows), which are set to improve only
slightly through the forecast horizon.

developing Europe and Central Asia—with
spreads having increased relatively little andcapital flows recovering in line with domestic
conditions. Should events in high-income
Europe force banks to repatriate capital or justreduce the pace at which regional profits are
reinvested, capital flows to the region could dry
up —with potentially large negative effects on
those countries with high-levels of debt and/or
large current account deficits.

The economies of the South Caucasus subregion are expected to expand by an average of
4.5 percent over the next three years, due tohigher commodity prices and on the back of therecoveries in the EU and in Russia. Oil-fueled
Azerbaijan is project to grow by a robust 4.2 andto experience improvements in its external andfiscal positions. Although both Armenia andGeorgia are projected to enjoy growth of,respectively, around 4.3 and 4.9 percent going
forward, both these economies will remainsensitive to changes in sentiment given persistent
double-digit current account and budget deficits.

Finally, the region was buffeted by a very poor
crop year in 2010. If domestic production does
not improve, a second year of disappointing
harvests could reinforce recent upticks ininflation —possibly even resulting in secondround effects that would increase inflation
expectations, especially if combined with thedirect effects of the energy price shock, forcing afurther tightening of monetary policies andincreasing the already daunting challenges ofrecovering from the excesses of the boom
period.

Risks
Although the forces of recovery in the global
economy and in developing Europe and Central
Asia are well established, there are a number ofimportant evolving tensions that have thepotential to disrupt the relatively robust recovery
that is projected for the region.

Notes:
1. For the purposes of this report, thedeveloping Europe and Central Asia region
is comprised of only low- and middleincome countries (22 in total). Thus theaggregate excludes high-income Western
European countries (among which Croatia,
the Czech Republic and Hungary), but
includes low- and middle-income EU
member states (Bulgaria, Lithuania andRomania).

Continued uncertainties and political tensions in
the Middle-East and North Africa or a further
disruption to oil supplies could send oil prices
even higher. Simulations reported in the main
text suggest that growth among regional oil
exporters could accelerate by between 0.1 and
2.0 percentage points in the 2011-2013 period if
tensions were to give rise to a sustained $50
increase in oil prices. The estimated 0.5 to 0.6
percentage point reductions in regional oil
importers growth between 2011 and 2013 issomewhat less severe than for oil importers
elsewhere, partly because of offsetting benefitsof higher remittances and increased imports fromregional oil exporters, which represent around 60
percent of the regional economy.

2. The CIS is a loose organization that includes
most of the countries from the former Soviet
Union, notably Armenia, Azerbaijan,
Belarus, Georgia, Kazakhstan, Kyrgyz
Republic, Moldova, Russia, Tajikistan,
Turkmenistan, Ukraine and Uzbekistan.
Turkmenistan discontinued its membershipof the CIS as of 26 August 2005, and is now
an associate member, while Georgia has left
the group in August 2009. Ukraine has neverratified the CIS Treaty,

A second major risk for the region centers on theevolution of the fiscal sustainability crisis in
high-income Europe. So far, these challenges
have had limited impact in countries in

3. The ongoing creation process of a Customs

89

Global Economic Prospects June 2011: RegionalAnnex
Union between three members of the socalled―EurasianEconomic
Community‖ (EurAsEC), namely Belarus,
Kazakhstan and Russia may conceivably
increase the regional share of intra-CIS trade(albeit possibly at the cost of welfarereducing trade diversion).
4. Low measured unemployment likely reflects
hidden unemployment due to limited
economic restructuring in Belarus, andimperfect official statistics in Tajikistan
5. The World Bank’s ―Doing Business‖
indicator, a useful proxy for investment
climate, shows that, while the region broadly
stagnated between 2010 and 2011 (theaverage value for the aggregate indicatorremained at 78, or over twice the EU
average), each of the three largest regional
economies worsened their relative positions(and Russia by a significant 7 slots).
6. See also ―Rising Food and Energy Prices in
Europe and Central Asia‖ (World Bank
2011) for an analysis of the regional effects
of increasing commodity prices.

90

Global Economic Prospects June 2011: RegionalAnnex

Latin America and the Caribbean
expanded 5.2 percent in 2010 after a 5.5 percent
contraction in 2009. The rebound in growth inCentral America reflects mainly a strong
rebound in the Mexican economy, which is
closely linked to the United States. The
Caribbean region recorded the weakest growth in
Latin America at 3.8 percent, after a modest 0.5
percent in 2009.

Recent developments
The Latin American and Caribbean region has
rebounded strongly from the global crisis of
2008-09, growing 6.0 percent in 2010 comparedwith a 2.1 percent contraction in 2009. Strong
growth in Argentina, Brazil, and Peru boosted
growth in South America to 6.5 percent after amild contraction in 2009. Central America(including Mexico), the area in the region mostaffected by the crisis has yet to reach the level of
output recorded before the crisis, having

Industrial production growth picked up in thefirst quarter of 2011, growing at more than a 10
percent seasonally adjusted annualized rate (orsaar) boosted by strong domestic demand andTable LAC.1 Latin America and the Caribbean forecast summary(annual percent change unless indicated otherwise)
98-07a

2008

2009

Est.
2010

Forecast2011 20122013

GDP at market prices (2005 US$) b
GDP per capita (units in US$)PPP GDP c
Private consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

2.9
1.6
2.9
3.2
2.2
3.4
5.2
5.5
-0.1
-0.9
5.8
-2.9

4.0
2.7
4.3
5.1
3.0
8.7
1.4
7.7
-1.7
-0.8
8.0
-0.9

-2.1
-3.4
-2.0
-0.8
4.3
-10.4
-10.1
-15.5
1.7
-0.6
4.0
-4.0

6.0
4.7
5.9
5.8
3.9
11.9
12.5
22.5
-2.5
-1.5
5.0
-3.0

4.5
3.2
4.7
4.6
3.7
7.0
6.6
7.9
-0.6
-1.4
5.2
-2.2

4.1
2.8
4.2
4.0
4.4
7.8
6.1
7.8
-0.7
-1.9
5.6
-2.3

4.0
2.7
4.1
3.9
4.3
6.7
6.1
7.1
-0.6
-2.3
5.4
-2.0

Memo items: GDP
LAC excluding Argentina
Central America e
Caribbean fBrazilMexicoArgentina

3.1
3.5
4.4
2.6
3.4
3.0

3.8
1.8
3.3
5.2
1.5
6.8

-2.4
-5.5
0.5
-0.7
-6.1
0.9

5.7
5.2
3.8
7.5
5.5
9.2

4.3
4.4
4.1
4.2
4.4
6.3

4.1
4.1
4.3
4.1
4.1
4.2

4.0
4.2
4.0
3.8
4.2
4.3

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Central America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El
Salvador.
f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St.
Lucia, Trinidad and Tobago, St. Vincent and the Grenadines.
g. Estimate.
h. Forecast.

Source: World Bank.

91

Global Economic Prospects June 2011: RegionalAnnex
import demand from other developing countries,
China in particular, and more recently from high-income countries where consumer spending has
started to recover at a moderate pace. The
recovery has been supported to a great extent bystrong increases in output and employment in
non-traded sectors, including services.

remains an issue in the Caribbean economies andCentral America, partly because of their relianceon remittances and tourism from the UnitedStates and—to a lesser extent—Europe, where
the recovery has been relatively slow. Although
output in the region as a whole is now 2.2
percent below its pre-crisis peak level, in a few
countries it has exceeded that benchmark.

In seasonally adjusted annualized terms
acceleration in industrial production growth wasparticularly pronounced in several resource-rich,globally integrated economies, including
Argentina (close to 11 percent), and Mexico(close to 9 percent). Growth in Central America
strengthened to close to 9 percent, boosted bystrong external demand. In other countries therecovery is more muted or industrial production
remains stagnant (figure LAC.1).

The rebound in industrial production has been
mirrored in trade volumes, which have also
strengthened in the three months ending inMarch 2011. The biggest rebound was inregional import demand, which preceded the
pickup in exports. Latin American imports now
stand 4 percent above earlier pre-crisis peaks,
reflecting a strengthening in regional domestic
demand--retail sales were up year-on-year 15.3
percent in Argentina, 8.5 percent in Brazil, 5.5
percent in Colombia in February, andmomentum is particularly strong in some ofthese economies. Widespread currency
appreciation (notably in Brazil and Mexico) has
contributed to this result, as have stronger wages
in some cases.

Reflecting both differences in initial conditions
going into the crisis and in the pace of recovery,
output gaps across the region vary widely.
Manufacturing capacity utilization is now above
trend levels for the region as a whole, with therecovery entering a new more-mature phase,where additional investment in productive
capacity will be necessary to sustain growthahead. Spare capacity has been completely reabsorbed in Uruguay, Peru, Brazil and Colombia
due to strong growth in 2010 and relatively
shallow slowdowns in 2009. Industrial output
gaps have closed in Mexico, and remain positivein Argentina, but are expected to close in thecourse of 2011 (figure LAC.2). Economic slack

The rebound in imports was followed by anacceleration in regional export growth to a 9.2
percent annualized pace in the three months toMarch 2011, mainly reflecting strong exports by
Argentina, Brazil, Colombia, and Mexico (figure
LAC.3). Export volumes are now roughly 1.1
percent above pre-crisis peaks, and exceed thepre-crisis peak by 9.2 percent in Brazil. In

Figure LAC.1 Industrial output annualized growth remains strong in Latin America

Figure LAC.2 Industrial capacity utilization in Latin
American countries

3m/3m %-change, volumes, seasonally adjusted annualized rates
30

percentage difference from long-term trend

20

Central America

Commodity exporters

60

LAC

40

10

20

0

0
-9.6

-10

-1.6

0.8

0.7

5.8

5.7

10.4

-19.8

-20

-20

-2.6

-39.1

-40

-30

Source: Thomson Datastream and World Bank

Source: Thomson Datastream and World Bank.

92

Peru

Uruguay

Colombia

BrazilMexicoDec-10Venezuela

May-10

Nicaragua

Oct-09Argentina

Mar-09Chile

Aug-08Ecuador-60-40
Jan-08Global Economic Prospects June 2011: RegionalAnnex
Central America, including Mexico, volumes areclosing on pre-crisis peaks. The increase in both
export revenues and imports is much stronger on
account of rising commodity prices for somemain export and import commodities.

first months of 2011. Mexico took advantage ofhistorically low U.S. interest rates and sold $1.5
billion of bonds due in 2040 during April, its
second dollar issue in two months, pushing its
share of regional offerings to 65 percent.

Capital flows have returned to selectedeconomies in search of higher yields and are
putting upward pressures on select currencies(box LAC.1). Net private inflows rose to 4.8
percent of GDP in 2010, after falling to 3.7
percent of GDP in the year of the crisis, but are
still shy of the 6.0 percent of GDP recorded in2007. The largest increase was recorded in FDI
inflows, up 57.4 percent, while net portfolio
equity inflows increased by almost 30 percent to$54 billion. Net lending by banks totaled $7.4
billion, after an outflow of $5.6 billion theprevious year, while short-term debt flows
amounted to $16.6 billion.

Figure LAC.3 Trade growth reaccelerates in Latin
America and the Caribbean
Volumes, ch% 3m/3m saar

70
50

Imports
30
10-10

A large pipeline of sovereign and commercial
bond issuance has run through the region in the-30

Exports-50
Jan-07

Sep-07

May-08Jan-09Sep-09

May-10Jan-11

2011f
-78.6
-1.4

2012f
-112.8-1.9

2013f-141.7
-2.3

237.1
4.3
174.1
130.1
44.0

243.3
4.2
181.3
132.3
49.0

258.1
4.1
199.1
147.1
52.0

63.0

62.0

59.0

62.5

68.4

Source: World Bank.

Table LAC.2 Net capital flows to LAC$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+private debt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Workers' remittances

2003
8.1
0.4

2004
20.2
0.9

2005
32.4
1.2

2006
44.0
1.4

2007
9.9
0.3

2008
-35.8
-0.8

2009 2010e
-22.2
-67.1
-0.6
-1.5

62.2
57.5
3.1
46.6
43.3
3.3
15.7
4.7
-0.4
5.6
-0.4
10.9
9.2
16.7
-7.0
-0.5
1.8
-34.6
-35.6

57.2
67.3
3.1
65.3
65.9
-0.6
-8.1
-10.2
-1.0
-6.3
-2.9
2.0
-0.9
3.1
-3.8
-0.1
3.0
-52.0
-25.4

85.2
116.6
4.4
84.4
72.2
12.2
0.8
-31.3
-0.7
-27.6
-3.0
32.2
16.4
20.6
-3.9
-0.3
15.7
-83.3
-34.4

66.2
86.1
2.8
83.0
72.0
11.0
-16.8
-19.9
-3.4
-12.1
-4.4
3.1
5.2
-11.9
17.7
-0.6
-2.1
-54.7
-55.5

217.5
218.5
6.0
138.2
109.4
28.8
79.2
-1.1
-0.1
0.0
-1.0
80.3
47.6
13.4
34.6
-0.4
32.7
-89.6
-137.8

177.2
170.7
4.0
118.2
127.9
-9.7
59.0
6.5
2.4
0.0
4.1
52.5
48.4
7.5
41.4
-0.5
4.1
-91.2
-50.1

166.7
147.5
3.7
115.2
73.6
41.6
51.5
19.2
6.6
0.4
12.2
32.3
34.1
40.3
-5.6
-0.5
-1.8
-92.5
-52.0

240.4
220.0
4.8
169.9
115.9
54.0
70.5
20.4
6.2
0.2
14.0
50.1
40.9
33.5
7.4
0.0
16.6
-110.6
-62.7

36.9

43.4

49.8

58.9

63.0

64.5

56.6

57.6

Source: World Bank.
Note: e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.

93

Global Economic Prospects June 2011: RegionalAnnex
Furthermore international investors bought $21
billion of peso-denominated debt in the six
months through March. And Argentina’s
companies and provinces sold $1.5 billion worthof bonds in the first quarter, a record since 2001
when the government defaulted on $95 billion of
obligations and more-than double the $597
million sold a year ago.

In most economies the build-up in inflationarypressures stems from significant increases ininternational fuel and food prices. Additionally,
Brazil, Peru, and Argentina are operating at
almost full capacity, and face the risk of costFigure LAC.4 Annualized inflation in the three months
to April exceeds the upper limit of the targeted band in
three of the five inflation targeting economies in LAC
percent, 3m/3m saar

Inflationary pressures are rising in several
economies on higher food and fuel prices, strong
domestic demand, rising wages, and increasingly
limited spare capacity. Headline inflation rates
are near the upper ends of central bank target
ranges in many inflation-targeting economies.
Indeed, inflation accelerated to 6.5 percent
during April in Brazil (year-on-year) matching
the upper-limit of the inflation target range. In
Peru, inflation accelerated to the fastest pace inalmost three years, while Uruguay’s consumer
price inflation picked-up to 8.6 percent, thefastest pace in four years, and well above theupper limit of the inflation target range of 3 to 7
percent (figure LAC.4).

10

10

8

8

6

6

4

4

2

2

0

0
BrazilChile

MexicoColombia

Peru

-2

-2
Upper Limit

Inflation momentum, saar

Lower Limit

Source: World Bank, Central Banks.

Box LAC.1 Impacts of and policy responses to strong capital inflows and strong real credit growth
Strong economic performance in the major economies of the region, low interest rates in high-income countries,
and interest differentials favoring Latin American assets, have attracted large capital inflows. And along withstrong export revenues in commodity-exporting countries, this has resulted in strong upward pressure on selectedcurrencies. In real-effective terms, the Brazilian real and the Mexican peso have appreciated sharply, reducing theexternal competitiveness of their exports.
To limit short-term volatile capital inflows, countries have implemented a combination of macro policies(monetary, exchange rate policies, and fiscal policies). To stem currency appreciation, which in some cases had
started in the pre-crisis period, some countries have intervened in foreign exchange markets. As foreign exchange
market interventions were proving increasingly costly and ineffective in stemming currency appreciation, and as
massive sterilization efforts led in selected cases to rising interest rate differentials which where attracting still
more capital inflows, countries also resorted to some measures of capital control. Argentina, Brazil, Chile, Colombia, Mexico, and Peru have intervened in the foreign exchange markets, while Chile, Colombia, Mexico and Peru
have also increased ceilings for foreign pension fund investments. Furthermore Brazil has introduced IOF taxes on
financial transactions, short-term loans and issuance of securities. It is now charging a 6 percent levy on international debt sales and loans with an average minimum maturity of up to 360 days, after having tripled a tax on foreigners’ purchases of fixed-income securities in October 2010 in a bid to stem the appreciation of the real.
Countries have also taken steps to manage credit growth in a bid to ease domestic demand and prevent overheating, by increasing reserve requirements (Brazil, Colombia, Peru), as real credit growth has been expanding very
rapidly in selected economies (14 percent in Brazil and 20 percent in Colombia).
Rapid credit growth increases the risk that in the event of growth slowing down abruptly, banks’ balance sheets
will come under pressure. Some countries in the region have already implemented measures to strengthen balance
sheets and capital by raising countercyclical capital requirements, and capital requirements for credit operations(Brazil), requiring tighter loan-loss provisions (Bolivia, Colombia, Peru), limiting the net open positions of financial institutions (Brazil, Colombia, Mexico, Peru), and through counter-cyclical provisioning (Bolivia, Colombia,
Peru, Uruguay).
Source: Crowe 2011, Moreno 201194

Global Economic Prospects June 2011: RegionalAnnex
push inflation. Indeed, wages in Argentina wererising at a record pace in January. Demand-pull
inflation is also a source of concern in countries
like Brazil, where domestic demand remains
buoyant. Moreover, la Nina-related supply sideshocks have compounded the effects of imported
food inflation, in countries like Colombia and
Venezuela. Inflation remains relatively subdued
in many economies, including in Mexico, Chile,and Peru.

Relative to the pre-crisis period, the currencies
of Ecuador, Colombia, Chile, Peru and Brazil
have appreciated in nominal effective terms,
between 2.5 and 11 percent, while Venezuela
and Argentina recorded some of the strongest
depreciations. Meanwhile real effective
exchange rates have appreciated by more than 10
percent relative to the pre-crisis period in
Bolivia, Brazil, Costa Rica, Guyana, andUruguay, while depreciating in Mexico andArgentina. Nevertheless given relatively stablenominal exchange rate and high inflation rates
the Argentine peso appreciated strongly in 2010
and in the early months of 2011. In the first fourmonths of 2011 the currencies of Brazil,
Colombia, and Mexico have appreciated in
nominal effective terms by between 3.5 and 4.5
percent. In some cases like Brazil and Colombia,
the currencies are considered overvalued, whilein others like Argentina currencies are estimatedto be weaker than warranted by medium-term
fundamentals.

Most inflation-targeting countries in the region
have begun to normalize monetary policy(Mexico is a notable exception). Brazil’s central
bank hiked its benchmark rate 125 basis points
to 12.00 percent over the past three meetings as
inflation is nearing the upper limit of the targetedrange; while Peru raised policy rates ten times to
4.25 percent (figure LAC.5). Nevertheless, inmany cases policy has not kept pace with
inflation and how effective these measures will
depend critically on what has happened toinflationary expectations. At the moment,
despite hikes in nominal interest rates, realinterest rates deflated by actual inflation remain
low and even negative in some countries. The
task of adopting the appropriate monetary policy
is being complicated in selected economies by
the surge in capital inflows, which is puttingpressure on currencies to appreciate and whichlead to increased liquidity in the economy to theextent that these flows are intermediated by thefinancial sector.

Many countries that saw increased pressures oncurrencies intervened in the exchange markets,
including Argentina, Brazil, Chile, Colombia,
and Mexico. International reserves rose $37.6
billion to reach $657.1 billion by the end of thefirst quarter. Some countries have also
introduced higher ceilings to foreign investmentof pension funds, including Chile, Colombia,
Mexico, and Peru (Crowe et al. 2011, Moreno2011). Several countries, including Brazil andPeru have resorted to capital controls to ease thepressure on currencies.

Figure LAC.5 Central banks in Latin America havestarted the monetary tightening cycle

After deteriorating on average by nearly 3
percent of GDP in the crisis year, as
governments engaged in counter-cyclicalspending, fiscal balances improved last year in
most developing Latin American and Caribbean
countries, on average by more than 1 percent of
GDP. Government balances deteriorated more insmall economies and island economies. General
government balances are expected to continue toimprove this year, by an estimated 0.8
percentage points of GDP, helped in large partby commodity windfall for commodity
exporters. General government balances are
expected to deteriorate in Paraguay and Ecuador,

short-term policy interest rates, percent
16
14
12
10

Colombia
Brazil86

Mexico

Chile

4
Peru

2
0
30-May30-Jan30-Sep31-May31-JanSource: National Agencies through Datastream

95

Global Economic Prospects June 2011: RegionalAnnex
among others, as growth decelerates and/or
prices of main commodity exports weaken. In
Argentina’s government balances are expected todeteriorate as government spending grows fasterthan government revenues, particularly in 2011,
an election year. In Haiti the government deficit
is projected to deteriorate sharply to 5.3 percent
of GDP in 2011, after a surplus of 2.2 percent of
GDP in 2010. Continued weak growth andincreased discretionary spending is expected tocause deficits in some countries to deteriorate
further in 2011.

performance in Latin America has also boosted
tourist arrivals and to a lesser extent, tourism
revenues, which tend to lag in a recovery. Still,this has been a positive for growth, especially incountries that rely heavily on tourism revenues.
Tourism arrivals increased the most in SouthAmerica, up 10.4 percent to 23.5 million,
followed by Central America, where arrivals
rose 8.3 percent to 8.3 million, while growth in
the Caribbean region lagged at 3.9 percent, witha total of 20.3 million tourist arrivals.3 In the firstquarter of 2011 tourism arrivals were up 15
percent in Latin America and the Caribbean.

Nevertheless fiscal policies are becoming procyclical in some countries,1 and tightening isrequired especially in countries that have very
little spare capacity and that show signs ofoverheating. For these countries, but even for
those where deficits have receded, policy willneed to take special care to ensure that the fiscal
space that allowed policy to respond countercyclically in the most recent crisis is recreated.
This, such that should another crisis arise, fiscal
policies will once again be in a position to
respond. Corrected for cyclical impacts onspending and revenues, the structural deficit inArgentina is estimated to be above 3 percent ofpotential GDP, in Brazil it is estimated at 2.5
percent, while in Guyana it is more than 5
percent of GDP. Structural deficits are lower inChile and Peru, at around 1.5 percent of GDP.2

Current account balances deteriorated in the
Latin America and Caribbean region by 0.9
percent of GDP in 2010 to a deficit of 1.5
percent of GDP. Current account balances
remained relatively stable in the Caribbean
region and deteriorated by 0.24 percentage
points in Central America. Stronger currencies
and rapidly growing domestic demand help
explain in part the deterioration in current
account balances. In selected economies thedeterioration in the services balance has played asignificant role in the deterioration of current
account positions (for example in Brazil).

Medium-term outlook
After a strong 2010 recovery from the 2009
economic slump, Latin America and the
Caribbean is expected to grow at a somewhat
slower pace in 2011. Growing capacity
constraints, and high fuel and food prices thatcut into real incomes, as well as a gradualtightening of fiscal and monetary policies are all
factors that are expected to contribute to theslowdown (figure LAC.6).

Brazil has signaled that it will rebalance its
policy mix to help fight inflation. Quasi-fiscal
expenditures remain a problem for Brazil
however, and public banks need to contain loan
expansion to help anchor inflationary
expectations. The government announced a 50
billion reais spending cut for 2011, with 68
percent to come from reductions in discretionary
spending, and the remainder to come fromlimiting increases in mandatory expenditure.

Growth in Brazil is expected to ease from the 7.5
percent recorded in 2010, to 4.2 percent in 2011
and around 4.0 percent in 2012 and 2013, as the
economy is operating near full capacity, labormarket conditions are tight, and wages arestarting to increase faster than productivity. The
46 percent real effective exchange rate
appreciation observed since January 2009, is
expected to continue to weigh on industrial
production, both because of weaker exports andImproved economic performance in high-income
countries and higher employment helped tourism
and remittances recover from the 2009 slump.
The recovery in remittances was modest in 2010,
but due to the depreciation of the U.S. dollar, in
local currency terms, remittances have fallenslightly in many countries. Strong economic

96

Global Economic Prospects June 2011: RegionalAnnex
increased import demand. Capital flows areprojected to be boosted by an increase in FDI(FDI is projected to reach $55 billion this year),even as market sensitivity and government
policy serves to dampen more volatile equity anddebt-creating flows.

star performer of the region, expanding by 7
percent in 2011, on the back of strong domestic
demand, expansionary fiscal policy andconsumption tax cuts, before easing to a moresustainable pace of 5.2 percent by 2013.
Venezuela’s economy should recover this year,
after a two-year recession, but growth willremain anemic, at less than 2 percent, as thebusiness environment continues unattractive forprivate investors; inflation remains elevated, andsupply bottlenecks undermine economic
performance.

In Mexico, economic activity should slow mildly
to 4.4 percent in 2011, and 4.1 percent in 2012,
before picking up slightly to 4.2 in 2013. Higher
energy prices are projected to cut into consumer
demand in both Mexico and the United States,with the latter impact slowing Mexican export
growth. Argentina’s economy is projected toslow this year to 6.3 percent following aremarkable 9.2 percent gain last year as bounceback effects recede. Prospects for 2012 and 2013
are for a further slowing of growth as capacity
constraints begin to be felt, but outturns will
depend importantly on efforts to improve thecountry’s productive potential. Colombia’s
economy is expected to expand by about 4.7
percent in 2011, picking-up slightly from 4.3
percent recorded in 2010, before easing
marginally in 2012 to 4.4 percent and further to
4.2 percent in 2013. There are downside risks to
the forecast, as consumer demand is showing
signs of weakness, evidenced in weaker retailsales and worsening consumer confidence.

Growth in Central America excluding Mexico is
expected to accelerate to 4 percent in 2011, andto average about 4.1 percent over the 2012-2013
period, as labor markets in the high-income
countries improve only gradually. Stronger
external demand will underpin growth over theforecasting horizon, but remittances will growonly modestly as labor income of migrants in the
United States and Spain advance only
moderately, and as unemployment remains
relatively elevated. Poor infrastructure, shortagesof skilled labor, expensive electricity andunreliable energy supply will hinder growth in
the region.
Economic activity in the Caribbean will
accelerate marginally to 4.1 percent in 2011, inlarge part due to continued strong growth in the
Dominican Republic and rebound in growth to
8.7 percent in Haiti on reconstruction efforts.
Meanwhile growth in other countries in theregion will be more subdued as remittances andtourism are yet to show signs of moderate
recovery. Uncertainties regarding the strength of
the global recovery among U.S. investors haveresulted in major tourism and large-scale
investments being put on hold. Jamaica will be
one of the weakest performers in the region, due
to structural weaknesses and over-dependence on
the United States. The Dominican Republic,
which accounts for 40 percent of output in the
Caribbean region is expected to grow close to 5
percent in 2011 and record slower growth of 4.3
by 2013. Growth in the Caribbean is expected toaccelerate marginally to 4.3 percent in 2012
before easing to 4 percent in 2013.

Chile and Venezuela will be also see an
improvement in economic performance relative
to the previous year, while Peru should be the
Figure LAC.6 Growth in Latin America andCaribbean to decelerate over the next two years
GDP, percent change
1210

The Caribbean

8

LAC

Central America (incl. Mexico)

6

4
2
0

-2
-4
-6
-8
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: World Bank.

97

Global Economic Prospects June 2011: RegionalAnnex
Current accounts are expected to deteriorate in
the economies that operate close to capacity andwhich experienced currency appreciation, as
imports become cheaper. Commodity exporters
should continue to see improvements in theircurrent account balances, on account of stronger
growth in commodity revenues.

America face the challenge of fine-tuningmonetary policy to help anchor inflationary
expectations and keep inflation rates within atargeted range without dampening recovery. If
the authorities fail to bring inflation undercontrol in the near term, sharper monetary
tightening is the likely course of action, withnegative consequences for economic growth in2012 and 2013.

Despite the recent rise in oil prices, as a result of
the political upheavals in the Middle East andNorth Africa, income effects in many oilimporting developing countries are expected tobe relatively small due, to the partially offsetting
effects of high non-oil commodity prices.
Resource-rich oil importers in the region will see
their terms of trade improve slightly (0.2 percent
of GDP), as higher export prices for metals andgrains offset the negative impact induced byhigher imported oil prices. Saint Vincent and the
Grenadines, Dominica, Saint Lucia, Nicaragua,
Honduras, and Jamaica will see the largest termsof trade losses, in excess of 3.5 percent of GDP(figure LAC.7). Oil exporting countries will see
income gains of 2.0 percent of GDP, while theregion as a whole will see positive gains
estimated at 0.98 percent of GDP.

The recent political upheavals in the Middle
East, while not having a direct impact on growth
for the region have increased the risks of further
hikes in energy prices, which will negatively
affect growth in oil-importing countries in theregion, and in particular growth in Central
America, excluding Mexico, and the Caribbean.
The impact of a sustained $50 per barrel increasein oil prices is expected to slow growth by 0.3
percentage points in 2012 and 0.4 percentage
points in 2013 in Latin America and the
Caribbean (excluding Mexico), although theimpacts very by country (see Table 3 in the maintext).
And with food prices at elevated levels, any
disruption in supply risks pushing food prices up
further fueling inflation, cutting into household
purchasing power and increasing the poverty
count, and fueling social tensions. Failure to
bring inflation under control could result in
sharper tightening of monetary and fiscal policy,
which could result in a sharper slowdown ineconomic activity.

Risks
Perhaps the most important downside risk facing
the region is that the surge in oil prices will dent
global economic growth, as inflationarypressures will take a heavier toll on consumer
spending worldwide. Most economies in Latin

Selected economies in the region face the risk ofoverheating as they face strong commodity
prices and high capital inflows that underpin
strong domestic demand. If policymakers in theregion fail to rebuild policy buffers, vulnerability
to future crisis would be much increased.
Furthermore if exit from the fiscal stimulus isdelayed, countries will rely more on monetary
tightening to keep inflation under control.

Figure LAC.7 The terms of trade impacts in 2011
share of 2010 GDP, percent
Venezuela
Paraguay
Ecuador
Bolivia
Argentina
Chile
Peru
MexicoBrazilUruguay
GuatemalaCosta Rica
Dominican Rep.
BelizeHaiti
El Salvador
GuyanaJamaica
Honduras
Nicaragua
St. Lucia
Dominica
St. Vincent & Grenadines
-6

-4

-2

0

2

4

6

8

The economic fallout from the earthquake andtsunami that hit Japan will likely have a negative
impact on FDI flows, given that Japan is an
important source of FDI for countries like Brazil.
Another risk facing the emerging economies in

10

Source: World Bank.

98

Global Economic Prospects June 2011: RegionalAnnex
the LAC region is that of an abrupt reversal of
portfolio flows, which could result in sharp
depreciations of currencies. A disorderly
unwinding of the fiscal sustainability issue inEurope represents a risk to economic activity inthe Latin America and Caribbean region throughtrade and financial linkages.

Table LAC.3 Latin America and the Caribbean country forecasts(annual percent change unless indicated otherwise)
98-07aArgentina
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
BelizeGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Bolivia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Brazil
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Chile
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Colombia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Costa Rica
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Dominica
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Dominican Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
EcuadorGDP at market prices (2005 US$) b
Current account bal/GDP (%)
El Salvador
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
GuatemalaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
GuyanaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Honduras
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Haiti
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Jamaica
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

2008

2009

Est.
2010

2.2
1.3

6.8
2.1

0.9
2.8

9.2
0.8

6.3
0.4

4.2
-0.6

4.3
-0.9

5.4
-13.1

3.8
-10.7

0.0
-9.4

2.0
-2.7

2.1
-8.6

2.4
-6.6

2.8
-5.8

2.8
0.8

6.1
12.0

3.4
4.7

4.2
4.8

4.4
3.7

4.5
4.3

4.2
3.8

2.8
-1.2

5.2
-1.7

-0.7
-1.5

7.5
-2.6

4.2
-2.6

4.1
-3.3

3.8
-3.6

3.4
0.3

3.7
-1.9

-1.7
1.6

5.2
1.9

6.1
0.8

5.0
0.2

4.5
-1.8

3.1
-1.4

2.7
-2.9

1.5
-2.2

4.3
-3.1

4.7
-1.9

4.4
-2.6

4.2
-2.8

4.7
-4.6

2.6
-9.3

-1.3
-1.9

4.2
-3.6

4.0
-4.2

4.2
-4.3

4.5
-4.7

1.6
-19.0

3.5
-36.4

-0.3
-28.3

1.0
-26.9

1.9
-30.2

2.6
-26.4

2.8
-24.7

4.9
-1.4

5.3
-9.9

3.5
-4.6

7.8
-8.2

5.1
-8.7

4.9
-6.0

4.3
-5.4

3.1
-0.1

7.2
2.0

0.4
-0.5

3.6
-3.4

3.1
-3.1

3.2
-3.4

3.6
-3.8

2.6
-3.1

2.4
-7.2

-3.5
-1.8

0.7
-2.5

2.5
-4.4

3.0
-3.3

3.2
-3.6

3.4
-5.4

3.3
-4.5

0.6
-0.1

2.5
-2.2

3.1
-3.4

3.3
-3.8

3.0
-4.1

1.7
-8.7

2.0
-9.9

3.3
-7.7

3.5
-9.5

4.6
-10.7

5.1
-21.0

5.6
-19.3

4.0
-6.7

4.0
-12.9

-2.1
-3.8

2.8
-6.2

3.2
-6.9

3.8
-6.5

4.0
-6.5

0.6
-22.4

0.8
-11.9

2.9
-3.9

-5.4
-3.4

8.7
-4.3

9.0
-4.8

8.3
-5.1

1.6
-7.8

-0.5
-19.6

-3.0
-10.4

-1.1
-8.4

1.7
-8.7

2.2
-8.0

2.4
-6.0

99

Forecast
2011
2012

2013

Global Economic Prospects June 2011: RegionalAnnex(annual percent change unless indicated otherwise)
Source: The
World Bank.

98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

2.8
-1.9

1.5
-1.5

-6.1
-0.7

5.5
-0.5

4.4
-0.8

4.1
-1.0

4.2
-1.0

3.4
-18.0

7.5
-25.8

-5.6
-12.9

5.1
-15.5

3.1
-16.2

3.5
-16.2

4.0
-15.7

4.8
-5.5

10.7
-11.7

2.4
-0.2

4.5
-11.2

7.4
-12.4

6.8
-11.8

6.0
-11.9

4.1
-1.1

9.8
-3.7

0.9
0.2

8.8
-1.4

6.9
-2.2

6.1
-3.1

5.2
-3.0

1.9
-0.1

5.8
-1.8

-3.8
0.3

15.3
-3.2

5.5
-4.0

4.6
-4.0

4.3
-3.1

2.0
-18.5

0.8
-35.2

-3.6
-14.4

1.1
-16.7

3.7
-27.0

3.7
-21.6

3.1
-18.5

4.2
-20.4

1.1
-39.2

-1.1
-33.8

-2.1
-33.2

3.1
-36.2

2.9
-33.4

3.6
-32.7

0.8
-1.0

8.5
-4.8

2.6
0.7

8.5
0.6

5.2
-1.4

5.7
-2.0

4.1
-2.4

2.8
8.5

4.8
12.0

-3.2
2.6

-1.5
5.0

1.6
7.6

2.2
6.6

2.4
4.7

Mexico
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Nicaragua
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
PanamaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Peru
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Paraguay
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
St. Lucia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
St. Vincent and the Grenadines
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Uruguay
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Venezuela, RB
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly
differ at any given moment in time.
Barbados, Cuba, Grenada, and Suriname are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Notes:

Economic Outlook. April.

1. World Bank, LAC Success put to the test,
April 2011.

Moreno, R., 2011. “Policymaking from amacroprudential perspective in emerging
markets.”

2

IMF, World Economic Outlook, April 2011.

3

UN World Tourism Organization, January
2011.

BIS Working Papers No. 336, January.
Walsh, James P. 2011. ―Reconsidering the Roleof Food Prices in Inflation‖. IMF Working Paper.
WP11/71.

References

World Bank, 2011. “LAC Success put to thetest”.

Crowe, C., G. Dell’Ariccia, D. Igan, and P.
Rabanal, 2011. “Policies for Macro-Financial
Stability: Options to Deal with Real Estate
Booms.” IMF Staff Discussion Note SDN/11/02,
February.

World Travel and Tourism Council. 2011
Tourism Impact Data and Forecast. April 2011.
[www.wttc.org]

International Monetary Fund. 2011. World

100

Global Economic Prospects June 2011: RegionalAnnex

Middle East and North Africa
January to 1.8 percent anticipated in April.3
Those economies hardest hit include Egypt(down 4.5 percentage points), Tunisia (3.3
points) and Jordan (1.5 points) (figure MNA.1).

Recent developments
Before the start of the political upheaval in
the Middle East and North Africa, developing
countries of the region had been poised to
improve economic performance over 2011-12,
returning to GDP gains of near 5 percent.1
Indeed, lack of tight international connections infinance and non-oil goods trade allowed
developing Middle East and North Africa2 toexperience less adverse effects from the financial
crisis and global recession of 2008-09 than otherdeveloping regions. But recovery in 2010
disappointed, with regional growth falling below
expectations to 3.1 percent, the slowest growthamong developing regions in a year of buoyant
gains for developing economies.

Political-economy developments in countries
where protests- and authorities‘ responses
occurred earliest—Tunisia and Egypt—could
play a strong role in shaping other outturns in theregion. And as evidenced from the first monthsof 2011, there are a variety of political responses
across the Arab world. Progress may be more
likely in countries like Tunisia, as well as in themonarchies (Jordan and Morocco) where popularpressure will continue to have well-establishedchannels in which to be expressed. In the broader
view of the World Bank, if these political eventsand economic externalities are followed bysound transitions to better governance structures,in looking forward, they should provide a unique
opportunity to change Middle East and North
Africa‘s political and social landscape (table
MNA.1).4

The Arab Spring. Revolutions and unrest havedisrupted economic activity across almost every
country in the region over the first months of
2011, and will continue to restrain growth in a
number of countries at least for the year, andpotentially for more. For those parts of theregion where unrest has been less marked, higher
oil prices (linked tightly to developments in the
Middle East and North Africa) will be a boon forsome and a drag on growth for others. And
higher food prices will exact an increasing toll
on external balances across all countries.
Economic and social impacts are likely to be
substantial in the short term as production, trade,
services and other elements of economic activity
slip; and fiscal revenues, tourism and FDI
receipts come under increasing pressure.
Consumers will be further affected as inflation
heats up, tied among other factors todevelopments in oil and food prices.

The parameters of political and economic
disturbance in 2011. With the exception ofseveral GCC economies, every country in theregion has been affected—to varying degrees by
Figure MNA.1 GDP growth marked down by 3.1 points
in 2011 for developing Middle East and North Africa
GDP growth in percent
Developing MENADiversified economies
Egypt
JordanTunisia
Developing Oil exporters

Taking current- and anticipated developmentsfor 2011 into consideration, a comparison of theJanuary 2011 projections with revised forecasts
prepared in April, yields a sobering conclusion.
GDP growth for the developing region is likely
to suffer a 3.1 percentage point mark-down forthe year, from gains of 4.9 percent expected inAlgeria
GCC
0

Forecast of January 20112

4

Forecast of April 2011

Source: Middle East and North Africa Poverty Reduction
and Economic Management Unit, World Bank.

101

6

Global Economic Prospects June 2011: RegionalAnnex
 Egypt, Tunisia, Libya, and potentially Syria,

the Arab Spring. Among important observed andanticipated economic developments for 2011:

will be most affected, as continued uncertainty,
economic disruption and lapse in tourism
revenues dampens growth in the former two,
while Libya—and to a lesser degree, Syria—
may face prospects of prolonged violence or
civil war. Those countries which haveexperienced the longest protests will suffer
lower growth- with investment coming to beparticularly adversely affected.

 Oil prices are likely to remain high amid the

Libyan crisis and market fears of potential
supply disruptions tied to unrest in larger oil
exporters; Oil exporters that are less troubled by protest(e.g. Algeria, Kuwait, Oman, Qatar, Saudi
Arabia and the UAE) will likely see windfall
gains from higher oil prices—but net fiscal
revenues will be reduced by use of funds forfinancial packages intended to address social
unrest;Developing Middle East and North Africa’s
growth edged lower in the second half of2010—and for the year. Early indicators for2011 point to a substantial slowdown.

 Oil importers will suffer—especially those that

The initial strong rebound in global trade andproduction, particularly among the regions‘ main
Euro Area trading partners, and rising oil prices
underpinned GDP gains for developing Middle

choose to provide energy and food subsidies.
Higher food prices will accentuate inflationpressures.
Table MNA.1 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
98-07aGDP at market prices (2005 US$) b
4.1
GDP per capita (units in US$)
2.6
PPP GDP c
4.3
Private consumption
4.4
Public consumption
3.2
Fixed investment
6.0
Exports, GNFS d
5.2
Imports, GNFS d
7.1
Net exports, contribution to growth-0.2
Current account bal/GDP (%)
7.5
GDP deflator (median, LCU)
4.8
Fiscal balance/GDP (%)
-1.0

2008
3.7
1.9
4.1
5.1
9.1
7.7
4.6
11.4
-2.2
7.7
12.2
-0.3

2009
2.8
1.1
3.1
4.5
12.6
1.0
-4.9
-7.8
1.0
-1.1
3.0
-4.1

Est.
2010
3.1
1.5
3.0
4.4
8.3
-3.8
4.6
3.6
0.4
1.4
5.5
-4.3

Forecast2011 2012
1.9
3.5
0.2
1.9
1.7
3.6
3.2
3.5
8.6
7.3
-2.4
3.4
3.7
4.4
2.4
6.9
0.5
-0.7
5.6
5.7
11.5
7.3
-3.2
-2.3

3.8

4.4

1.5

3.2

2.8

3.8

4.1

Resource poor- Labor abundant

4.1

6.6

4.8

4.5

2.5

4.0

5.0

Resource rich- Labor abundant

4.2

1.8

1.4

2.2

1.4

3.2

3.2

3.4
4.3
4.9
3.5

5.3
7.2
1.0
2.4

0.0
4.7
0.1
2.4

3.3
5.2
1.0
3.3

4.0
1.0
0.0
3.7

4.2
3.5
3.0
3.6

4.3
5.0
3.0
3.5

2013
4.0
2.3
4.0
4.2
7.0
5.9
2.0
7.1
-1.7
4.3
5.3
-1.8

Memo items: GDP
MENA Geographic Region e

Selected GCC Countries
Egypt
Iran
Algeriafa. Growth rates over intervals are compound average; growth contributions, ratios and the
GDP deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Geographic region includes high-income countries: Bahrain, Kuwait, Oman and Saudi
Arabia.
f. Selected GCC Countries: Bahrain, Kuwait, Oman and Saudi Arabia.
g. Estimate.
h. Forecast.

Source: World Bank.

102

Global Economic Prospects June 2011: RegionalAnnex
East and North Africa during the first half of2010. But a world-wide ―growth pause‖ inproduction during the third quarter- andslumping demand in Europe during the second
half of 2010 came to the fore (see Main Text)
and dampened the region‘s non-oil exports to
Europe, slowed tourism arrivals from earlier
heady rates while crimping remittance flows to
the Maghreb and Egypt in particular. Thesedevelopments preceded the start of popular
unrest in early 2011.

manufacturing production in Tunisia performed
well until late 2010, but by March 2011 had
fallen 9.3 percent on a smoothed basis (y/y),with output of textiles and clothing declining at asteeper 15 percent rate. Lebanon highlights acase of faltering production growth over thecourse of the second half of 2010, due to acyclical decline after a period of unprecedented
boom, especially in construction and real estate.
Developments in the region and uncertainty
regarding political developments in the country
yielded a falloff in electricity generation of 3.3
percent in the first quarter (y/y); Jordan‘s path ofrecuperating output growth became more volatile
but re-crossed the line to positive growth inMarch (figure MNA.2b).

Industrial production for the diversified
economies (proxied in some cases here byelectricity generation) slowed from rapid gains
in early 2010 to fall fairly sharply during the firstquarter of 2011.5 Egyptian cement production for
example, traced a path of output responding toeasing domestic and foreign demand, fromgrowth of 20 percent in late 2009 to declines
averaging 15 percent over the first quarter of
2011; on a smoothed basis, cement output
dropped 11.3 percent in March (3mma, y/y). In
contrast, the decline in Egyptian electricity
generation highlights the initial effects of thereform demonstrations in Cairo and the attendantbroader disruption to economic activity, halvingfrom robust 8 percent gains in early 2010 to
below 4 percent the first quarter (figure
MNA.2a)
Among

other

diversified

Merchandise trade. Market conditions have beendifficult for the diversified group, with main
export destinations in the European Union
undergoing generally sluggish GDP growth andweak demand for exports from the region. But
most recent data suggests a renewal of export
growth for several countries, a favorable note in
the current environment. Almost mirroringproduction trends, Egyptian exports shifted fromgrowth near 25 percent at the start of 2010 tomodest decline in February 2011, but of
encouragement, to a sharp upturn in Marchreaching an 11 percent smoothed year-on-year
pace. Exports of Lebanon dropped by 8 percent
as of March, down from 20 percent gains in theeconomies,

Figure MNA.2a Egypt: Early indicators of disruption to economic activity

Figure MNA.2b: Activity begins to falter in otherdiversified economies as well

ch% 3mma, yr-on-yr

ch% 3mma yr-on-yr

25

9

20

8

15

7

10

6

5

5

0

4

-5

3

-10

2

-15

1

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

15

10

5

0

-5

-10
Jan-09 Apr-09

Egypt IP cement [Left]

Egypt IP electricity [Right]

Source: Egypt CAPMAS, through Haver Analytics.

Jul-09Tunisia IP

Oct-09 Jan-10 Apr-10

Jordan IP

Jul-10

Oct-10 Jan-11

Lebanon IP Electricity

Source: National Agencies through Haver Analytics.

103

Global Economic Prospects June 2011: RegionalAnnex
spring of 2010. For Tunisia, textiles and clothing
shipments declined by some 7.5 percent inMarch (smoothed, y/y)—likely a combination of
supply difficulties in production and weaker
demand in export markets. But overall exports
are reviving quickly to a 15 percent pace as ofApril. Conditions have been difficult for
Morocco and Jordan, but both countries haveseen exports perform buoyantly, in a 20 to 30
percent range, due to strong global demand forphosphates (inputs to fertilizers and other goods
and materials) (figure MNA.3).

This represented an impressive rebound from the2009 recession, with tourist arrivals improvingfrom 3.5 percent growth in the previous year.
Performance in Egypt was particularly vibrant,with a 17.5 percent gain in arrivals and 16.5
percent jump in receipts.
Looking at developments in 2011, with data
covering just a few months of the year, tourism
Figure MNA.3 Exports from the diversified economies generally slacken in the second half of 2010
and into early 2011

Tourism—a mainstay for the region exerting
negative economic effects in 2011. For Lebanon,
Morocco, Tunisia, Jordan and Egypt, as well as
GCC-members Bahrain and the United ArabEmirates, international tourism constitutes a key
contributor to GDP, with fiscal revenues
benefitting as well. Tourism is a key driver for
local employment growth directly—and throughsecond-round effects—while spurring domestic
and foreign investment in tourism and related
facilities. For the GCC economies, tourism isproviding an important path for diversification.

export values in US dollars, ch% 3mma, yr on yr
50
Tunisia
Egypt
25

0
-13
-25
-38

-50
2009M01

2009M11

2010M04

2010M09

2011M02

Figure MNA.4b Tourism’s contribution to GDP waslarge in several Middle East and North Africa countries (2010)

tourist arrivals ('000)

Direct contribution to GDP in percentage points

40,00025,000

2009M06

Source: National Agencies through Haver Analytics,
Tunisia: INS, Morocco: Customs, Egypt: CAPMAS,
and Jordan: DoS.

Figure MNA.4a Middle East and North Africa
tourism boomed in 2010

30,000

Jordan13

Before the onset of the political uprising, tourism
in the broader Middle East and North Africa
region was booming, with arrivals in 2010 up by
10.2 percent to 98 million persons; and for thecountry sample in figure MNA.4a, a jump of 11
percent to 37 million arrivals (figure MNA.4a).

35,000Morocco38

Tunisia

LebanonMoroccoMoroccoLebanonTunisia

JordanJordan

Egypt

Egypt

20,000

North Africa

15,000

United Arab Emirates

BahrainSyria

10,000

Middle East
Algeria

5,000

Saudi Arabia
0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0

2010

Source: United Nations World Tourism Organization
and National Agencies.

3

5

8

10

Source: World Travel and Tourism Council and World
Bank..

104

Global Economic Prospects June 2011: RegionalAnnexarrivals appear to have fallen dramatically. BothEgypt and Tunisia, for example, have reported a
45 percent decline in arrivals between the firstquarter of 2011 and the like period of 2010. Suchlarge-scale falloff in arrivals (and related
receipts), if sustained could exact a heavy toll on
growth in countries where tourism contributes a
substantial share of GDP (figure MNA.4b).
Estimates of the direct contribution of tourism to
GDP appearing in the figure are produced by theWorld Travel & Tourism Council (WTTC), an
industry group working closely with the United
Nations World Tourism Organization(UNWTO).6 In addition to the direct impact of
tourism on the economy, second-round effects
can be quite large, as tourism is a labor intensive
sector with many interconnections with otherbranches of the economy; and in recent years
tourism has attracted much related investment,
both domestically and from abroad.

abroad in the first half of 2010, remittances forthe year grew by 6.5 percent (with Egypt up 8.1
percent to $7.7 billion) stronger than the 5.6
advance for developing countries in aggregate.
Looking forward, the World Bank‘s Migration
and Remittances Unit expects Egypt to garner amodest 0.8 percent gain during 2011, while
remittance inflows to Tunisia are seen to drop by
2.5 percent. For developing Middle East andNorth Africa overall remittances increase 3.5
percent, slowest among developing regions, withstronger recovery in 2012 (5.4 percent)—still
sub-par contrasted with the region‘s historicstandards (average growth of 14 percent over
2000-2008).9
Large shifts in international prices and termsof trade carry differing effects across theregion.
Heightened market uncertainty regarding oil
supply accentuated by the outage of Libyan
crude, served to increase the price of benchmark
Brent oil to above $120/bbl in April 2011, a 33
percent increase from December 2010 levels,with the World Bank average price registering$116/bbl for the month (figure MNA.5 andCommodity Annex).10 A number of commodity
analysts suggest that about $20/bbl of theincrease in price relates to tension in the region;
the remainder reflects strong world demand foroil. Given the continued fluidity of the political
economy in the region, the outlook for crude oil

The less-than-favorable tourism reports from
Egypt and Tunisia to date, together withpreliminary projections of a potential 18 percent
drop in tourism-related receipts during Egypt‘s
FY-20117, would imply (using WTTC impact
factors) a 1.1 percent direct loss in GDP for theyear. Second-round and induced effects could
carry GDP lower by an additional 1.1 points—anadverse tourism contribution to GDP of 2.2
percentage points. As earlier noted, Egypt‘s
growth—pre-to-post the beginnings of the ‗ArabSpring‘—had been marked down by 4.5 points(see figure MNA.1), implying non-tourism
related factors (disruptions to production andother economic activity) may account for theremaining 2.3 points of the slowdown. A similar
range of assumptions for tourism revenues/
arrivals in Tunisia, Morocco, Jordan or Lebanon
would likely result in broadly similar outturns.

Figure MNA.5 Wheat, maize and sugar double
from recent troughs....oil increases 3-foldIndex Jan-2004=100
550
500

450
400
350

Worker remittance flows to the developing
region faltered during the global recession of2009 (as remittances did for all developing
regions) by some 7 percent to $32.2 billion, as
employment conditions in host countries in
Europe, the GCC and elsewhere deteriorated.8
Hardest hit at the time were Egypt and Yemen,each facing a decline of more-than 18 percent.
As recovery advanced within the region and

Crude Oil
Wheat
Maize
Sugar

300
250
200
150
100

50
Jan-04Jan-05Jan-06

Source: World Bank.

105

Jan-07

Jan-08Jan-09Jan-10Jan-11

Global Economic Prospects June 2011: RegionalAnnex
prices remains highly uncertain, but under a‗base case‘ the price of oil is likely to remain athigh levels, averaging $107/bbl in 2011, andeasing only slightly to $98/bbl by 2013.

East and North Africa in aggregate, median
inflation accelerated from 4 percent in August2010 to 5.1 percent by February 2011 (year-onyear)—but eased to 4.5 percent by April on a
recent softening in food prices. Indeed, foodprices for the group reached peaks of 8.2 percent
in October 2010 before diminishing to 3.6
percent in April 2011 (figure MNA.6a).

A quickening pace of increase in internationallytraded food prices—notably maize and wheat—is tied in good measure to supply disruptions,and together with higher crude oil prices ispressuring inflation across an increasing numberof countries (figure MNA.5). A key factor
underpinning the rise in food—likely the mostimportant—has been increasing production costs
due to higher energy prices. Since June 2010,
wheat prices have risen 113 percent and maize
109 percent. Sugar prices had earlier ratcheted
upward (86 percent from June 2010 to January2011) due to Brazilian use of sugarcane ingenerating bio-fuels, resulting in a degree ofshortage of sugar for use in food products. For
the region, cereals (notably wheat) and sugar
imports account for 58 and 75 percent ofdomestic consumption, respectively. And forthese foods alone, costs to the region haveamounted to $19-per capita or 0.3 percent of
GDP.11 12

Higher inflation is reducing purchasing powerand dampening the pace of consumer spending
in both oil importers and exporters, augmenting
the disruption of economic activity and output
otherwise pressuring households in the region.
Several economies among the diversified
group—Morocco and Tunisia—rely on rain-fed
agriculture, with wheat crops often exposed toadverse weather; these economies are now
experiencing escalating import bills and passthrough to headline inflation.
For the diversified economies, food prices led
headline prices through most of 2010, but the
food CPI eased from 7.7 percent in October to
dip below headline CPI by February 2011. As of
April food prices were increasing at a median 3.6
percent pace for the group against overall
inflation of 4.5 percent—pointing to thelikelihood of higher domestic costs emerging incountries in transition—Egypt, Tunisia andothers.

Tied to higher wheat and oil prices, as well as
government outlays that have tended to increaseliquidity within economies, inflation picked up
across both diversified economies and oil
exporters of the region. For developing Middle
Figure MNA.6a Food CPI in developing Middle Eastand North Africa now lags median headline inflation

Figure MNA.6b Middle East and North Africa oil
exporters inflation led by rising costs of imported
food

median ch%, year on year

median ch%, year on year

12

12

Food CPI99Food CPI
6

6

Headline CPI

30
Jan-09Jun-09

Nov-09Apr-10

Sep-10Source: World Bank; Haver Analytics.

Headline CPI

30
Jan-09Feb-11

Jun-09

Nov-09Apr-10

Sep-10Source: World Bank; Haver Analytics.

106

Feb-11

Global Economic Prospects June 2011: RegionalAnnex
Among oil exporters, headline and food priceinflation have ramped-up much faster, given
exceptionally high import dependence for foodand feedstuffs in a number of economies (figure
MNA.6b). For oil exporters (developing as well
as GCC), food prices continue to lead overall
CPI, with the former standing 7.8 percent above
year-earlier levels in March 2011; the later up
4.7 percent. Food price increases span a wide
range from Bahrain (2.7 percent in March (y/y)),Saudi Arabia (5 percent), Kuwait (10 percent), to
Iran (26 percent). Price developments in Iran,especially since December 2010, are due to a
combination of international food price hikes
and a removal of domestic subsidies.

In contrast with the differentiation of terms oftrade displayed across the diversified group, theaggregate of oil exporters (including GCC)
experienced cumulative gains of 16.2 percent of
GDP over 2010-11, 6.2 percent- and a large 10
favorable movement in 2011 and 2012
respectively (figure MNA7.b). The run-up inhydrocarbons receipts as a share of oil exporter‘s
GDP in 2011 exceeds that of the last boom yearof 2008 at 42 percent versus 40 percent. Whether
the large boost to domestic incomes will result instronger GDP growth, will depend on the policyof the authorities in the current environment, tosave or dispense the windfalls via subsidies or
public works projects. It will also depend on theimport propensity of the new spending. Evidence
over 2011 to date suggests that substantial
portions of these funds will be expended
domestically.

Terms of trade developments for Middle Eastand North African groups are tightly linked tointernational price movements and theunderlying commodity composition of goods
trade. For the diversified economies, the direct
impact of the first ―food crisis‖ of 2008 cost thegroup some 2.2 points of GDP (with Jordan an
exception) as prices ratcheted much higher. But
the loss was more-than offset during the global
recession of 2009 for most countries withsoftening oil and food prices. During 2010 and2011, the terms of trade are anticipated todeteriorate in Jordan, Lebanon, and Morocco,with both oil and food prices rising. The
diversified economies in aggregate are likely toface a fairly moderate decline of 0.8 percentage
points of GDP in 2010-11 (figure MNA.7a).

FDI and portfolio flows to the region likely tofall sharply amid rising risk aversion.
Foreign direct investment (FDI) inflows to thedeveloping region, increasingly originating in
the GCC economies, had been a welcome sourceof new capital, attracted not only to tourism andrelated facilities but also to industry (oil and gas,and other), services (telecoms) and real estate(table MNA.2). Countries tending to benefit
most from FDI were Egypt, Tunisia, Moroccoand to a lesser degree, Jordan and Lebanon. At
peak dollar volumes in 2008, FDI amounted to$29.3 billion or 3.1 percent of regional GDP.

Figure MNA.7a Several diversified economies suffer
terms of trade losses in 2010-11

Figure MNA.7b Oil exporters enjoy two years of
windfall revenues in 2010-11

change in termns of trade as a share of GDP (%)
5

Change in terms of trade as a share of GDP (%)
15

4
10

3
2

5

1
0

0
-1

-5
-2

2009

2010

2011

-3

-10
JordanLebanonSource: World Bank.

Morocco

Egypt

2009

Source: World Bank.

107

2010

2011

Global Economic Prospects June 2011: RegionalAnnex
Capital flows to developing Middle East andNorth Africa held up exceptionally well during
the recession of 2009 and over the course of2010 (figure MNA.8), amounting to $26 billion
in 2009, an increase of $6 billion, and theequivalent of 0.6 points of GDP. Other flows
stepped up to offset a $4 billion falloff in FDI
during 2010—including issuance of sovereign
bonds from among others Tunisia and Lebanon,
and an increase in official lending to the region.

closed on January 28.
Financial projections for 2011-2013 prepared by
the World Bank suggest a sharp falloff in net
capital flows in 2011, followed—underassumptions of a gradual equilibration ofpolitical conditions in the region—by fairly rapid
resumption of flows to reach recent pre-turmoil
levels by 2013 (table MNA.2). In particular, FDI
is seen to almost-halve from $20-to $10.7 billion
in 2011, as GCC and other investors adopt a‗wait and see‘ perspective to political–economy
developments. Indeed, the focus of the GCC,
less affected by political unrest and bolsteredwith new revenues, may turn ―inward‖ for a time
to bolster domestic demand and infrastructure
investment. The recently announced $20-billion
Gulf Development Program for Bahrain andOman is an example of this emerging trend.

Following the onset of political disturbance,
financial market risk premia increased, implying
tighter financing conditions for sovereign- andcorporate borrowers. Spreads on Egyptian
sovereign credit default swaps (CDSs) increasedby 100 to 150 basis points through February andMarch 2011. Equity bourses were hard hit from
Egypt to Dubai (UAE) to Morocco, with MSCI
dollar-based indexes dropping by double digits.
Egypt‘s market capitalization plummeted 14.5
percent during the week before the exchange was

Net private flows in 2011 are viewed to drop by
a substantial 83 percent to $4.1 billion from $28

Table MNA.2 Capital flows to the Middle East and North Africa$ billions
2003
Current account balance
34.7
as % of GDP
8.2
Financial flows:
Net private and official inflows
13.5
Net private inflows (equity+private debt) 15.6..Net private inflows (% GDP)
3.7
Net equity inflows
10.2..Net FDI inflows
10.0..Net portfolio equity inflows
0.2
Net debt flows
3.4..Official creditors-2.1....World Bank
-0.3....IMF-0.6....Other official-1.2..Private creditors
5.4....Net M-L term debt flows
0.9......Bonds
0.7......Banks-0.2......Other private
0.4....Net short-term debt flows
4.6
Balancing item /a-25.1
Change in reserves (- = increase)-23.2
Memorandum items
Workers' remittances
20.5

2004
49.5
10.2

2005
58.9
10.7

2006
68.9
10.8

2007
74.2
9.6

2008
70.5
7.7

2009
-10.8
-1.1

2010e
15.4
1.4

13.0
16.4
3.4
10.4
9.7
0.7
2.6
-3.4
-0.6
-0.5
-2.3
5.9
2.7
2.8
0.0
0.0
3.2
-47.8
-14.7

19.4
22.4
4.0
19.2
16.8
2.4
0.2
-3.0
0.0
-0.7
-2.3
3.2
2.9
2.5
1.3
-0.9
0.3
-39.3
-38.9

14.4
25.7
4.0
28.2
27.2
1.0
-13.7
-11.2
-0.8
-0.2
-10.3
-2.5
-1.7
0.8
-1.3
-1.2
-0.8
-45.5
-37.8

29.4
28.4
3.7
25.5
27.6
-2.1
3.9
1.1
1.0
-0.1
0.2
2.8
-0.7
0.7
-0.2
-1.2
3.5
-55.6
-48.0

21.1
22.9
2.5
29.7
29.3
0.4
-8.6
-1.8
-0.3
-0.1
-1.4
-6.8
-2.7
-0.8
-0.5
-1.3
-4.2
-48.2
-43.4

27.8
25.5
2.7
25.6
24.4
1.2
2.2
2.3
0.9
-0.1
1.4
-0.1
-1.7
0.5
-1.2
-0.9
1.6
7.3
-24.2

28.0
25.1
2.3
21.5
20.1
1.4
6.5
2.9
1.8
-0.1
1.2
3.6
5.0
2.3
2.7
0.0
-1.4
-32.0
-11.3

23.2

25.1

26.5

32.1

36.0

33.6

35.6

Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.

Source: World Bank.

108

2011f
68.1
5.6

2012f
74.2
5.7

2013f
60.2
4.3

4.1
0.3
11.0
10.7
0.3

22.1
1.7
17.9
17.4
0.5

29.6
2.1
23.2
22.6
0.6

-6.9

4.2

6.4

36.9

38.9

Global Economic Prospects June 2011: RegionalAnnex
billion in 2010—a falloff equivalent to 2.1
percent of regional GDP. Thereafter, a revival of
FDI is hoped to lead private flows back into a
range near $20 billion, with new opportunities
for investment emerging in the region. Clearlyrisks to this projection are numerous, and inparticular, a more extended period of time may
be required before international and local risk
aversion regarding the region is diminished.

weaker worker remittances; FDI flows arelikely to decline substantially. Unemployment
reached 11.9 percent during the first quarter of
2011, and may increase further as a result of
disruptions to activity, but also as some
183,000 overseas workers have returned– andare continuing to return from Libya.14 Against
this background, GDP growth is anticipated todrop sharply to 1 percent in 2011. Recent
reports regarding financial support frominternational organizations and bilateral donors
is encouraging.

Economic developments and policy among thediversified economies. 13
A stronger start to 2010, and a sufficiently
diverse set of outturns across countries, meantthat GDP growth for the diversified groupfaltered by just 0.3 points from 2009 outturns to
4.5 percent in 2010—still notable as a 0.4
percentage point mark-down from earlier
expectations.

 The Tunisian revolution, removal of former

President Ben Ali and dissolution of the rulingparty and Parliament have been significant
developments. GDP is anticipated to be hard
hit by declines in production and in services
activity (tourism), such that growth of 1.5
percent is a likely outturn for 2011. Theinterim government has undertaken short-term
measures to support business and the labormarket; and a with $1 billion multi-donor
package the financial situation should remain
manageable.

 Until recent political events, the Egyptian

economy showed strong signs of recovery
from the global recession, during which
Egypt‘s GDP advanced 4.7 percent against an
increase of 1.9 percent for all developing
countries. Consumer spending and increasing
activity in construction, tourism andcommunications were driving forces for
growth, which moved up to 5.2 percent in2010. Egypt is facing a more prolonged periodof political uncertainty with signs emerging
during early 2011 of disruptions to production,
widening trade deficits, falling tourism and In Jordan, political tensions are occurring

while economic recovery remains weak. GDP
growth of 3.1 percent characterized 2010,
based on weak consumption and a drop in
public investment. In February, Moody‘s and
S&P both downgraded Jordan‘s debt outlook
rating, raising the cost of capital for theKingdom. To address social concerns the King
launched initiatives related to corruption andimproving governance and the government
increased social spending and subsidies on theorder of 2.1 percent of GDP. In Lebanon, thegovernment of National Unity formed in
November 2010, collapsed on January 12,2011 blocking further policymaking. Still the
economy grew by a rapid 7 percent in 2010 on
the back of domestic demand fueled by foreign
financial inflows. A key risk is that traditional
Lebanese political rifts could re-emerge amid
the regional unrest of 2011.

Figure MNA.8 FDI viewed to halve from $20- to$10 billion in 2011
net capital f lows to developing MENA region
billions USD [L] and %GDP [R]billions USD

35% of GDP

3.5
3.0

25

2.5

15

2.0
5

1.5
-5

Portfolio flows
FDI
Official creditors
Medium-term debt
Short-term Debt
Share of GDP %

-15
-25
2008

2009

2010

1.0

 And

in Morocco, the King announced
potentially significant constitutional andpolitical reforms in response to a series of
popular protests in more-than 52 cities duringlate February 2011. The announced proposals

0.5
0.02011 fcst

Source: World Bank.

109

Global Economic Prospects June 2011: RegionalAnnex
appear to be short of the youth movement‘s
demands, but are supported by political parties.
The economic outlook remains generally
favorable with a sustainable macro- andfinancial framework. GDP growth could pickup in 2011 based on gains in domestic
demand, in part funded by increased subsidies
for food and fuel.

authorities over a range of intensity (from most
severe in Yemen and Syria, to latent populardissatisfaction in Iran, and to a lesser degree in
Algeria). Growth for the aggregate of oil
exporters dipped from 2.2 percent in 2009 to 1.4
percent in 2010. Gains across the group ranged
from 1 percent in Iran to 3.3 percent in Algeria,with Yemen an exception, as the coming onlineof an LNG train boosted growth to 8 percent in
the year. OPEC members GDP gains were
dampened by constraints in hydrocarbons output
in support of price targets, but were supported bystronger growth in non-oil GDP. All oil
exporters benefited from the 28 percent gain inoil prices in 2010 (to $79/bbl from $62/bbl in2009).16

 Oil exporter’s windfall eclipses 2007-08.

Middle East and North African developing and
GCC oil exporters15 appear set to eclipse thehydrocarbon revenue windfalls of 2007-08
during the course of 2011 (figure MNA.9). The
cumulative increase in oil export receipts over
2010-11 amounts to $370 billion or 37 percent ofoil exporter-GDP, with total revenues expected
to peak at $845 billion in 2011. Several large
exporters (including Saudi Arabia) have begun
to advance production modestly to offset the lossof Libyan crude, and combined with the 36
percent gain in crude oil price for the year,
resulting export receipts are anticipated toincrease within a range of $85 billion for Saudi
Arabia to $10 billion in Oman. The aggregate
result contrasts with top receipts of $735 billion
during 2008, with the buildup in revenues having
accrued to $245 billion over 2007-08.

 Althoughprotests in Algeria have notcoalesced into revolutionary style movements
as in some neighboring countries, Algeria‘s
anticipated $72 billion in crude oil and natural
gas exports in 2011 remains somewhat
vulnerable to political unrest which could
disrupt shipments. GDP gains in 2010 weregrounded in moderate advances for the oil
sector and non-oil growth of some 5.3
percent—reflecting strong multiplier effects
associated with public infrastructure programs.
Authorities have mitigated the chances ofunrest by increasing food subsidies andmicrocredit loans; adding public sector jobs
and promising more sustainable employment
in other sectors of the economy. Though

Within the region, such massive revenue gains
for oil exporters offer authorities the means toincrease spending of various forms to mitigate
the potential for protest and social unrest. Saudi
Arabia for example, pledged to provide
unemployed Saudi nationals with financial
support for a year, helping its young populationcope with structurally high unemployment. The
Saudi Government issued a number of suchorders with a total cost of SR135 billion ($36billion) for the first year; possibly accumulating
to $100 billion over 10 years.

Figure MNA.9 Middle East and North Africa oilrevenues build by $370 billion over 2010-11
billions U.S. dollars
900
800
700
600
500
400
300

Developing oil exporters face economic as well
as social challenges against a broadly
favorable international background

200
100
0
2005

The group of developing oil exporters in theregion, Algeria, Iran, Syria, and Yemen, form agroup of economies troubled by political protest
and/or forms of repression on the part of

2006

2007

Saudi Arabia
Kuwait
Yemen

2008

UAE
Algeria
Syria

2009

2010

Iran
Oman

2011

2012

Qatar
BahrainSource: World Bank-COMTRADE and International Energy Agency.

110

2013

Global Economic Prospects June 2011: RegionalAnnex
spending has added a degree of stress to thefiscal position, new oil revenues should morethan compensate in the near term. With OPEC
likely to expand output over the next years,
Algeria should be well placed to participate
more fully in energy markets, while keeping
domestic demand buoyant.

favor Middle East and North African oil
exporters with terms of trade moving largely
against regional oil importers, but intensified for
all countries by the surge in international grains
prices.
As highlighted in figure MNA.10, the net resultof regional and international developments is astrong compression of GDP growth for theaggregate of developing countries in the region,
moving down by 1.2 percentage points between
2010 and 2011 to 1.9 percent. The step-down ingrowth for oil exporters (0.6 points in the year)
to 1.4 percent, compounds the sharper downturnfor diversified economies (2 points), dominatedby markdowns from pre-‗social revolution‘
projections for several countries (figure MNA.1
earlier). The diversified economies in aggregate
are expected to fall from growth of 4.5 percent in2010 to 2.5 percent in 2011.

 The recent upturn in unrest in the Middle East

appears to have briefly reinvigorated Iran’s‘Green Movement‘, however there was no
substantial effects on the economy as protests
were quickly suppressed. Despite
improvements in global oil markets, Iran‘s
growth has weakened over the last two years
as a result of a major tightening of monetary
policy in mid-2008 that led to a slowdown ingrowth in 2009; a large-scale subsidy reform
program that went into effect in December
2010, and the effects of the 4th round ofinternational sanctions against the country
taking hold. GDP growth registered a meager
0.1 percent during 2009, and remained weak at
a 1 percent gain in 2010. The approved 2011budget contains a major fiscal stimulus
package that pushes budgetary spending up
sharply (46 percent), to counter subsidy
reforms and sanctions, putting additionalpressures on already accelerating inflation.

Differences in current account balances between
the groups for 2011 are presented in table
MNA.3—with oil exporter surpluses rising from
5.4-to 12.6 percent of GDP from 2010 to 2011,vis-à-vis increased deficits of some 0.8 points forthe diversified economies to 4.8 percent of GDP.
On fiscal accounts, deficits increase to more-than
7 percent of GDP in 2011 for the diversified
exporters given the drain on government
revenues associated with declining tourism andpotentially increased subsides to cover higher
food and fuel costs; for developing oil exporters,
fiscal deficits narrow by 1.7 points to 0.5 percent
of GDP.

 Syria (more recently) and Yemen have joined

Libya closer to the fulcrum of popular protest
and severe, violent repression by authorities in
the region. Economic developments will likely
move into second-tier consideration until someform of resolution is found to the violence andcivil-war like conditions in Yemen andrepression by Syrian authorities. Neither
country is a major exporter of crude oil (Syria
about $4 billion) and Yemen just commencing
gas production and exports amounting to $8
billion in 2010.

Political economy transitions will be crucial forthe economic outlook. Under the assumption thatsome form of ―normalization‖ takes place acrosscountries—a revival in domestic demand
becomes feasible, as does the ability of
economies to participate in a rebound ininternational activity, through goods trade,
tourism and investment flows. On these grounds
views for GDP growth over 2012-13 aremoderately optimistic for the developing region-though still below pre-‗Arab Spring‘
expectations—at 3.5 and 4 percent respectively.

Medium-term outlook
Political economy developments within theregion appear likely to result in less disruption toeconomic activity in those oil-exporting
economies least exposed to unrest and moreaggressive popular calls for reforms. At the sametime, the international environment has come to

Regional growth in this phase is likely to be111

Global Economic Prospects June 2011: RegionalAnnex
driven by the diversified economies, 4 and 5
percent gains over the period respectively, led by
5 percent advances in Egypt by 2013, and byimprovements in performance for Morocco,
Jordan, Lebanon and Tunisia to similar rates ofgrowth. Domestic demand contributes fully 7.8
points of growth in these years, with net exports
influenced by a catch-up in import demand,
dampening GDP gains by about 3.3 percentage
points. Developing oil exporters experience a
more modest growth pickup to 3.2 percent in2012-13 powered by public spending programsin both Algeria and Iran. As the current run-up in
oil prices turns to a modest gradual decline overthe period current account surplus for the groupeases from 12.6 percent of GDP in 2010 to 9.7
percent by 2013, in part due to strong import
growth tied to large infrastructure and social
development programs.

Figure MNA.10 Growth returns to 4 percent by
2013 under favorable assumptions
percent change
5
2010

2011

2012

2013

4

3

2

1

0
Diversified Exporters

Developing Oil
Exporters

Developing MENA

Source: World Bank.

Table MNA.3 Middle East and North Africa country forecasts(annual percent change unless indicated otherwise)
98-07aAlgeria
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Egypt, Arab Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Iran, Islamic Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
JordanGDP at market prices (2005 US$) b
Current account bal/GDP (%)
LebanonGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Morocco
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Syrian Arab Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Tunisia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Yemen, Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

2008

2009

Est.
2010

Forecast
2011
2012

2013

3.5
28.9

2.4
20.0

2.4
0.3

3.3
9.4

3.7
17.8

3.6
17.4

3.5
12.0

4.3
0.9

7.2
-0.9

4.7
-2.3

5.2
-2.0

1.0
-2.9

3.5
-2.4

5.0
-2.0

4.9
10.3

1.0
15.7

0.1
4.2

1.0
6.0

0.0
14.5

3.0
14.0

3.0
12.0

5.6
-2.3

7.6
-9.6

2.3
-5.1

3.1
-4.3

3.5
-8.0

4.0
-6.8

5.0
-6.0

2.8
-17.5

9.3
-13.7

8.5
-21.5

7.0
-15.4

4.8
-15.6

5.0
-15.6

6.0
-15.0

3.7
1.4

5.6
-5.2

4.9
-5.0

3.3
-4.2

4.4
-4.0

4.5
-3.5

5.0
-3.0

2.9
3.0

4.5
0.3

6.0
-5.7

3.2
-4.4

1.7
-5.3

3.0
-4.8

3.0
-4.5

4.5
-2.8

4.5
-3.8

3.1
-2.9

3.7
-4.8

1.5
-6.2

3.5
-4.0

4.5
-3.8

3.5
2.5

3.6
-4.6

3.9
-10.7

8.0
-4.4

3.0
-4.0

4.0
-4.0

4.0
-3.4

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly
differ at any given moment in time.
Djibouti, Iraq, Libya, West Bank and Gaza are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the
GDP deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Source: World Bank.

112

Global Economic Prospects June 2011: RegionalAnnex
region included in this report are Algeria,
The Arab Republic of Egypt, The Islamic
Republic of Iran, Jordan, Lebanon, Morocco,
the Syrian Arab Republic, Tunisia andYemen. Data is insufficient for the inclusionof Djibouti, Iraq, Libya and the West Bankand Gaza. The high-income economies
included here are Bahrain, Kuwait, Oman
and Saudi Arabia. Data is insufficient for the
inclusion of Qatar and the United ArabEmirates. The group of developing oil
exporters includes Algeria, the Islamic
Republic of Iran, the Syrian Arab Republic
and Yemen. The diversified economies of
the region (oil importers) may be usefully
segmented into two groups: those withstrong links to the GCC (Jordan andLebanon), and those with strong EU links(The Arab Republic of Egypt, Morocco andTunisia).

Risks
Among the numerous challenges facing theregion at this critical time, are wide variations inthe set of possible political-economy outturns
that could result from the series of reformmovements and differing responses ofauthorities over 2011, from lower growthscenarios associated with limited or unsuccessfulreform, to higher growth scenarios linked todeeper and swift changes. The outturns of suchdevelopments in the Middle East and North
Africa would carry effects well beyond thegeographic boundaries of the area, as the oilmarket (for one) would act as a powerful channel
for transmission to the global economy.
The ongoing fiscal crisis in the Euro Area
presents an external risk for the region, which if
continued or intensified would imply a longer
period of sub-par exports and growth for the
Maghreb economies. Moreover, if risk
perceptions regarding the broader Middle Eastand North Africa region have ―hardened‖ due tosafety and other concerns, a risk that the flow of
tourist arrivals from Western Europe might belost for an extended period of time is one ofconcern.

3. See ―Middle East and North Africa
Economic Recovery Weakened in the Midstof Arab Uprisings‖, A Regional Economic
Update. Middle East and North Africa
Region. The World Bank. April 2011.
4. See Arab World Brief: Shamshad Akhtar.
Vice President, World Bank, Middle Eastand North Africa region. February 2011.

And should oil prices remain at higher levels fora longer period of time, emergence of newer
energy sources (affordable at prices over $100/
bbl oil equivalent), such as solar/ocean,
Canadian tar sands, U.S. shale gas andimprovements to enhanced recovery techniques
could yield faster-than earlier anticipatedcompetitive pressures for hydrocarbon exports inthe medium to longer terms.

5.

Notes:
1. Global Economic Prospects: ―Navigating
Strong Currents‖. The World Bank. January
2011. Internet. And ―Sustaining the
Recovery and Looking Beyond‖, A Regional
Economic Outlook. Middle East and North
Africa Region. The World Bank, January
2011.

The types of growth rates discussed in thissection and throughout the report, andappearing in accompanying figures—range
from simple year-over-year (y/y) percentagechange: gy/y=((Xt/Xt-12))-1)*100; a ‗smoothed‘
yr/yr rate, which helps to even out volatility
to highlight underlying trends: sgr=(((average(Xt-2:Xt)/(average (Xt-14:Xt-12))-1)*100, and aseasonally adjusted annualized rate (saar)
which annualizes (i.e. multiplies– or raises tothe power-4) the relationship between
consecutive 3-month averages to obtain aclearer picture of most recent trend
developments. saar=(((average(Xt-2:Xt)/(average(Xt-5:Xt-3))**4)-1)*100.

6. See ‗World Tourism Impact Data‘. World
Travel & Tourism Council (WTTC).
London. 2011. www.wttc.org for definitionsof ‗direct-, indirect, and induced‘ impacts of

2. The low-and middle income countries of the113

Global Economic Prospects June 2011: RegionalAnnex
tourism on the national economy. And‘UNWTO World Tourism Barometer‘.
United Nations‘ World Tourism
Organization. Madrid. April 2011.

(including Qatar and UAE), Algeria, Iran,
Syria and Yemen. Data for Iraq and Libya is
not available at this time.
16. Expressed as World Bank average price.

7. World Bank preliminary projections. Middle
East and North Africa Poverty Reduction
and Economic Management Unit. May 2011.
8. Worker remittances as presented in thisreport are sourced from the World Bank‘s
Migration and Remittances Unit (DEC/
PREM). The definition of ‗remittances‘compiled by the Unit differs from that of the
IMF‘s Balance of Payments (BOP)
construct: in particular, to the BOP transfer
item ‗worker remittances‘ is added BOP
factor income items ‗compensation of
employees‘ and ‗migrant transfers‘ (on boththe credit and debit sides). Data is reported
as gross receipts (credit) or payments (debit)
presented in calendar-year U.S. dollars.
9. See ‗Migration and Remittances Factbook
2011‘. World Bank. Migration andRemittances Unit. November 2010.
10. The World Bank average price of crude oil isa simple average of Brent, Dubai, and WTIbenchmarks.
11. Middle East and North Africa ‗Knowledge
and Learning Note‘. Number 38. World
Bank. Middle East and North Africa
Department. March 2011.
12. It should be noted that the high price ofsugar on international markets served to shift
Brazilian producers of sugar cane fromdirecting output toward ethanol production,
to the refined sugar market. Indeed, Brazil is
now importing ethanol from the UnitedStates as an additive to local fuels.
13. ‗Economic Monitoring Notes‘. World Bank.
Middle East and North Africa Department.
Spring 2011.
14. As of March 14, 2011.
15. The group is comprised of all GCC members

114

Global Economic Prospects June 2011: RegionalAnnex

South Asia
developing countries, recovering demand in high-income countries and resilient worker
remittances inflows (table SAR.1).

Recent developments
After growing a robust 9.3 percent during
calendar year 2010, activity in South Asia
moderated in the first quarter of 2011—pointing
to a projected slowdown in aggregate regional
growth to a still buoyant 7.5 percent in 2011.
This slowdown partly reflects macroeconomic
policy tightening aimed at curbing stubbornly
high price pressures and reducing large fiscal
deficits. Tighter financing conditions havecontributed to a moderation in private
investment growth, while private consumption
growth has been hit by high and rising food andfuel inflation. The moderate compression ofdomestic demand has been partly offset bystrong exports, as countries in South Asia havebenefited from robust import demand in

The regional economic slowdown in 2011
mainly reflects a fall-off in activity in India,
which represents about 80 percent of South
Asia‟s GDP, where growth is projected to easeto 8 percent in FY2011/2012 from 8.8 percent in
FY 2010/11 (box SAR.1). The slowdown stems
from a moderation in domestic demand, as
elevated inflationary pressures have cut into
disposable incomes and household spending¸
and as more restrictive monetary conditions havecontributed to a dampening of investment
activity. In particular, investment growth
decelerated sharply in Q1-2011 to 0.4 percent
from 7.8 percent in Q4-2010 and 14.1 percent

Table SAR.1 South Asia summary forecasts(annual percent change unless indicated otherwise)
98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

GDP at market prices (2005 US$) b,f
GDP per capita (units in US$)PPP GDP d
Private consumption
Public consumption
Fixed investment
Exports, GNFS e
Imports, GNFS e
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

6.0
4.4
6.0
4.9
3.9
9.5
14.1
9.3
-0.2
-0.4
5.7
-7.1

5.9
4.5
5.8
6.8
16.9
5.6
13.7
24.8
-3.7
-3.3
8.4
-7.3

6.2
4.8
6.3
6.4
13.6
3.9
-6.3
-6.5
0.6
-1.7
7.5
-8.9

9.3
7.9
9.0
7.0
2.8
14.3
12.7
3.2
1.7
-2.4
9.8
-8.3

7.5
6.1
9.5
5.9
6.7
9.4
11.3
8.8
0.1
-2.8
8.8
-7.4

7.7
6.4
7.7
5.6
5.4
12.6
11.7
10.5
-0.2
-2.6
8.6
-6.9

7.9
6.6
7.7
5.9
4.8
13.1
12.4
11.6
-0.4
-2.4
7.0
-6.6

4.5
6.4
5.0
5.1

4.8
4.9
6.8
1.6
6.2

3.9
9.1
8.0
3.6
5.7

5.0
8.8
8.5
4.1
5.8

4.7
8.0
8.2
2.5
6.2

4.7
8.4
8.5
3.9
6.4

5.2
8.5
8.6
4.3
6.6

Memo items: GDP at market prices fSouth Asia excluding India
India
at factor cost
Pakistan
Bangladesh

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP figures are presented in calendar years (CY) based on quarterly history for India. For
Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two
fiscal year periods to provide an approximation of CY activity.
d. GDP measured at PPP exchange rates.
e. Exports and imports of goods and non-factor services (GNFS).
f. National income and product account data refer to fiscal years (FY) for the South Asian
countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs
from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in
Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Nepal,
and Pakistan report FY2009/10 data in CY2010, while India reports FY2009/10 in CY2009.

Source: World Bank.

115

Global Economic Prospects June 2011: RegionalAnnex
for 2010 overall (year-on-year). At the sectorallevel, a recent good harvest buoyed agricultural
production, following poor crops on low rainfallwith the 2009 monsoon. In contrast, industrial
output growth was weak in early-2011.

growth is also tied to worsening security
conditions, heightened political uncertainty,
stalled policy implementation, and extensive
infrastructure bottlenecks. While whole year
growth numbers are expected to be weak,
activity has begun to firm recently, as the effectsof the 2010-flooding (which affected an
estimated one-fourth of agricultural productive
capacity) wear off, supported by a surge inexports in early-2011, and an upswing in worker
remittances inflows.

Economic growth in Pakistan—the region‟ssecond largest economy (representing about 15
percent of regional GDP)—significantly lags
much of South Asia, and is projected to slow to
2.5 percent in FY2010/11 (ending June-2011)
from 4.1 percent in FY2009/10, reflecting thedevastating flooding across much of the countryin July and August 2010. The easing of GDP

Real GDP growth in Sri Lanka remains buoyant,but has decelerated in early-2011, due to floods

Box SAR.1 GDP reporting practices—market price versus factor cost and calendar year versus fiscal year
There are a number of measures of economic output—including gross domestic happiness as reported in Bhutan.
Most governments report headline GDP at market prices in calendar-year terms. In South Asia, many governments report data on a fiscal-year basis using factor costs to weight output rather than market prices. The Indian
government reports data in two different ways: factor cost and market prices, both in fiscal-year terms—although
it places greater emphasis on the factor-cost measure. Importantly, although these measures are consistent, they
can yield large differences.
The differences arise because the weights attached to sectoral growth rates differ, depending on which measure
you use. The factor-price measure weights output using prices that are net of indirect taxes less subsidies in a baseyear, while the market-price measure uses weights that are based on the actual market prices observed in a baseyear. If the underlying growth rates of sectors with relatively high net tax-rates are different from those of sectors
with relatively low net tax-rates in the base year, then there will be a systematic and persistent difference between
real GDP growth measured at factor cost and GDP measured at market prices. Indeed such persistent differences
between real GDP growth at market prices and at factor cost are observable across most countries that publish
both data, including Brazil, Australia and Germany, for example. In India, this difference is historically about 0.3
percentage points over the past twenty years, and by even more in recent years.
There are a number of reasons why countries choose to report different headline measures. Only a small subset ofcountries (Egypt, Indonesia, Iran, and much of South Asia), report headline GDP at factor cost, in part reflectingthat agricultural sectors remain important drivers—albeit typically declining—to their growth outturns. Similarly,
countries often report data in fiscal years (instead of calendar years), as this often reflects the given country‟s cropyear.
For the purposes of this report, GDP growth is provided at the country level at market prices in both calendar-year
terms and fiscal-year terms for South Asia, while all regional aggregates are provided at market prices in calendar-year terms. The use of GDP at market prices in calendar-year terms enables ready comparison and aggregation
across countries. This is because the vast majority of governments outside of South Asia report headline GDP atmarket prices—as it tends to be easier to monitor (and more reliable) given tax receipts, for example. Additionally, fiscal years can vary significantly across countries. For example, India‟s fiscal year runs from April 1
through March 31 and Nepal‟s fiscal year runs from July 16 through July 15.
India's real GDP growth at market prices and factor cost, in calendar year- and fiscal year-terms
2003
2004
2005
2006
2007
2008
2009
Market Price
6.9
7.9
9.2
9.4
10.1
6.2
6.8
Factor Cost
7.4
7.2
9.2
9.6
9.7
6.1
8.5

Market Price
Factor Cost

2010
10.3
9.0

2003-04FY 2004-05FY 2005-06FY 2006-07FY 2007-08FY 2008-09FY 2009-10FY 2010-11FY
8.4
8.3
9.3
9.3
9.8
4.9
9.1
8.8
8.5
7.5
9.5
9.6
9.3
6.8
8.0
8.5

Sources: Central Statistics Office, India and The World Bank.
Note: For years 2006 and 2005-06FY onward, the base year is 2004-05FY. For prior years, the base year is 1999-2000FY.

116

Global Economic Prospects June 2011: RegionalAnnex
that damaged a significant share of this year‟s
early crop. GDP growth in 2010 (calendar year)
registered 8 percent and has been strongly
underpinned by the peace dividend following theend of the decades-old civil war. The recovery
was led by private consumption and investment.
Agricultural output growth was boosted by the
return to production of previously fallowed landwith the cessation of fighting, while services
activity benefitted from an upsurge in tourism.
Activity in the first few months of 2011 has
slowed due to waning of these rebound effects
from the end-of-conflict and more normal
growth rates in agriculture (aside from thenegative impact of floods).

sectoral level, rising agricultural output reflects
good harvests, and strengthened industrial
production has been buoyed by a revival ingarment exports. However, Bangladesh‟s output
continues to be constrained by widespread power
supply outages, which are expected to limit GDP
gains to 6.2 percent FY2010/11 (ending June2011) from 5.8 percent in FY2009/10.
Among the remaining economies in South Asia,
Bhutan‟s real GDP is firming, underpinned byconstruction of additional hydropower projects,
and to a lesser extent by a revival in tourism. In
FY2010/2011 GDP growth is projected to rise to
8.3 percent, up from 6.9 percent in 2009/10,(ending June-2010). The recovery in theMaldives appears to have firmed slightly in early-2011 with strong tourism arrivals. In 2011,
GDP growth is projected to accelerate to 5
percent (calendar year) following 4.8 percent in2010. Tourism is expected to remain the key
driver for growth, supported by a 17.4 percent
expansion of capacity (number of beds) at end2010 and robust growth in arrivals stemmingfrom diversification to faster-growing newmarkets. In particular, China surpassed theUnited Kingdom in 2010 as the largest source of
tourists to the Maldives.

Afghanistan‟s GDP (on a fiscal year basis) is
expected to have grown 8.2 percent in
FY2010/11 (ending June-2011), down from anunsustainable 20.1 percent increase in
FY2009/10 that was driven by a record harvest(following a long period of drought) and an
upswing in donor grants. Output this year
continues to be bolstered by reconstruction andstrong aid inflows, which are reflected in arobust expansion of services (includingtransport) and vibrant construction activity.
Nepal also experienced a moderation in activity
in early-2011. Ongoing political uncertainty
attached to the post-conflict transition to a new
government has extended into its fourth year,with law and order problems, continued
extensive infrastructure bottlenecks (particularly
widespread load-shedding and unreliable power
delivery) projected to limit real GDP growth to
3.5 percent in FY2010/2011 (ending mid-July2011), down from 4.6 percent in FY2009/10.

Inflationary pressures are elevated across South
Asia reflecting various factors, including higher
international food and fuel prices, tight capacity
utilization, and past macroeconomic loosening,which have led to elevated inflation expectations
and higher core prices (figure SAR.1). Highinternational fuel and food prices are key factors
in South Asia because of its heavy reliance on
imports of oil and some staples, such as edibleoils. Additionally, food represents a large share(about 40 percent) of the regional household
consumption basket, a key concern from apoverty perspective.

GDP growth has been picking up in Bangladesh,
where private consumption spending has been
supported by higher private sector credit growthand public- and private-sector wage increases.
However, the strong boost to consumer incomesfrom worker remittances in 2009 (up 17.1
percent in dollar terms that year) has given way
to a much more modest 2.7 percent gain in 2010,reflecting falling net outmigration since 2009
and fewer remitters following last year‟s returnof workers from several gulf states. At theIn particular, international wheat and edible oils
prices have surged, while rice prices haveremained more stable. Afghanistan, the Maldivesand Sri Lanka—where at least one-third ofdomestic consumption of grains (including rice,wheat, pulses) and edible oils is imported—are
most exposed to an imported pass-through of117

Global Economic Prospects June 2011: RegionalAnnex
higher international commodity prices (figure
SAR.2). Indeed, reliance on imported edible oils
is high across the region, where at least twothirds of consumption is imported (inAfghanistan, Bangladesh, India, Pakistan, andSri Lanka, for which data is available). Somecountries are self-reliant in key staples, such as
Bangladesh, India and Nepal, where rice-imports
represent a very small share of consumption (2percent or less). Notably, the short-run passthrough (monthly) of international grain prices isgenerally low in South Asia, partly reflecting
administered prices. For example, in India,
wheat prices have remained well-below
international prices, compared to near complete
pass-through in Bangladesh.

partial liberalization of petroleum prices in India(mid-2010); and the raising of administered
petrol prices elsewhere in the region (including
Bhutan, the Maldives, and Pakistan). A recent
devaluation of the Maldives‟ currency, following
the introduction of an exchange rate band aroundthe Rufiyaa/US-dollar peg (R12.85/$1) of plus
or minus 20 percent, has also contributed to aresurgence of inflation in that country.
To rein-in domestic demand and inflationarypressures, monetary authorities have initiatedpolicy rate hikes in Bangladesh, India, andPakistan, with the Reserve Bank of India having
started raising rates in March 2010. Despite
these measures, real policy interest rates arenegative—or remain looser than they were prior
to the crisis (figure SAR.3). Unfortunately,
bringing inflation back down will becomplicated by the trend rise in inflation overthe past decade, which has contributed to anincrease in inflationary expectations in recent
years. Household surveys in India, for example,
indicate that consumers‟ inflation expectations
have increased over the last four years (from 5.8
percent in Q4-2006 to 13.1 percent in Q4-2010
for year-ahead inflation), and have recently
jumped by 1.2 percentage points in the second
half of 2010 (figure SAR.4).1

The strength of the recovery in South Asia partly
explains the persistence of inflation in theregion, as little spare capacity remains. Althoughestimates of potential output can vary depending
on methodology and assumptions—especiallyfor countries with ongoing conflict, such as
Pakistan, or coming out of conflict, such as Sri
Lanka—measures across sources for many of theregion‟s economies (Afghanistan, Bangladesh,
India, Sri Lanka) suggest output gaps narrowed(or closed) in 2010, which has likely contributed
to price pressures. In addition, a series of local
one-off factors have contributed to pricepressures including: the economic disruptions
from flooding in Pakistan (during the second
half of 2010) and Sri Lanka (early-2011); theDespite the steps taken earlier to reduce fuelsubsidies, the pass-through of higher
international energy prices is incomplete,Figure SAR.1 South Asia’s inflationary pressures
sharply exceed other developing countries in postcrisis years

Figure SAR.2 Imports of rice, wheat and edible oils as ashare of domestic consumption

median annual percent change, CPI%-shares, 2008/9-2010/11period averages, zeros indicate no data
available, ranked by wheat

12

140

120

Developing Countries

10

Rice

100

South Asia
8

Wheat

Edible oils

80

60

6
40

4

20

0
Nepal

2
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

India

Pakistan

Afghanistan

Bangladesh

Sri Lanka*

Sources: World Oil, U.S. Department of Agriculture and The World Bank
*Sri Lanka's wheat imports as a share of consumption is above 100% due to re-exports

2010

Sources: Thomson Reuters and World Bank.

Source: U.S. Department of Agriculture and World Bank.

118

Global Economic Prospects June 2011: RegionalAnnex
increasing subsidization costs and contributing
to fiscal deficits (figure SAR.5). The region‟slarge general government budget deficits are also
complicating efforts to restrict domestic demand
and reduce inflation. South Asia‟s aggregate
fiscal deficit continues to outstrip those of otherdeveloping regions. And, despite progress
toward fiscal consolidation in some countries(India, Maldives and Sri Lanka) in 2010, general
government deficits remain very high, at 8.8
percent of GDP in India for FY2010/11, 20.7
percent in the Maldives for CY2010, and 7.9
percent in Sri Lanka for CY2010. Large outlays
for interest payments are slowing progress
toward fiscal consolidation, and—while
improving in some countries (Afghanistan,
Maldives, and Sri Lanka, for example)—the
region‟s low tax base makes consolidation
particularly challenging.

funded by the Tala hydroeclectic project revenue
stream. In Bangladesh, the deficit rose to 4.9
percent in 2010/11, due to large outlays forinvestment in power generation and higher
subsidies. Sizeable foreign aid inflows andimproved revenue performance helped contain
Nepal‟s deficit to a relatively modest 2.8 percent
of GDP and helped Afghanistan retain a surplus
of 0.6 percent of GDP.
Given high inflation rates—currencies in South
Asia appreciated in real effective (tradeweighted and inflation adjusted) terms, with the
Figure SAR.4 India's household inflation expectations
have increased
mean inflation rates for given survey quarter, y/y percent growth rates
17
Current perceived
1-Year Ahead

15

Actual CPI
Linear (Current perceived)

Elsewhere in the region, fiscal balances havedeteriorated. In Pakistan—after rising to 6.3
percent of GDP in FY2009/10—the deficit
continued to expand in the first half of
FY2010/11 tied to flood-related outlays, highpower-sector subsidies and increased defense
spending. In Bhutan, the fiscal deficit rose to an
estimated 4.4 percent of GDP in FY2010/11, as
the government continues to plow money intodevelopment and infrastructure projects(including roads, financial services andinformation technology) that are only partly

Sources: Reserve Bank of India and World Bank.

Figure SAR.3 Real lending rates remain expansionary
in India and Pakistan, despite monetary policy tightening

Figure SAR.5 Elevated food and fuel prices are likely
to weigh on fiscal balances and might delay consolidation

lending interest rate minus CPI, annual growth rates, percent

General government balances, percent share of GDP

16

2

13

Linear (1-Year Ahead)
Linear (Actual CPI)

11
9

7
5
3
Q3-2006

Q2-2007

Q1-2008

Q4-2008

Q2-2009

Q1-2010

Q4-2010

1

12

0

8

-1
-2

4

-3

0

-4
-5

-4
-8
-12

Bangladesh

-6

India

-7

Pakistan-8

Sri Lanka

-9

2007

South Asia

-16
Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10

Sources: Economist Intelligence Unit and World Bank.

High-Income
countries

Source: World Bank.

119

2010

2013

Middle East East Asia and Latin America Sub-Saharanand NorthPacific
andAfricaAfricaCaribbeanGlobal Economic Prospects June 2011: RegionalAnnex
largest increases in Pakistan and Nepal, where
currencies stood about 15 percent above mid2008 levels at end-2010. Bangladesh‟s realeffective exchange rate had appreciated strongly
as well, but depreciated during much of 2010
and ended the year 12 percent above pre-crisis
levels. In India and Sri Lanka, real effective
exchange rate appreciation has been lesspronounced, about half the rates of appreciation
across the rest of the region (8 percent and 6
percent, respectively, over the same period).

in combination with higher import prices led to amodest deterioration in the region‟s trade deficit
from 6.2 percent of GDP in 2009 to 6.4 percent
of GDP in 2010.
Tourism receipts rebounded in 2010 following
the 2009 downturn with nearly all countries in
the region registering a recovery (Bhutan, India,
Maldives, Nepal, and Sri Lanka). Sri Lanka inparticular posted a 46 percent upsurge in tourist
arrivals following the end of civil war in 2009.
In general, higher regional tourist arrivals
reflected recovery in high-income Europe andvibrant growth in developing East Asia,
especially China.

Despite headwinds implied by appreciating
currencies, regional merchandise export volume
growth accelerated sharply in the second half of2010 (figure SAR.6). As the global growthrecovery has deepened, external demand forSouth Asia has firmed, with volume growth
given an extra impetus following a shift inexport market composition toward highergrowth developing countries (China) and awayfrom traditional export markets in slowergrowing Europe and the United States (figure
SAR.7). In India, the value of exports rose by
37.5 percent year-on-year to reach $245 billion
in FY2010/11, exceeding the $200 billion
government target. Among other factors, thisstrong performance reflects the success of thegovernment's strategy to expand export markets
in emerging economies, particularly in Latin
America and Asia. Regional merchandise import
volume growth remained robust as well, which

Worker remittance inflows to South Asia rose in
U.S.-dollar terms by 8.2 percent in 2010 to $81
billion, helping to offset sizeable trade deficits,
remaining a critical source of foreign exchange.2
However, when measured in local currency
terms, remittances inflows to the region grew by
only 4.1 percent in 2010, while high inflation
rates meant that the real value of these inflows
declined by 3.9 percent.
The pick-up in the dollar value of remittances
was strongest in Sri Lanka, where they increased
24 percent in 2010—reflecting increased inflows
through official channels and the boost in
confidence following the end of the civil war. In
Nepal, the dollar value of remittances expanded
Figure SAR.7 Shift toward developing country export
markets buoys South Asia's export growth as demandslackens in high-income countries

Figure SAR.6 South Asia's merchandise goods exports
recover following sharp deceleration in mid-2010
3m/3m, %-change, seasonally adjusted annualized rates,
long-term average=1991-2010
100
80

Developing excl. South Asia

percent share of South Asia's merchandise exports
40
2000-2004

South Asia

High Income Countries

World long-term average

30

60

25

40

20

20

15

0

10

-20

5

-40
-60
Jan-07

2005-200935

0

Aug-07Mar-08

Oct-08May-09Dec-09Jul-10Developing countries

Feb-11

European Union

Sources: CEIC and World Bank.

Sources: Thomson Datastream and World Bank.

120

United States

2010

Global Economic Prospects June 2011: RegionalAnnex
17 percent, supported in part by vibrant growth
in India, a key source-country for Nepalese
remittances. In India, the uptick in the dollar
value of remittances inflows was more modest(7.4 percent), reflecting larger shares of Indian
migrants in high-income countries that have yet
to fully recover from the financial crisis.
Elsewhere in the region, remittances inflows
moderated sharply in 2010 (in dollar terms) by
2.7 percent in Bangladesh, following 19.4
percent growth in 2009. The deceleration
appears to partly reflect a delayed impact of thedecline in the net outflow of migrants, which
nearly halved during the first half of 2009 andcontinued to decline in 2010 and into early-2011.

fell to 3.8 percent from 4.2 percent—roughly
half the peak share (7.8 percent) recorded in2007 when inflows reached $113.3 billion. South
Asia accounts for a small share (10 percent in2010) of total private capital inflows todeveloping countries, in part reflecting more
shallow financial markets—with the exceptionof equities (India). Capital inflows to South Asia
rose in the third quarter of 2010, after which theyfell-off in the fourth quarter and into early-2011,very much in line with the overall trend in flows
to developing countries in aggregate.
The composition of South Asia‟s inflows has
shifted markedly since the onset of the global
crisis, led by a sharp contraction in FDI
inflows—which are down 50 percent in 2010
from the 2008-peak. This compositional shift
also reflects a recovery in portfolio equity
inflows, which have expanded 19 percent above
the 2007-peak as of 2010. In comparison, for the
rest of the developing countries FDI inflows aredown by only 18 percent as of 2010 from the
2008-peak (including a 52 percent decline posted
by Europe and Central Asia). Portfolio inflows
to South Asia are more in line with
developments in the rest of the developingworld, standing 12 percent above 2007 peaks asof 2010. As a share of FDI inflows to developing
countries in aggregate, South Asia captured 5
percent, roughly in line with those captured by
Sub-Saharan Africa and the Middle East andAfrica.

South Asia‟s current account deficit deteriorated
in early 2011, reflecting higher oil import bills
and strong, albeit moderating, import volume
growth. Helping to contain the deterioration inexternal balances, the region recorded strong
export volume growth in early-2011 (led byIndia, Pakistan and Sri Lanka)—supported bystrong external demand from China. During
calendar year 2011, the regional current accountdeficit is projected to expand to 2.8 percent as ashare of GDP from 2.4 percent in 2010. In part
this reflects a projected shrinking of
Bangladesh‟s current account surplus, due to astronger pace of growth in imports over exports,
falling terms of trade (driven by risinginternational food and fuel prices) and a major
slowdown in worker remittances receipts.
Indeed, deterioration in the current accountprompted the government of Bangladesh to seek
IMF funding to help maintain business andinvestor confidence. While FDI to the region has
fallen (India and Pakistan), the regional current
account deficit is expected to continue to becovered by significant foreign exchange reserve
holdings, particularly in India, and sustained
capital inflows.

In contrast, South Asia attracts a
disproportionately large share of total portfolio
inflows to all developing countries, equivalent to28 percent in 2010, for example (or 1.5 percent
of South Asia‟s GDP versus about 0.8 percent
for other developing countries). While theseflows are more volatile than FDI flows, South
Asia has generally accounted for a relatively
large share of the total, and for 2010 exceeded
the shares of portfolio inflows accounted byother regions, with the exception of Latin
America and the Caribbean (with 35 percent in2010) and just above East Asia and Pacific (24percent in 2010). Investors have been drawn toSouth Asia‟s relatively liquid equity markets—
notably in India, where its companies have

Capital Flows
Net private capital inflows to South Asia
expanded by an estimated 12.3 percent in 2010
to $76.6 billion, driven by a doubling (110percent growth) in portfolio equity inflows (table
SAR.2). As a share of GDP, however, inflows

121

Global Economic Prospects June 2011: RegionalAnnex
continued to issue ADRs (American Depository
Receipts) and GDRs (Global Depository
Receipts) in recent years (in contrast to China forexample, where companies have stopped ADR
and GDR issuances). In comparison to equities,
South Asia‟s bond markets—including inIndia—are much less developed, thus effectively
channeling foreign investors into equities.
Elsewhere, flows to Latin America and the
Caribbean tend to be more concentrated in bonds
and flows to Europe and Central Asia—prior to
the global crisis—were more concentrated inbanking instruments.

double the level in 2009, with 47 percent of thefunds flowing to the energy sector. After India,
Sri Lanka and Pakistan also attract significant
equity inflows. Following the end of the civil
war in Sri Lanka of 2009 capital inflows have
surged, contributing to the Colombo Stock
Exchange‟s boom returns of 96 percent in dollar
terms in 2010, registering the largest gains in theworld in the year.
FDI to India, the region‟s main recipient, fell bynearly one-third in 2010. In January 2011, FDI
continued to decline sharply, down nearly byhalf from January 2010. This weak FDI
performance has occurred despite India‟s strong
growth. A confluence of factors may havecontributed to the sharp decline, which has
prompted the government of India to form apanel to investigate possible causes.
Nevertheless, it appears that increased regulatory
scrutiny of the sources of FDI has contributed toa fall-off in flows tied to „round-tripping‟ (toavoid taxes, for example) via offshore accounts.
Flows from Mauritius and Cyprus—which
together account for two-fifths of flows to
India—contracted markedly in 2010, by 60

India continues to account for the bulk of
portfolio inflows to the region, which arechanneled largely through institutional investors(which tend to squeeze out individuals). Foreign
equity inflows into India reached a record $44.8
billion in 2010, exceeding the previous peak of2007 before the market crash of 2008. The
increased participation of many foreign mutual
funds in the country has contributed to thesuccess of many new issues by Indiancompanies, such as the mega, public sector
offering of Coal India. In 2010 IPOs were nearly
Table SAR.2 Net capital flows to South Asia
$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+private debt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Workers' remittances

2003
12.5
1.6

2004
-1.2
-0.1

2005
-15.1
-1.5

2006
-16.8
-1.5

2007
-17.6
-1.2

2008
-49.9
-3.3

2009
-28.0
-1.7

2010e
-49.6
-2.4

14.5
18.6
2.4
13.5
5.4
8.0
1.0
-4.1
-2.3
-0.1
-1.8
5.1
3.1
-3.7
6.8
0.0
2.0
10.0
-36.9

21.2
21.5
2.4
16.8
7.8
9.0
4.4
-0.3
2.3
-0.3
-2.4
4.7
4.0
3.9
0.5
-0.3
0.7
7.6
-27.6

28.5
25.6
2.5
23.6
11.2
12.4
4.9
2.9
2.3
0.0
0.6
2.0
-0.2
-2.8
2.8
-0.2
2.3
-6.6
-6.8

76.6
73.1
6.3
36.4
26.0
10.4
40.2
3.5
2.0
-0.1
1.6
36.7
19.9
6.4
13.5
-0.1
16.8
-18.2
-41.7

117.7
113.3
7.8
68.4
32.3
36.1
49.3
4.4
2.0
-0.1
2.4
44.9
32.0
10.7
21.3
0.0
12.9
3.7
-103.8

61.4
52.8
3.5
32.9
48.7
-15.8
28.5
8.6
1.4
3.2
4.0
19.9
12.0
1.7
10.3
0.0
7.9
-37.8
26.3

77.7
68.2
4.2
58.8
38.3
20.5
18.8
9.5
2.1
3.6
3.8
9.3
10.3
1.7
8.6
0.0
-1.0
-11.0
-38.6

88.3
76.6
3.8
67.2
24.2
43.0
21.1
11.7
3.9
3.8
4.0
9.4
3.2
-2.6
5.8
0.0
11.1
-30.4
-8.3

30.4

28.7

33.9

42.5

54.0

71.6

75.1

81.2

Note : Only for Afghanistan, Bangladesh, Bhutan, India, M aldives, Nepal, Pakistan and Sri Lanka.
e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.

Source: World Bank.

122

2011f
-60.3
-2.8

2012f
-60.9
-2.6

2013f
-63.2
-2.4

103.1
4.8
73.1
36.1
37.0

107.3
4.5
82.8
43.8
39.0

118.3
4.5
92.3
51.3
41.0

30.0

24.5

26.0

88.7

93.8

Global Economic Prospects June 2011: RegionalAnnex
percent and 78 percent, respectively. In contrast,
total inflows to India excluding these countries
contracted by only 8 percent. Similarly, someprojects were delayed for environmental
compliance issues. For example, South Korean
steel giant POSCO suffered a setback when theEnvironment Ministry delayed the operation ofits $12 billion steel project in Orissa in mid2010. U.K.-based Vedanta‟s investment ofaround $9 billion was also halted in 2010, as it
had breached environmental regulations in themining sector. Other countries in the region
generally rank below India in international
investor surveys, with Afghanistan often ranked
near the bottom, helping to explain relatively
weak FDI inflows to South Asia. Remarkably,
Pakistan—where security concerns remain a key
hindrance—captures a similar share of FDI
relative to GDP as India and has exhibited thesame pattern of declining FDI inflows as India
over recent years (figure SAR.8).

with that of high-income countries (91 percent),
although the upward trajectory since the onset ofthe financial crisis is not as pronounced in South
Asia as in high-income countries—with themarked exception of the Maldives.

Medium-term outlook
Regional GDP growth is projected to continue torecord strong growth outturns averaging 7.7
percent in calendar terms and at market prices
from 2011 through 2013, off 1.6 percentage
points from the 9.3 percent outturn of 2010—but
1.7 percentage points above the pre-crisis
decadal average from 1998 through 2007. The
deceleration from 2010 reflects progressive
tightening of monetary policy and fiscal
consolidation aimed at a quelling excess demandand inflationary pressures, reducing
unsustainably large fiscal deficits and containing
deterioration in external balances. Aside fromdampening private sector demand, fiscal
consolidation is expected to lead to a slowing of
public sector consumption.

Government debt is elevated across the region—
reflecting the impact of long-term structural
fiscal deficits—and exceeds the average fordeveloping countries in aggregate (except for
Afghanistan) (figure SAR.9). As of FY2009-10,
debt as a share of GDP in the Maldives (96percent), Sri Lanka (82 percent) and India (73percent), sharply exceeded the average fordeveloping countries (37 percent). Indeed, South
Asia‟s government debt is more closely in line

In combination with macro-policy tightening,
improving crop production (Pakistan and Sri
Lanka) and an expected moderation ininternational fuel prices over the balance of 2011
should foster some easing of inflationarypressures ahead. But, deceleration in prices is
projected to be slow given incomplete pass-

Figure SAR.8 India and Pakistan FDI inflows as a share of
GDP lag other developing countries

Figure SAR.9 Government debt in South Asia exceeds
average for emerging markets -- except in Afghanistan

percent share of GDP

Total government debt, percent share of GDP for fiscal years(*calendar years 2008 and 2009)

4.5

100
90
80

2007-08

2009-10

70

3.0

60
50
40

1.5

30

India

20

Pakistan

10

Developing countries, excl. South Asia0

0.0

Afghanistan

2003

2004

2005

2006

2007

Sources: .UNCTAD and World Bank

2008

2009

Nepal

Bangladesh

Pakistan

BhutanIndia

Sri Lanka*

Maldives*

Emerging* High-income*

2010e

Sources: CEIC, IMF Fiscal Monitor Jan-2011, and World
Bank.

123

Global Economic Prospects June 2011: RegionalAnnex
through of higher international prices thus far,particularly for fuel prices. An expected normal
crop year (2011/2012) in much of the region andrelatively high regional stocks are providing abuffer for grain prices and import demand in2011 (table SAR.3).3 However, South Asia isfacing the current upturn with some weaker
initial conditions compared with the 2007-2008
upswing—given less fiscal space and higher
inflation—which is posing additional challenges
in addressing risks of increased poverty andmalnutrition rates.

translate into significant terms of trade
deterioration for South Asia, compared with oil
importers in most other developing regions, withthe exception of the Middle East and North
Africa (figure SAR.10). Price changes are
expected to reduce real incomes in South Asian
countries by about 1.1 percent of GDP, largely
due to higher oil prices, and partly offset byincreases in other commodities. For example,
South Asia‟s cotton producers (such as India) arelikely to see marked gains in their terms of trade,as cotton prices are projected to rise by onethird, whereas textile exporters (such as
Bangladesh, which imports cotton) are likely to
see greater deterioration in their terms of trade.

External demand for goods and services is
projected to moderate in 2011, given policy
normalization and fiscal consolidation acrossmost of South Asia‟s export markets, along witha natural deceleration in demand growth as
global demand converges back to trend
production levels. Accordingly, the pace ofgrowth of tourism activity is projected tomoderate in 2011, as arrivals from high-income
countries, particularly from Europe, are expected
to slow. However, the slowdown in arrivals from
Europe is being partially offset by still strong
growth from developing East Asia and highincome Middle Eastern economies. Decelerationin domestic demand growth will be reflected in amoderation in South Asia‟s imports in 2011.
However, given the deterioration in the terms oftrade (as higher oil prices weigh on the region‟s
import bill) the current account deficit isprojected to expand in 2011.

Remittances are projected to rise 9.1 percent in2011 in dollar terms, up slightly from 8.2 percent
growth in 2010 (growing substantially below pre-crisis boom rates, when they averaged 30
percent over 2007 and 2008), and help provide acushion to the deterioration in the regional
current account balance (figure SAR.11). In
particular, worker transfers to South Asia fromthe high-income Gulf Cooperation Council(GCC) countries (most of the region‟s 9 million
migrants work in these countries) are projected
to firm with strengthened activity tied to higher
oil-rents, which is boosting labor demand in theoil producers (figure SAR.12).4 The countries
most affected by political upheaval in the Middle
East (Egypt, Libya, Syria, Tunisia, and Yemen)
are not large migrant host-countries for SouthAsia, so the net impact on migrant labor demand
and remittances appears positive.

The recent rise in oil prices is projected toTable SAR.3 South Asia’s grain supply and demand balances
1,000 metric tons, unless otherwise noted

Production

2004/2005

2005/2006

2006/2007

2007/2008

2008/20092009/20102010/2011 2011/2012

251,472

263,234

264,995

284,200

289,168

278,943

290,733y-o-y % growth

-0.6

4.7

0.7

7.2

1.7

-3.5

4.2

2.7

Ending stocks

18,71020,72923,117

26,13440,76745,38945,581

43,406y-o-y % growth

-20.6

10.8

11.5

13.1

56.0

11.3

0.4

-4.8

% share of use*

7.8

8.4

9.2

9.9

15.7

17.5

16.6

15.4

240,445

245,368

251,370

262,857

260,328

259,012275,288282,363

-0.6

2.0

2.4

4.6

-1.0

-0.5

6.3

2.6

Domestic consumption *y-o-y % growth* Excludes feed consumption.

Countries = Bangladesh, India, Nepal, Pakistan, Sri Lanka.

Sources: U.S. Department of Agriculture (11 May 2011) and World Bank.

124

298,683

Global Economic Prospects June 2011: RegionalAnnex
GDP growth (in calendar year terms) in South
Asia is projected to gain momentum
incrementally in 2012 and 2013 to 7.7 percent
and 7.9 percent, respectively, from an expected
7.5 percent in 2011, led by firming private sector
activity, as inflationary pressures diminish andenable monetary authorities to pursue lessrestrictive stances in the outer years. In
particular, investment is expected to firm astighter monetary conditions are projected tocontribute to an easing of inflation expectations
and as fiscal consolidation fosters greater accessto credit. Additionally, large programmed
investment and reconstruction projects in

Afghanistan, Bangladesh, Bhutan, India and Sri
Lanka should support acceleration of GDP
growth in the outer years, boosting productivity
and potential output. External demand is
projected to strengthen incrementally in 2012
and 2013—assuming continued increased market
penetration to faster growing developing
countries—and be supportive of growth as well,as large high-income export markets begin tostabilize macroeconomic conditions.
The region‟s relatively strong projected growth
path—reaching 7.9 percent in 2013 comparedwith the 6.0 percent average from 1998 through2007 (compound growth rate)—is projected tobe led by India, Sri Lanka and Bangladesh,
where acceleration of investment activity is
expected to support higher growth outturns. In
contrast, Pakistan and Nepal are expected to lag,given continued political challenges andassociated macro-policy slippage. Indeed, GDP
growth in Pakistan is not projected to recover toabove the pre-crisis decadal average of 5.0
percent during the forecast period (table SAR.4).

Figure SAR.10 Projected terms of trade impacts in 2011
for oil-importing countries (by region)
percent share of GDP
Middle East & North Africa

South Asia
East Asia & Pacific
Europe & Central Asia

Risks

Latin America & Caribbean
Sub-Saharan Africa
-2.0

-1.5

-1.0

-0.5

0.0

0.5

The region has witnessed a build-up in pricepressures and is bumping up against potential
output, which suggests that it needs to address
supply constraints through higher investment.
However, large fiscal deficits and public sector

1.0

Sources: UN Comtrade and World Bank.
Figure SAR.11 Growth of worker remittances inflows toSouth Asia projected to level off in 2011

Figure SAR.12 Most migrant workers from South Asia
are based in the high-income Gulf Cooperation Council
countries of the Middle East

annual percent change

40%

Developing countries, excl. South Asia

35%

thousands

South Asia

3,500

30%

3,000

25%
20%

2,500

15%

2,000

Sri Lanka
Pakistan
Nepal
India

10%

5%

1,500

0%

1,000

-5%

Bangladesh

500

-10%
-15%

0

2005

2006

2007

2008

2009

2010e

Bahrain2011f

Source: World Bank, Migration and Development Brief No.
16, April 2011.

Oman

Qatar

KuwaitUAE

Saudi
ArabiaSource: World Bank, Migration and Development Brief No.
16, April 2011.

125

Global Economic Prospects June 2011: RegionalAnnexdebt may be crowding out private sector
investment, which is likely being pressured by arelatively poor business climate and relatively
shallow domestic financial markets (such as
small corporate bond markets). As aconsequence, demand is being channeled intohigher prices and deteriorating current accountbalances. In this context, pursuing policy
normalization is critical and failure to bring
public finances and monetary policy into line
could undermine growth projections andprogress toward South Asia‟s urgent
development objectives, including an expansionof infrastructure spending and potential output.

Inflation remains a key downside risk to growth,
as policymakers face numerous challenges in
reducing price pressures. If inflation remains
elevated, unless offset by exchange rate
depreciation (itself an inflationary impulse) it islikely to begin eating into the region‟sinternational competitiveness and discourage
foreign investment—creating headwinds to gains
in productivity. Elevated internationalcommodity prices are also a negative risk factor,
particularly given political resistance to reducing
subsidies. In countries such as India thatmaintain price controls on food, farmers are notfully participating in the global upswing inprices. Higher monetary policy interest rates

Table SAR.4 South Asia country forecasts(annual percent change unless indicated otherwise)
98-07a

2008

2009

Est.
2010

Forecast
2011
2012

5.0
0.2

6.3
1.4

6.0
3.5

5.8
2.5

6.0
-0.5

6.3
-1.3

6.5
-1.7

6.4
-0.3

6.2
-2.6

6.8
-2.0

10.3
-2.7

8.1
-2.8

8.4
-2.5

8.5
-2.3

3.4
-1.7

6.2
3.0

5.3
-2.0

4.5
-2.8

4.1
-2.9

3.7
-2.7

4.1
-2.6

4.9
-0.8

3.6
-9.6

2.6
-2.5

3.9
-1.3

3.3
-2.4

3.2
-2.5

4.1
-2.7

4.4
-3.2

6.0
-9.8

3.5
-0.7

8.0
-3.5

7.5
-4.9

6.8
-4.7

6.4
-4.2

5.1

6.2

5.7

5.8

6.2

6.4

6.6

6.4
-

4.9
6.8

9.1
8.0

8.8
8.5

8.0
8.2

8.4
8.5

8.5
8.6

3.4

6.1

4.4

4.6

3.5

4.0

4.2

5.0

1.6

3.6

4.1

2.5

3.9

4.3

2013

b

Calendar year basis
Bangladesh
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
India
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Nepal
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Pakistan
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Sri Lanka
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Fiscal year basis b
Bangladesh
Real GDP at market prices
India
Real GDP at market prices
Memo: Real GDP at factor cost
Nepal
Real GDP at market prices
Pakistan
Real GDP at market prices

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly
differ at any given moment in time.
Afghanistan, Bhutan, Maldives are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. National income and product account data refer to fiscal years (FY) for the South Asian
countries with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year
runs from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in
Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Nepal,
and Pakistan report FY2009/10 data in CY2010, while India reports FY2009/10 in CY2009. GDP
figures are presented in calendar years (CY) based on quarterly history for India. For
Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two
fiscal year periods to provide an approximation of CY activity.
c. GDP measured in constant 2005 U.S. dollars.
d. Estimate.
e. Forecast.

Source: World Bank.

126

Global Economic Prospects June 2011: RegionalAnnex
aimed at crimping price pressures, however,
could also prompt a rise in capital inflows andcomplicate monetary policy—emphasizing theneed for fiscal consolidation.

the Maldives and Sri Lanka.

Notes:
1. The Reserve Bank of India‟s Inflation
Expectations Survey of Households
conducted in Q4-2010 (Round 22) showshouseholds expect inflation to increase 130
basis points to 13.1 percent from theperceived current rate of 11.8 percent—compared with the expected 11.9 percent
inflation rate from the Q2-2010 survey(Round 20), (1-year-ahead expected rates).

Persistently large budget deficits also poseimportant downside risks to growth, by
crowding out private investment andcontributing to excess demand. Fiscal slippage iscontributing to inflationary pressures and limits
policy options in the event of future crises
through limited fiscal space. Regional deficit(and debt) problems will need to be resolved bysimultaneous reforms on both revenues andexpenditures along with reforms to support
expansion of the private sector, including
deepening financial markets. Efforts to reduce
deficits are being hampered by South Asia‟sweak revenue collection and a small tax base,while large food-, fuel- and fertilizer subsidies
are hindering progress toward cutting
expenditures.

2. Nepal, Bangladesh, and Sri Lanka, wereamong the top 15 recipients of remittances in
2009—with inflows representing theequivalent of 23.8% of GDP in Nepal,
11.8% in Bangladesh, 8% in Sri Lanka,
5.4% in Pakistan and 3.6% in India.
3. Sources: India‟s Meteorological Department(April 2011 first monsoon forecast for
2011/12), and U.S. Department ofAgriculture (May 2011).

Key external downside risks are tied to
uncertainty in the Middle East and North Africa.
If political turmoil leads to sustained high oil
prices, South Asia‟s oil import bill and pricepressures could rise further, while a spreading of
turmoil to GCC countries could undermine
confidence and economic growth in the Middle
East and North Africa, and result in sluggish oreven falling remittances inflows. Already, recent
political tensions have intensified efforts within
the GCC to replace migrant workers withnationals, which if it were to spread, could curb
remittances flows to South Asia.

4. Over two-thirds of South Asia‟s migrant
workers are based in Saudi Arabia (3.3
million) and the U.A.E. (2.9 million).
5. “European Sovereign Debt Crisis: Links to
the South Asia Region”. December 2010.
Francis Rowe, et al.

Expansion of the sovereign-debt crisis in theEuro Area represents another important external
downside risk, particularly if the crisis were to
spread to larger Euro Area economies that would
lead to weaker goods and services exports,
worker transfer receipts and capital inflows forSouth Asia. The Euro Area represents about onefourth of South Asia‟s merchandise export
market, of which Germany and France accountfor 40 percent and 20 percent, respectively.5 A
spreading of the Euro Area crisis could
negatively impact the tourism sectors among thesmaller South Asian economies, particularly in127

Global Economic Prospects June 2011: RegionalAnnex

Sub-Saharan Africa
whose price increases were higher than theincrease in crude oil prices also benefitted(figure SSA.2). This includes exporters ofmetals such as copper (Zambia), as well as
exporters of agriculture products such as rubber(Liberia), and cotton (Burkina Faso, Benin, andMali). However, even though the prices of theprincipal merchandise exports of many oil
importing Sub- Saharan countries improved in
2010, they still suffered a deterioration in theirterms of trade, as in general, the recovery inprices was not sufficient to compensate for the

Recent developments
Growth in Sub-Saharan Africa rebounded
sharply in 2010. Supported by the global
economic recovery and developments on thedomestic front, GDP in Sub-Saharan Africa
grew by 4.8 percent in 2010—up from the 2
percent advance of 2009 and just shy of theregion’s 5 percent pre-crisis average growth(figure SSA.1). Excluding South Africa, thelargest economy in the region, Sub Sahara Africa
grew by 6.0 percent, one of the fastest growth
rates among developing regions.

Figure SSA.2 Terms of trade changes in SSA countries

Recovery in exports. African export revenues,
which had fallen to some 51 percent of their precrisis August 2008 levels by January 2009, hadalmost recovered by November 2010, reaching
93 percent of earlier peaks. Much of the increase
was due to the surge in commodity prices (seeCommodity annex) as in volume terms, exports
increased by a moderate 7.5 percent in 2010.

Terms of Trade Changes as Share of GDP (%)
Mauritania
AngolaNigeria
Mali
Cote d'Ivoire
Sudan
Cameroon
UgandaTanzania, United Rep.
SwazilandSouth Africa
Central African Republic
BurundiEthiopia
RwandaMalawiNamibia
Eritrea
Comoros
Cape Verde
Seychelles

Among the biggest winners from the terms oftrade changes were the oil exporters in theregion, with incomes gains of upwards 10
percent of GDP in Angola, Congo, and Gabon.
Among oil importers in the region the picture
was mixed. In general, exporters of commodities

-10

-5

0

5

10

15

20

Source: World Bank.

Figure SSA.1 Growth in Sub Saharan Africa rebounds close to Pre-Crisis Average

Figure SSA.3 Impact of terms of trade on growth is
mixed

Percent growth GDP
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Sub Saharan Africa
Sub Saharan Africa ex. South Africa
Pre-Crisis Average

Source: World Bank.

Source: World Bank.

128

Global Economic Prospects June 2011: RegionalAnnex
sharp rebound in oil prices. Nonetheless, theimpact of terms of trade changes on growth in2010 remains mixed as stronger growth was
associated with countries that recorded bothfavorable as well as unfavorable terms of tradechanges, implying that there is more to the Sub
Saharan African growth story than developments
in commodity prices (figure SSA.3).

2011, with new discoveries and production
coming on stream (table SSA.1).
These resource flows have supported growth bycreating new jobs, increasing government
revenues and helping to finance current accountdeficit. Yet in countries with poor governanceand weak institutions, the natural resource sector
which exists as an enclave in many countries,
can be a deterrent to growth, as rents generated
by the sector are appropriated by the elite
minority, often leading to conflict. This so-calledresource-curse need not be the norm. Twentyone Sub-Saharan countries have sought tomaximize the potential benefit from resource
exploitation and reduce the potential for
corruption by joining the Extractive Industries
Transparency Initiative. Five are currently
considered compliant to the initiative (theCentral African Republic, Ghana, Liberia, Niger,
and Nigeria), while another 16 countries are
candidates.

Rebound in capital flows. Thanks to recovery in
the global economy, as well as an increasing
recognition by investors of the opportunities
presented in a rapidly growing developing
region, net private capital inflows to Sub
Saharan Africa increased from $35.8bn in 2009
to an estimated $41.1bn in 2010 and areprojected to rise to $48.6bn in 2011 (figure
SSA.4 and table SSA.3).
The leading destination of FDI inflows, in value
terms, is to the capital intensive mining sector.
Indeed, higher commodity prices and the global
competition to secure supplies of commodities
have spurred investments globally in the natural
resource sector. Sub Saharan Africa, a region
with a high proportion of known mineral
resources with great potential for further
development is benefitting from this trend. Thishas been facilitated by improvements toregulatory regimes in some countries. Capitalraisings by African resource companies arereported to have increased by 240 percent
compared to 2009.1 Much exploratory activity
has been ongoing in several countries during

Even though, natural resources and energy are
the most important destination for Sub-Saharan
FDI by value, combined they represent only 16
percent of the total number of new FDI projects.2
Motivated by higher GDP growth rates, fast
growing populations and a rising middle class,the bulk of new investment projects were in the
non-natural resources sector. Developments inthe telecommunications (box SSA.1) and retail
Table SSA.1 Recent mineral discoveries and production

Figure SSA.4 Net private capital inflows to Sub
Sahara Africa rebounds after crisis

Discoveries in Q1 2011
Natural Resource Country
Oil
Ghana (West Cape Three points)
Gold
Tanzania (Handeni region)
Iron Ore
Liberia (Bopulu and Timbo)
Manganese
Gabon (Ndjole)
DiamondSierra Leone (Tongo)
Natural gas
Tanzania (offshore)($ bn)
80

Forecasts

70
60
50
40

New Production to come on stream in 2011
Natural Resource Country
Coal
Mozambique
Oil
Ghana
CopperZambia (Konkola North)
Manganese
Gabon

30
20
10
0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: World Bank.

Source: Africa Mining, various issues.

129

Global Economic Prospects June 2011: RegionalAnnex
sectors epitomize the interest in non-extractive
industries in the region. In retail for instance,large South African retail firms have been busy
opening up shopping malls across the region.
Walmart, the world’s largest retailer, is currently
in the process of acquiring MassMart, a South
African chain with operations in 14 countries in
the region.

share of such inflows. However othereconomies, including Nigeria, with its fast
growing economy and large population; Kenya,
which is often viewed as the gateway to the $84
billion East African economy, and Ghana, with
its stable political environment and fast growing
economy, are of particular interest.

Portfolio equity flows to Sub Saharan Africa roseby 10 percent in 2010, reaching $11 billion. The
strong growth performance of Sub SaharanAfrican countries over the last decade (5 percent
per year) coupled with increasing politicalstability and reforms that have lowered barriers
to entry, have begun to place Sub SaharanAfrican countries on the radar screens of
portfolio equity managers. This is evidenced in
the recent establishment of a number of Africafocused private equity funds (table SSA.2). Not
surprisingly, South Africa receives the largest

Table SSA.2 Africa Focused Funds

ECP Africa FundPan African Investment Partners II
Aureos Africa Fund
Leapfrog Microfinance Inclusion
Fund
Evolution One Fund
Africinvest Financial Sector

Fundsize ($m)
613
492
381
136
91
43

Source: Africainvestor, November December 2010.

Box SSA.1: Recent Developments in the Telecoms Sector in Sub Saharan Africa – a booming sector
Sub Saharan Africa is the region with one of the fastest growing mobile phone markets (International Telecommunications Union, 2010), partly because of the weak penetration of fixed-lines but also due to the pace of urbanization—the fastest compared to other regions. An estimated 40 million new mobile cellular subscriptions
were added in 2010, and as much of the population remains unserved, the potential for further growth remains
strong.
The telecommunications sector is one of the strongest recipients of foreign direct investment flows to the region.
In 2011 there have been a number of announcements to that effect. MTN, the giant South African telecommunications company, has announced plan to invest $1 billion in Nigeria (Sub Saharan Africa’s biggest mobile phonemarket) and a further $150 million in Zambia. In March 2011, Etisalat, a UAE telecommunications company,
announced that it had sealed an agreement for a $680m syndicated loan from eight Nigerian banks. Movitel(Vietnamese company), Mozambique’s third biggest mobile phone operator, also announced plans to invest$120 million to build new base stations.
Government policies are supporting these FDI inflows through improvements to regulatory regimes, including
opening up the sector to further competition. In the last year, for example, operating licenses have been granted
to new entrants to the telecommunications sector in Congo (Brazzaville), Ghana, Liberia, Malawi, Mozambique,and network charges by regulators have been reduced.
These developments, and the arrival of high speed undersea fiber optic broadband cables on the coast of Africa,
are a boon to the sector but also the broader economy as they generate significant productivity spillovers. In both
East and Western Africa a ―price war‖ is ongoing between rival telecoms operators, and in some cases service
charges have dropped by more-than 50 percent – lowering costs for business (and personal) customers. Innovations such as Kenya’s pioneering mobile money scheme (M-PESA), Ethiopia’s Commodity Exchange, whichuses mobile technology to provide real time information to farmers across the country, and Ghana’s mPedigreeapp, which allows patients to check the authenticity of medicines, are only a few examples of how investment in
the telecoms sector is supporting innovation and growth in the region.
A recent study finds that increasing access to mobile telephone networks by 1 percent translates into a 0.5 percent increase in real GDP per capita (Djiofack and Keck, 2009). In Nigeria, for instance, though the telecommunications sector share in GDP was about one-quarter of that of the oil sector, its direct contribution to GDP
growth was higher than the oil sector’s in 2010.

130

Global Economic Prospects June 2011: RegionalAnnex
South Africa also dominated bond flows to theregion, accounting for almost all of the $4.7
billion in regional bond sales during 2010.
However, with an estimated $93 billion annual
infrastructural deficit, and a funding gap of $31
billion, a number of countries in Sub SaharanAfrica (Ghana, Kenya, Tanzania, Zambia)
continue to express interest in tapping the eurobond market. In January 2011, Nigeria issued a$500 million debut Eurobond, which wasoversubscribed. In March 2011 Zambia received
a ―B+‖ credit rating from international credit
rating agencies. Several other countries arerevamping their laws to tap into the nearly $1
trillion Islamic financial market. Senegal has
indicated that it plans to raise $200m in Islamic
financing in 2011. Increasingly, foreign
investors are participating in local bond markets,notwithstanding the foreign exchange risk.
Ghana’s February 2011 auction of GHS 400
million ($263m), in 3-year bonds attracted
significant global interest and wasoversubscribed by 88 percent. Kenya auctioned a
9-year infrastructure bond worth 31.6 billion
shillings ($380m) in August 2010, and thecountry is likely to continue to tap the market in2011. Indeed, local currency bond supply in Sub
Saharan Africa is estimated to have increased
from $7bn in the 1990s to almost $20bn by
2008. Improving liquidity is also supporting theextension of the yield curve in a number ofcountries, with Nigeria offering 20-year
maturities and Kenya up to 30-year maturities.3
Domestic demand reinforced growthprospects for Sub-Saharan Africa. While theincrease in external demand supported GDP
growth, domestic demand accounted for morethan all of the growth in the region) in 2010.
Although exports increased 7.5 percent thereby
supporting growth, imports increased by evenmore (9.1 percent), boosted by a solid 4.9
percent rise in consumer demand. Hence, the net
exports contribution to growth was negative.

Table SSA.3 Net capital flows to Sub-Saharan Africa$ billions (April 2011)
Current account balance
as % of GDP
Financial flows:
Net private and official
inflows
Net private inflows(equity+private debt)..Net private inflows (%GDP)
Net equity inflows..Net FDI inflows..Net portfolio equity
inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- =increase)
Memorandum items
Workers' remittances

2003

2004

2005

2006

2007

2008

2009

2010p

2011e

2012f

2013f

14.6

24.0

33.0

42.4

53.2

38.9

45.3

51.1

13.2

21.7

33.9

44.4

50.7

34.3

35.8

41.1

48.6

56.1

70.4

3.0
14.0
13.3

4.0
17.7
11.0

5.3
26.1
18.0

6.0
37.0
20.2

5.9
38.7
28.5

3.5
28.9
34.5

3.9
40.2
30.3

3.8
34.8
23.8

4.1
39.1
32.1

4.4
44.2
35.2

4.8
55.3
45.3

0.7
0.6
1.4
2.2
0.0
-0.8
-0.8

6.7
6.4
2.3
2.5
-0.1
0.0
4.0

8.1
6.9
-0.9
2.4
-0.4
-2.9
7.9

16.8
5.4
-1.9
2.2
-0.1
-4.1
7.4

10.1
14.6
2.5
2.4
0.1
0.0
12.1

-5.6
10.0
4.6
1.9
0.7
2.0
5.5

10.0
5.1
9.5
3.1
2.2
4.1
-4.4

11.0
16.3
10.0
3.4
1.8
4.8
6.3

7.0

9.0

10.0

9.5

11.9

15.1

0.9
0.4
1.2
-0.7

2.7
0.6
2.4
-0.3

4.8
1.3
3.8
-0.3

-2.0
0.3
-1.7
-0.7

8.0
6.7
2.1
-0.8

0.8
-0.7
1.7
-0.1

8.1
3.4
4.7
0.0

9.4
26.0
32.5

4.0
20.4
27.0

4.6
11.1
10.9

5.6
1.9
2.9
0.8
10.0
28.7

-1.7

1.4

-4.1
-3.5

-4.6
21.7

3.0
33.5
19.9

-38.5

1.9

-6.1

6.0

8.0

9.4

12.7

18.6

21.3

20.8

21.0

22.0

24.0

Source: World Bank.

131

-2.1

Global Economic Prospects June 2011: RegionalAnnex
Robust consumer demand were supported byhigher farm incomes from favorable harvests inmuch of the region in 2010 (box SSA.2);
increased activity in the mining sector and robust
growth in the services sector and a relatively low
inflation environment—all of which served toboost real incomes.

telecommunication sectors, creating new well
paid jobs and improving overall productivity.
Associated increases in tax revenues supported
by higher aid inflows contributed to a 5.5
percent increase in public consumption, even as
fiscal balances in the region improved by 1
percentage point from a deficit of 5.1 percent of
GDP in 2009 to 4.1 percent in 2010. Countries
that benefitted the most from the positive termsof trade changes also had a better turnaround intheir fiscal balances.

Improved access to consumer credit (especiallyin South Africa, where interest rates were atrecord lows) and stable remittance inflows ($21billion in 2010) also helped underpin consumer
demand. And, in a virtuous circle, that strong
demand has been an important factor luring in
new investments into the retail, banking andThough overall growth in Sub Sahara Africa
remains strong, there is significant
heterogeneity across region. An encouraging

Box SSA.2: The Agriculture Sector in Sub Saharan Africa – Unrealized potential
The agricultural sector, the largest employer in many Sub Saharan African economies, an important foreign exchange earner, and the sector with the greatest potential for poverty reduction was also providing support to
growth in several countries in 2010. Studies have found that growth originating in the agricultural sector is two-tofour times as effective as non-agricultural growth in reducing poverty (WDR, 2008), since some 75 percent of thepoor live in rural areas. 4
However, while the past 40 years has witnessed remarkable progress in global agricultural production, with per
capita world food production growing by 17 percent and aggregate world food production up by 145 percent, agricultural production in Sub Saharan Africa is 10 percent lower than it was in 1960. Land productivity in Africa isestimated at 42 percent and 50 percent of that in Asia and Latin America, respectively. Factors accounting for low
yields in Sub Saharan Africa include the fact that only 4 percent of Africa's crop area is irrigated compared to 39
percent in South Asia, and fertilizer usage is less than 10 percent of the world average. Further, mechanization
remains low with an average of only 13 tractors per 100 square kilometers, compared to a world average of 200
tractors per square kilometers. In part this underinvestment in the agricultural sector reflects a weak policy supportive environment. 5
Indeed much of agricultural production is mostly weather dependent. In 2010, where weather patterns were mostly
favorable, good harvests kept food prices in check, even amidst the surge in global food prices. In the Southern
Africa region bumper harvests were recorded in Malawi, Zambia and South Africa, with the latter reaching a thirty-year record high maize output of 12.8 million tonnes. These favorable weather conditions are unlikely to repeat
themselves regularly, hence for output growth to be sustained other yield enhancing techniques need to be employed. Already in 2011 agricultural output is being hampered in East Africa by poor rains, thus cutting into
growth prospects for the region.
Nonetheless there a number of recent encouraging developments in the Sub-Saharan African agriculture sector
worth highlighting. One prominent example is the transformation of Malawi from a food importer with dependence on food aid to a food self sufficient and net exporter over the past five years, thanks to a government supported farmer input program. Other Sub Saharan countries including Ghana, Zambia, Nigeria, Rwanda and Tanzania are implementing programs of their own. However, if not managed well, fiscal sustainability could be compromised.
With about 60 percent of the world’s uncultivated arable land in Africa and very low yields there exists significant
opportunities to scale-up production. By one estimate, if cereal yields were to be doubled to two tons per hectare –still half of the average in the developing world – Africa would grow an extra 100 million tons a year of food. This
would be roughly equivalent to adding another US corn belt to world food production, helping moderate world
food price increases, shifting Africa to a major food surplus region and helping eradicate hunger and poverty. 6
The benefits of an increase in yields with out improvements to both hard and soft infrastructure to allow the increased output to reach the relevant markets will however curtail the benefits.

132

Global Economic Prospects June 2011: RegionalAnnex
aspect of the trend rise in Sub Saharan Africa
growth rates has been the extent to whichalmost all countries have seen significant
improvements in their growth. Strong SubSaharan growth does not reflect extremely highgrowth rates by one or two countries, but solid
growth in several economies (figure SSA.5),
with the highest growth rates comparable tothose of other fast growing developing
economies (figure SSA.6). Only two economies
grew by less than 2 percent in 2010, while thebulk registered solid growth rates of between 2
and 6 percent, 30 percent of countries in theregion enjoyed real GDP growth rates of morethan 6 percent. Across sub-regions growth wasstrongest in West Africa (6.5 percent) poweredby Nigeria’s robust growth (7.9 percent) andsupported by Ghana’s 7.7 percent gains in theyear. GDP growth in East Africa was almost as
strong, with Ethiopia (7 percent), Rwanda (7.5
percent), Tanzania (7 percent) and Kenya (5.6
percent) all recording robust gains.

Angola, Southern Africa’s largest economy(excluding South Africa) dampened growth forthe sub-region. South Africa, the largest
economy in the region, grew at a 2.8 percent
pace in 2010.
Growth among the large economies. South
Africa’s tepid recovery has been driven byhigher consumer spending, with business
investment lagging in the recovery. Consumer
spending has been buoyed by an accommodative
monetary policy, with the repo rate at 30-yearlows in nominal terms. The lower cost of
borrowing lent support to spending on consumer
durables, while broader consumer spending was
supported by above-inflation wage increases
gained by South Africa’s unionized workers, andto a lesser extent the wealth effects associatedwith the recovery in asset prices. Increased
government spending on infrastructure, social
sectors and wages is also providing stimulus to
the recovery. In 2010, government consumption
expenditure increased by 4.6 percent. On a more
somber note, low business confidence and longrunning labor disputes caused private investment
spending to fall for a second consecutive year in2010. Fortunately, a recovery may be underway
in 2011.

In contrast, growth for most Central African
economies registered below the regional
average, save for Congo (Brazzaville) withgrowth of (9.1 percent), thanks to new oil thatcame on stream, thus making it the fastest
growing economy in sub Saharan Africa in 2010.
Though growth rates in several Southern Africancountries (Botswana, Malawi, Mozambique, andZambia) exceeded 6 percent, slower growth in

The Nigerian economy continued its robust
expansion in 2010, with growth estimated at 7.9
percent, up from 5.6 percent recorded in 2009.
Nigeria’s oil and government sectors benefitted

Figure SSA.5: More than a third of countries in
Sub-Saharan Africa achieved growth rates of 6
percent and more in 2010
No. ofcountries
16

SSA Oil Exporters

14

SSA Oil Importers

12

10
8
6

4
2

Figure SSA.6 Fastest growing SSA compares wellwith other fast growing developing countries
China
Congo
India
Ethiopia
Nigeria
Mozambique
Ghana
ZambiaNiger
BrazilRwandaBotswana
Burkina Faso
Tanzania
Malawi
Russia0Growth < 2%

Growth 2-4%

Growth 4-6%

Growth 6-8%

Real GDP growth (%)

0.0

Growth >8%

Source: World Bank.

2.0

Source: World Bank.

133

4.0

6.0

8.0

10.0

12.0

Global Economic Prospects June 2011: RegionalAnnex
from the global jump in oil prices, as well asfrom increased output due to relative calm in the
Niger Delta region following the government’s
amnesty program. However, the oil sector,
which accounts for some 16 percent of GDP,
contributed only a percentage point to the 7.9
percent surge in 2010 GDP, with the remainder
attributable to rapid growth in the non-oil sector.
The agricultural sector, which accounts for 42
percent of GDP and is the largest employer,
benefitted from favorable rains and expanded by
5.7 percent in 2010 Q3 contributing 2.4
percentage points. Productivity in the sector
remains low, however, as it is constrained bypoor market infrastructure and weak access tobasic farm inputs. Much of the dynamic sectoral
growth performance in recent years has been inwholesale and retail trade and the services
sectors with growth rates in the double digits. In
2010 Q3, these sectors added 2 and 2.1
percentage points to GDP growth, respectively.

the need to clear arrears to contractors.
Nonetheless, a pick-up is expected over theforecast horizon. The recovery in oil prices andgovernment revenues helped return both thefiscal and current account balances to healthy
surpluses in 2010 and tighter monetary policy
helped contain inflationary pressures somewhat.
Indeed, the improvements to its macroeconomic
environment supported the B+/B1 credit rating
for its long-term foreign debt issuer default
ratings from the three main international credit
rating agencies in 2010.
Kenya’s growth was stronger than expected at
5.6 percent in 2010. Good rainfall supported
harvests in the agricultural sector (including tea
and horticulture exports) and boosted electricity
and water supply. This helped to alleviate someof the binding infrastructural constraints,
allowing Kenyan manufacturers to meet strong
demand from its faster-growing regional trading
partners in East Africa. Business and consumer
confidence was also lifted by the passage of the
new constitution. Tourist arrivals were up by
15.6 percent in the first 11 months of 2010 (yearon-year), with tourist receipts increasing 8
percent in the same period. Strong growth in
Kenya’s other services sectors: finance,
telecommunication and real estate also provided
support to growth.

Growth in these dynamic sectors has been driven
by and contributed to a rising middle class. A
survey carried out by the National Bureau of
Statistics showed that, while in 1996 the average
household spent 63.6 percent of income on food,by 2004 the share had fallen to 47.3 percent.
With per capita incomes doubling between 2004
and 2010 the food expenditure share of income
has dropped still further, implying Nigerianhouseholds have more income to spend on
discretionary items--which helps to drive growthin new sectors. One such sector is
telecommunications. Using the latest detailed
GDP figures available (Q3 2010), thetelecommunications sector, which accounts for
only 3.7 percent of GDP, contributed 1.3
percentage points to GDP growth (even higher
than contributions from oil).

Medium-term outlook
GDP growth in Sub-Saharan Africa is expected
to remain strong in 2011 and 2012. With theglobal recovery still on a firm footing; a growing
domestic middle class with discretionary
incomes to spend, and rising business confidence
in the region’s prospects, growth in Sub SaharanAfrica is expected to step-up to stronger rates in2011 and 2012, reaching growth of 5.1 percent
and 5.8 percent, respectively (figure SSA.7).
Excluding South Africa, GDP growth in SubSaharan Africa is expected to grow between 5.9
percent and 6.6 percent over the forecasthorizon, making it one of the developing regionswith the highest growth prospects over the
medium term (table SSA.4 and table SSA.5).

Angola’s recovery from the crisis, unlike most
Sub Saharan African countries has lagged
behind. In 2010 it grew at 3.4%, well below its
strong pre-crisis double digit growth rates andthat of the Sub Sahara African average (4.8%).
Though oil prices rebounded in 2010, oil output
was hindered by technical delays. Further,government spending which has helped drive
growth in the non-oil sector was curbed due toProspects for large economies. Medium term

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Global Economic Prospects June 2011: RegionalAnnex
growth prospects for South Africa point to astrengthening economy. With the monetarystance expected to remain accommodative,
consumer spending should continue to drive
growth. As the global recovery has taken hold,the uncertainty that affected private investment
spending is expected to abate, allowing businessspending to increase and resume its positive
contribution to growth. As businesses demand
more labor, employment should rise andconsumer spending should strengthen. With
government fiscal policy countercyclical, theboost to growth from increased government
spending will remain strong in 2011 but is likely
to wane thereafter. With South Africa’s economy
well integrated into the global economy theongoing global recovery should continue toprovide support to South Africa’s export growth,Figure SSA.7 Growth in Sub Saharan Africa
will be among the fastest in developing regions
Percent growth GDP

8
7
6
5
4
3
2
1
0

2011

2012

Sub-Saharan Africa Ex. S.Africa

East Asia and Pacific Ex. China

Europe and Central Asia (ECA)

South Asia Ex. India

Latin America

Middle East and N. Africa

Source: World Bank.
Table SSA.4 Saharan Africa forecast summary(annual percent change unless indicated otherwise)

98-07a 2008 2009

Est. Forecast2010 2011 2012 2013

GDP at market prices (2005 US$) b
GDP per capita (units in US$)PPP GDP c
Private consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

4.2
1.9
4.4
2.3
5.5
8.0
4.2
6.8
-0.7
-0.8
6.1
-0.6

5.1
3.0
5.5
3.8
8.0
12.0
4.3
7.0
-1.1
-1.5
10.6
1.0

2.0
0.0
2.2
1.3
4.3
4.9
-6.5
-4.5
-0.5
-2.8
4.3
-5.5

4.8
2.8
4.6
3.9
6.9
8.3
8.3
9.5
-0.8
-1.3
6.3
-4.4

5.1
3.0
5.4
5.1
5.5
7.3
6.5
7.9
-0.8
-1.6
5.8
-3.2

5.7
3.7
5.7
5.3
5.3
6.8
7.2
6.9
-0.3
-1.6
6.1
-2.0

5.7
3.7
5.7
5.3
5.3
8.3
6.5
7.1
-0.6
-1.5
6.7
-1.2

Memo items: GDP
SSA excluding South Africa
Oil exporters e
CFA countries fSouth Africa
Nigeria
Kenya

4.5
4.9
3.5
3.7
5.0
3.4

6.0
6.6
4.2
3.7
6.0
1.6

4.2
4.7
1.6
-1.8
6.7
2.6

6.0
6.0
4.1
2.8
7.8
5.6

5.9
5.8
3.0
3.5
7.1
4.8

6.6
6.9
4.9
4.1
7.5
5.0

6.4
6.7
4.9
4.4
7.3
5.2

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator
are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Oil Exporters: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo,
Dem. Rep.
f. CFA Countries: Benin, Burkina Faso, Central African Republic, Cote d Ivoire, Cameroon, Congo,
Rep., Gabon, Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo.
g. Estimate.
h. Forecast.

Source: World Bank.

135

Global Economic Prospects June 2011: RegionalAnnexthough strengthening domestic demand will
increase imports which will moderate thecontribution of net exports to GDP. Over theforecast horizon, South Africa’s growth isprojected to accelerate to 3.5 percent in2011,then reaching pre-crisis average growth
rates of 4.1 percent and 4.4 percent in 2012 and2013 respectively.

investment will be capital intensive and thus
import dependent, which will reduce the overall
contribution of net exports to growth. However,growth in the non-oil sector, will continue to behindered by infrastructural challenges, a weakbusiness regulatory environment and possible
crowding out of private sector investment by the
public sector.

Prospects for faster and sustained growth inNigeria appear favorable for the forecasthorizon, as underlying growth dynamics remainrobust. Consumer spending, underpinned byincreased bank lending and employment
opportunities in the consumer services sector,
will continue to drive growth. A number ofmultinationals already operating in Nigeria haveannounced plans to increase investments (e.g.
food giant Nestle), while new ones seek
opportunities to get a foothold in the market. In
March 2011, the Carlyle Group–a Washington
DC based Global Asset Manager-set up offices
in Lagos (and Johannesburg) to conduct buyout
and growth capital investments in Sub SaharanAfrica. A forecast of favorable rain patterns
along with selected government programs in the
agricultural sector, should continue to provide
support to farm incomes. However,expansionary fiscal policy--if not managed
prudently--could compromise macroeconomic
stability, especially so as inflationary pressuresfrom food and fuel prices take hold. Over theforecast period, Nigerian GDP is projected toremain robust at 7.1 percent growth in 2011,
peaking at 7.5 percent in 2012 before moderating
to 7.3 percent in 2013.

And, the medium term outlook for Kenya is alsofavorable, though growth in 2011 will be
undercut by recent poor rains. The ongoing
global recovery should continue to provide
support to Kenya’s agricultural exports andtourism sector. Strong growth in its trading
partners in the East African Community, should
provide support to its manufacturing sector.
With the largest and most developed economy inEast Africa, a rising middle class and a sizeable
population (40 million people), investors are
increasingly considering Kenya as the gateway
to the rest of East Africa. This augurs well forforeign investment flows. Investor confidence
has been reinforced by the passage of the new
constitution, though some may postpone
investments until after the 2012 elections.
Government investment in critically needed ininfrastructure, and ongoing reforms at the
Mombasa port should underpin growthprospects. Kenya’s dynamic Information andCommunications Technology sector should also
be provided with a windfall opportunity fromincreased access to higher bandwidth after thearrival of a number of broadband fiber optic sea
cables on its coast. And developments in the ICT
sector should support productivity gains in othersectors of the economy. Inflationary pressures
stemming from higher crude oil prices andinadequate rainfall in the latter part of 2010
threaten to undermine growth prospects. Overthe forecast period Kenya’s growth is projected
to remain robust at 4.8 percent in 2011, rising to
5 percent in 2012 and 5.2 percent by 2013.

Medium term growth prospects for the Angolan
economy remain strong, with real GDP projected
to grow at 6.7 percent in 2011, up from the 3.4%
recorded in 2010. Output in the oil sector is
expected to climb up to 2.1 million b/d from1.78 million b/d on the back of new oil
production coming on stream. Further, the startof the liquefied natural gas project should further
boost export revenues. And with much of theclearance of contractor arrears behind, increased
public investment is expected to make a moresignificant contribution to growth over theforecast horizon. Nonetheless, much of thisProjected fastest growing Sub-SaharanAfrican economies. Over the forecast horizon(2011-2013), Sub-Saharan African economies
projected to be amongst the fastest growing in
the region, with growth rates averaging higher
than 6.5 percent in GDP include Ethiopia,

136

Global Economic Prospects June 2011: RegionalAnnex
Ghana, Mozambique, Nigeria, Rwanda, andZambia (table SSA.5).

from increased output and yields thanks in partto government support to the sector via theprovision of improved seeds and fertilizers tofarmers. Further, against the back drop of risingincomes and low accessibility of important
services such as telecommunication and banking
services, growth in the services sector is
expected to remain strong over the forecasthorizon.

With real GDP forecast to grow at 13.4 percent
in 2011, Ghana is projected to be the fastest
growing economy in Sub Saharan Africa, thanks
to the commencement of oil exports. Over the
medium term growth will be driven by thenascent oil sector with production expected toaverage 120,000 bpd, with the possibility ofhigher output as recent new discoveries alsocome on stream. Further, increased investmentsin the gold mining industry and productivity
gains in its cocoa sector should further boost
export revenues. Thanks to increased business
confidence the services sector will continue tosee strong inflows of private investments,
particularlyintheconstruction
andtelecommunications sector, thereby lending
further support to growth. However, increased
macroeconomic instability remains a downside
risk.

Real GDP growth in Mozambique is projected
at 7.6 percent in 2011. Mozambique is expected
to sustain its buoyant growth over the forecasthorizon as it continues to benefit from increased
investments in its mining sector. Recent
discoveries of large deposits of iron ore andcommercial quantities of natural gas offshore, in
addition to known deposits of coal, has only
added to its attraction as a mining investment
destination. Growth in Mozambique is alreadybeing supported by ongoing mega-projects
including the Mozal aluminium smelter, theMoatize coal mine which started production in
the second quarter of 2011, the extraction andtreatment of natural gas project by South African
petro-chemical giant Sasol, and the Irish-owned
titanium minerals dredge mine in Mona. These
investments and the exports that they generate in
the coming years will continue to drive growth
in Mozambique. However, the tightening ofmonetary policy to tackle double digit inflation
rates is likely to moderate growth in 2011.

Ethiopia’s economy is projected to growbetween 7.2 and 7.8 percent over the 2011-2013
period. Ethiopia’s growth will continue to be
driven by developments in its agricultural sector,
the largest sector in the economy. Productivity inthe sector will benefit from the support provided
to small scale farmers via the expansion of road,
power and market networks. Increased
investment flows to large scale commercial
agricultural ventures should lend further support
to the sector and the recent addition to hydroelectric power capacity should help alleviate
some of the binding constraints to growth.
However, the current double digit inflationary
environment remains a risk to growth.

Rwanda’s strong growth is projected to continue
over the medium term, averaging about 6.9
percent over the forecast horizon, led by the
agriculture sector. Food crop production will
benefit from government support to farmers via
the provision of fertilizer, improved seeds andextensions services. Coffee, Rwanda’s main
export, should also benefit from the strong
rebound in international coffee prices. Lowertransactions cost due to increased integration
with it’s neighbors in the East African
Community should lend further support to
growth through increased trade and investment
flows. Growth in the services sector, particularly
construction, finance and insurance, andtelecommunications is expected to be supported

Zambia is forecast to grow at 6.8 percent in2011 thanks to developments in its mining,
agricultural and services sectors. Record highcopper prices continue to support increased
investment activity in Zambia’s copper industry,
thereby generating higher copper production andexports. However, developments elsewhere in
the economy are also critical to Zambia’s growthprospects, in particular, the agricultural sector,
which still remains the major employer in theeconomy. The agricultural sector is benefitting137Global Economic Prospects June 2011: RegionalAnnex
by increased private credit flows through theforecast horizon.

inflation rates above 10 percent (including
Ethiopia, Nigeria, Sierra Leone, Guinea, andMozambique).

Risks to the outlook

The persistence of food price increases could
have negative consequences, including
deterioration in the current account and fiscal
balances of net food importing Sub-SaharanAfrican countries; as well as higher levels ofpoverty and malnutrition, with the possibility ofunrest in some countries--all of which would cut
into growth prospects for the region. The
moderate food price increases in 2010 were also
helped by the fact that compared to otherinternationally traded food products, the rise in
the price of rice was limited. Given the highimport content of domestic consumption of ricein most Sub-Saharan African countries, and as aconsequence a much higher pass through ofinternational price changes, if rice prices were to
go up more significantly in 2011, this could posean important threat to food security, even if forsome countries this would be moderated bysubstitution to other staples. Further, if current
forecasts of drought conditions in parts ofSouthern and Eastern Africa come to pass, thiswill serve to cut back on agriculture output andaccentuate the rise in food prices. In somecountries the impact of drought will go beyond
its effects on food prices, but could impacthydroelectric generation (e.g. Kenya), in anenvironment in where businesses alreadyconsider power supply to be a binding constraint.

High food prices pose a risk. Prices of globallytraded food products have risen significantly
since June 2010. As of April 2011, global prices
were up by 103.2 percent for maize (year-onyear), 74.1 percent for wheat, 94.6 percent for
Sorghum and 38.4 percent for palm oil.
However, for most Sub Saharan Africancountries, food price increases were moderate formuch of 2010, and in a few countries prices
declined, thanks to favorable harvests; the local
nature of food markets in many countries in theregion; and the availability of alternate staples(e.g. cassava) that can substitute for higher
priced internationally traded food (figure
SSA.8).
However, since November 2010 there has been arise in headline consumer price inflation rates
with increases in price of the food basket helping
to drive the increase. The median inflation rate
for Sub Saharan Africa increased to 4.5 percent
in December 2010 from a 10-year low 3.1
percent in August 2010. The distribution differs
across the region however. As of February 201124 percent of countries in the region had
inflation rates ranging between 5 and 10 percent;and another 25 percent of countries recorded
Figure SSA.8 Inflation levels remain below 10
percent for most Sub-Saharan African countries

Rise in oil prices represents another risk tomacro stability. Another price increase ofconcern is the rise in oil prices. As of April
2011, crude oil prices had risen by 38 percent
compared to a year earlier. The result of thisincrease in price on Sub Saharan Africancountries is mixed, as the region comprises bothnet oil exporters and importers. If oil prices areto persist at high levels through 2011, oil
exporters in the region will see an improvementin their current account and fiscal balances.
Indeed, given the pre-dominance of oil in theeconomy of Sub Saharan African oil exporters—
in both Angola and Congo the oil sector
accounts for over 90 percent of exports and over
60 percent of GDP—should oil prices remain at(number of countries)

14
12

Food price inflation

10

Consumer price inflation

8
6
4
2
0
Inflation<0%

Inflation 0- Inflation 5- Inflation 105%
10%
15%

Inflation>15%

Source: World Bank.

138

Global Economic Prospects June 2011: RegionalAnnex
their February levels current account balances
could improve by as much as 7 percent of GDP.
This could also pose a macroeconomic
challenge, since if not managed well, could leadto a ―Dutch Disease‖ effect, thereby making
more difficult the ability to diversify the
economy.

region, there still remain a number of instances
wherepolitical developments, leading toelections and in its aftermath, have been adeterrent to economic activity. In 2010, growthprospects in Madagascar, Comoros, Coted’Ivoire and Guinea were affected adversely bypolitical unrests. Hence the evolution of thepolitical cycle over the forecast horizon will beconsequential to individual country growth
outcomes. As of June 2011, six presidential
elections had been carried out, none of which
created disruptions to economic activity.
However, the turmoil in Cote D’Ivoire whichescalated in 2011 is likely to have led to negative
growth in the first two quarters of 2011.

The downside risks to oil importers in the region
are however, greater. With countries facing an
increased oil import bill, and given that oil
imports are about 18 percent of
total
merchandise imports among Sub Saharan Africa
oil importers, this could lead to a deterioration in
the current account to GDP ratio by about 0.5
percent (excluding South Africa), if the February
level of prices are sustained. However, wereprices to increase even further, by an additional$50 from their February highs, current accountbalances would deteriorate even further, by asmuch as 3.5 percent of GDP. Fiscal balances
could also deteriorate depending on the degree of
petroleum subsidies provided by governments.
And depending on the exchange rate regime,
deterioration in current account balances could
lead to depreciation of the nominal exchange
rate, thereby bringing a further bout of
inflationary pressures to bear. Higher inflation
rates are also likely to prompt further monetary
tightening, which could limit credit expansion inan already credit-constrained environment. For
instance, in both March and May, Kenya’sCentral Bank raised its key interest rate by 25
basis points, the first interest rate hikes sinceJune 2008, on account of rising inflation and thedepreciation of the shilling to close to a six andhalf year low. Other countries in the region tohave hiked up interest rates in 2011 include
Mozambique and Nigeria. According to WorldBank estimates, if the current high oil prices
were to increase an additional $50/bbl this could
shave between 0.3 percent and 1 percent from
GDP growth in Sub Saharan Africa.
Political risks associated with elections in 2011.
Over the forecast horizon, elections arescheduled to be carried out in at least a third of
Sub-Saharan African countries. Though the past
decade has seen an increasing number of smoothtransitions of power in many countries in the139Global Economic Prospects June 2011: RegionalAnnex
Table SSA.5 Sub-Saharan Africa country forecasts(annual percent change unless indicated otherwise)
AngolaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Benin
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Botsw ana
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Burkina Faso
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
BurundiGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Cape Verde
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Cameroon
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Central African Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Chad
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Comoros
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Congo, Dem. Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Congo, Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Cote d Ivoire
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Equatorial Guinea
GDP at market prices (2000 USD) 2
Current account bal/GDP (%)
Eritrea
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Ethiopia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Gabon
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Gambia, The
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Ghana
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
GuineaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Guinea-Bissau
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Kenya
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Lesotho
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Madagascar
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Malaw iGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mali
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

140

98-07a

2008

2009

Est.
2010

Forecast2011 2012

9.5
-0.9

13.3
8.5

2.4
-10.0

3.4
-1.7

6.7
4.0

8.1
7.4

7.8
9.9

3.8
-7.7

5.1
-9.3

2.7
-9.2

2.5
-10.6

3.4
-14.8

4.3
-12.4

4.8
-7.2

4.7
9.2

3.1
3.5

-4.9
-4.5

7.2
-6.2

6.5
-3.1

5.9
2.7

4.9
7.8

4.8
-14.0

5.0
-24.8

3.2
-19.5

7.9
-21.3

5.2
-19.8

5.6
-18.9

6.0
-18.0

1.8
-20.5

4.5
-30.2

3.5
-16.0

3.9
-14.6

4.1
-15.1

4.6
-14.0

4.8
-12.9

5.9
-10.8

6.5
-13.4

2.8
-9.9

4.7
-14.9

5.8
-11.8

6.6
-18.2

6.6
-24.3

3.4
-2.4

2.9
-1.9

2.0
-5.1

2.8
-3.8

3.8
-2.7

4.1
-3.2

4.6
-3.3

0.8
-4.6

2.2
-9.7

2.4
-7.9

3.0
-9.0

3.3
-8.0

3.3
-7.9

3.3
-7.0

8.0
-36.5

-0.4
-19.8

-1.6
-28.9

5.1
-24.1

6.0
-14.3

6.0
-12.7

4.0
-5.4

1.9
-4.0

1.0
-10.5

1.8
-5.9

1.7
-8.5

2.3
-9.1

2.3
-10.0

2.3
-10.3

1.9
-3.6

6.2
-17.5

2.8
-10.5

7.3
-6.8

6.5
-2.8

6.0
-0.7

8.0
0.6

2.9
1.2

5.6
1.2

7.6
-10.6

9.1
3.7

7.8
9.5

5.4
6.6

4.9
6.1

0.0
0.7

2.2
1.9

3.6
7.2

3.0
6.7

-6.0
-1.5

4.9
0.6

5.5
-0.8

20.7
6.7

11.3
10.1

-5.4
-20.0

0.9
-6.7

2.8
-10.7

4.0
-8.6

4.0
-6.9

-0.1
-19.0

-9.8
-5.2

3.6
-6.5

2.7
-2.5

3.4
-2.7

3.5
-3.2

3.5
-3.4

6.5
-5.3

10.8
-7.0

8.8
-5.1

8.1
-6.8

7.7
-7.7

7.2
-8.8

7.8
-9.6

0.4
10.9

2.3
22.2

-1.0
13.3

5.1
12.3

6.0
16.1

5.1
13.1

4.1
12.2

4.6
-9.5

6.1
-6.1

4.6
4.0

4.8
3.1

5.0
3.1

5.0
2.9

5.0
2.7

4.6
-6.4

8.4
-12.4

4.7
-3.6

7.7
-7.7

13.4
-6.3

10.0
-4.9

8.0
-4.0

2.8
-6.0

4.9
-31.9

-0.3
-10.4

3.5
-8.9

4.3
-7.6

4.5
-7.4

4.7
-7.1

1.5
-7.2

3.5
-11.0

3.0
-8.5

3.4
-9.4

3.9
-9.8

3.9
-9.2

3.9
-8.9

3.4
-4.9

1.6
-6.6

2.6
-5.7

5.6
-7.8

4.8
-9.9

5.0
-7.7

5.2
-7.1

2.8
-12.9

4.5
12.6

0.9
-2.4

2.4
-22.4

3.1
-19.5

4.0
-19.5

3.8
-19.3

3.2
-9.5

7.1
-17.4

-3.7
-15.2

0.7
-13.8

2.6
-12.7

3.9
-11.2

3.9
-9.7

2.8
-4.7

8.6
-7.1

7.6
-9.6

6.6
-2.7

6.1
-4.7

5.7
-5.1

5.5
-5.5

5.1
-7.9

4.9
-12.2

4.3
-14.1

5.0
-15.2

5.8
-15.4

5.9
-15.8

5.9
-15.8

2013

Global Economic Prospects June 2011: RegionalAnnex(annual percent change unless indicated otherwise)
Mauritania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mauritius
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mozambique
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Namibia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Niger
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Nigeria
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Rw andaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
SenegalGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Seychelles
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Sierra Leone
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
South Africa
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Sudan
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Sw aziland
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Tanzania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Togo
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
UgandaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
ZambiaGDP at market prices (2005 US$) b
Current account bal/GDP (%)

98-07a

2008

2009

Est.
2010

Forecast2011 2012

2013

4.1
-5.8

3.7
-12.6

-1.1
-13.2

4.9
-10.6

6.0
-11.6

6.3
-12.1

5.4
-12.7

3.6
-1.3

5.1
-10.5

3.0
-9.5

4.3
-13.1

4.1
-12.3

4.2
-11.5

4.3
-10.5

6.8
-14.6

6.7
-12.0

6.3
-12.0

6.6
-13.7

7.6
-12.0

7.7
-10.9

7.7
-9.9

4.4
4.0

4.3
0.5

-0.8
-1.2

4.6
-7.2

4.0
-1.8

4.8
2.1

4.5
6.3

2.7
-7.4

9.5
-12.2

1.0
-18.9

7.5
-19.3

6.0
-19.7

8.5
-17.1

6.8
-14.7

5.0
11.0

6.0
13.8

6.7
12.4

7.8
13.5

7.1
12.7

7.5
11.6

7.3
10.3

6.8
-6.0

11.2
-5.4

4.1
-7.3

7.5
-5.9

7.0
-5.6

6.8
-5.1

7.0
-4.7

4.0
-7.0

3.3
-14.3

2.2
-12.9

3.2
-14.0

4.2
-14.2

4.4
-14.9

4.4
-15.5

2.1
-16.4

-0.9
-44.0

-7.6
-37.2

3.5
-39.5

4.0
-23.1

5.0
-16.7

5.0
-10.3

7.5
-12.2

5.5
-15.3

3.2
-15.0

5.8
-14.3

5.6
-14.7

5.9
-13.6

6.0
-12.5

3.7
-2.1

3.7
-7.1

-1.8
-4.1

2.8
-2.8

3.5
-3.2

4.1
-3.8

4.4
-4.4

6.3
-7.1

6.8
-2.3

4.5
-7.1

5.5
-3.0

5.3
-7.8

5.8
-7.9

5.8
-7.9

3.1
-1.3

2.4
-8.1

1.2
-13.8

2.0
-14.5

0.5
-14.2

1.5
-13.6

2.0
-12.5

5.9
-5.7

7.4
-13.0

6.0
-8.5

7.0
-8.7

6.5
-9.1

6.9
-10.1

6.7
-11.3

1.8
-9.5

1.8
-7.7

3.2
-5.3

3.4
-5.7

3.7
-4.3

4.0
-4.6

4.1
-4.7

7.0
-5.4

8.7
-9.1

7.1
-6.6

5.2
-9.7

6.4
-11.9

6.6
-15.8

7.0
-12.1

4.2
-13.7

5.8
-9.5

6.4
-5.5

7.6
-3.7

6.8
-3.6

6.7
-3.0

6.0
-2.4

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator
are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Source: World Bank.

Bank, Washington DC.

Notes:

5. Calestous Juma. ―Growing the economy‖, in
The New Harvests. Oxford University Press.
Transforming Africa’s Role in the Global
Food Security System. Address by H.E. Mr
Kofi A. Annan, Chair of the Alliance for a
Green revolution in Africa, London 30
March 2011.

1. Peter Guests, ―Resource Deals to Africa‖, inThis is Africa, Financial Times Business,
April/May 2011.
2. ―Who’s investing in Africa‖, Ai, NovemberDecember 2010, Vol. 8 issue 6.
3. Gail Mwamba, ―Structuring Local
Solutions‖, in This is Africa, Financial
Times Business, April/May 2011.

6. Address by H.E. Mr Kofi A. Annan, Chairof the Alliance for a Green revolution in
Africa, London 30 March 2011.

4. World Bank (2008). World Development
Report: Agriculture for Development, World

141