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Global Economic Prospects January 2011

Global Economic Prospects January 2011:
Navigating strong currents
Overview & main messages
Economic activity in most developing
countries has,or is close to having,
recovered. Supported by a resurgence ininternational and domestic financial flows andhigher commodity prices, most of the sparecapacity in developing countries that was createdby the crisis has been reabsorbed, anddeveloping countries have regained trend growth
rates close to those observed in the pre-crisis
period.
In contrast, the recovery in many highincome countries (and several economies indeveloping Europe and Central Asia) has notbeen strong enough to make major inroads
into high unemployment and spare capacity.
Prospects in these economies, many of whichwere at the center of the financial boom andbust, continue to be weighed down by bankingsector restructuring, high consumer debt and aright-sizing of economic sectors that grewunsustainably large during the boom period.
The robust recovery in developing countries is
all the more remarkable because it mainlyreflects an expansion of their internalmarkets. Developing countries are not justleading the recovery. Increasingly they are an
important source of stability, with many of therisks to global growth centered in high-income
countries and reflecting as yet unresolved
imbalances generated by the boom period.
Very low policy-induced interest rates in high-income countries plus better growthprospects in developing countries prompted astrong recovery in capital flows, mainly to
middle-income countries. Overall net private
capital flows to developing countries expanded
44 percent in 2010, but remain well below
record 2007 levels. For most countries, theincrease in flows was beneficial, helping tofinance growth enhancing investment.

Capital inflows into some middle-income
countries have placed undue and potentiallydamaging upward pressure on currencies.
Many of these flows are short-lived, volatile andsometimes speculative in nature. Left unchecked,
such flows can lead to abrupt real appreciations
and depreciations that are out of line with
underlying fundamentals, and can do lastingdamage to economies. The biggest increases
were in short-term debt flows, equities andbonds, notably corporate bonds. Long-term banklending also posted large percentage increases,
but from a very low base. Foreign direct
investment (FDI) rose a relatively modest 16
percent given earlier large declines.
Low-income countries experienced modest
declines in capital flows in 2009 and modest
increases in 2010, partly reflecting theirreliance on relatively stable FDI. However,many low-income countries did benefit fromstronger remittance inflows, a recovery intourism and higher commodity prices. SouthSouth flows are increasingly important for lowincome countries.
Global growth is expected to weakensomewhat in 2011, before picking up in 2012
(Table 1). Real GDP is estimated to have
expanded by 3.9 percent in 2010, once again led
by strong domestic demand in developing
countries. Restructuring and right-sizing in thebanking and construction sectors, combined withnecessary fiscal and household consolidation,
will continue to drag on growth in many highincome economies and developing Europe andCentral Asian countries. At the same time,
growth is projected to slow in other developing
countries due to emerging capacity constraints.
Overall global GDP is expected to grow 3.3
percent in 2011, before picking up to 3.6 percent
in 2012 as the drag on activity from restructuring
in high-income countries eases somewhat.

Global Economic Prospects January 2011

pursuing policies that permit exchange rates
to gradually adjust in-line with relative
fundamentals; and, reducing the volatility of major reserve
currencies in order to sustain confidence inthem as stores of value and facilitators of
trade.

Strong growth of domestic demand indeveloping-country will continue to lead theworld economy. Developing countries domestic
demand is playing a major role in the recovery,
representing 46 percent of global growth in2010. GDP in low- and middle-income
countries expanded 7 percent during 2010 (5.2
percent excluding India and China) and is
projected to increase 6.0 and 6.1 percent in 2011
and 2012. As such it will continue to outstrip
growth in the high-income countries (2.8, 2.4
and 2.7 percent in 2010, 2011 and 2012).

The remainder of this report is organized asfollows. The next section discusses recent
developments in global production, trade, andfinancial markets, and presents updates of theWorld Bank’s forecast for the global economy
and developing countries. It is followed by adiscussion of the serious short- and longer-term
challenges facing the global economy. This isfollowed by a short section of concluding
remarks.

Serious tensions and pitfalls persist in the
global economy, which in the short-run couldde-rail the recovery to differing degrees.
These include the possibility that: market concerns over debt sustainability inEurope escalate; continued very low interest rates in highincome countries once again prompt large
and volatile flows of capital toward
developing countries that contribute todestabilizing movements in exchange rates,
commodity prices, and asset-prices.
 although real food prices in most developing
countries have not increased as much as
those measured in U.S. dollars, they haverisen sharply in some poor countries; and ifinternational prices continue to rise,affordability issues and poverty impacts
could intensify.
Longer-term risks center around thepossibility that policy in the economies mostdirectly hit by the crisis fail to shift focus
from short-term crisis management toward
measures that address the underlying (anddifficult to resolve) structural issues that
contributed to the crisis in the first place.
These include: putting in place credible plans for restoring
fiscal sustainability; placing more emphasis on fiscal measuresthat facilitate the re-employment of
displaced workers; and, in many countries,
programs
to improve longer-termcompetitiveness.
 completing the re-regulation of the financial
sector;Recent economic developments andoutlook
The global economy is transitioning from arapid, bounce-back phase of recovery, toward aslower, more sustainably paced phase. Goingforward, the recovery will be characterized byclose to potential growth rates among thosecountries that were least directly involved in theexcesses of the pre-crisis boom period.
Among those that were more closely implicated,
including many high-income economies anddeveloping Europe and Central Asia countries,
aggregate activity will continue to be burdenedby the restructuring required to undo theexcesses of the boom period. As a result,unemployment is expected to decline only
slowly.

The rebound in industrial activity
The rebound phase of the recovery came to an
end toward the middle of 2010, when global
industrial production and trade regained their pre-crisis levels of activity (dated here as August
2008 the month prior to the collapse of
Lehman’s and the onset of the acute phase of thecrisis1). Almost at the same time, the pace of the
expansion slowed abruptly, with 3-monthindustrial production and global exports2

Global Economic Prospects January 2011
Figure 1 Industrial production and world trade volumes have regained pre-crisis levels

Industrial production
Percent growth, 3m/3m saar
20
15

Export volumes

Global industrial production volumes,
billions of 2005 $
1200

40

1150

1000

20
10

5

800

1100
0

0
-5
-10

World merchandise export volumes,
billions of 2005 $1200
Annualized growth rate

30

Annualized growth rate

10

Percent growth, 3m/3m saar

1050

-15
-20

-10
-20

Level of activity
1000

600
Level of activity
400

-30
-40

950

-25
-30
900
2007M01 2007M06 2007M11 2008M04 2008M09 2009M02 2009M07 2009M12 2010M05 2010M10

200

-50
-60
0
2007M01 2007M06 2007M11 2008M04 2008M09 2009M02 2009M07 2009M12 2010M05 2010M10

Source: World Bank.

South Asia. Production in the Middle-East andNorth Africa as well as in Sub-Saharan Africa
declined only modestly, while it was harder hit
in Latin America and the Caribbean. Developing
Europe and Central Asia, where many
economies overheated during the boom period,
was hardest hit by the crisis, with output having
fallen 20 percent at the trough.

annualized growth rates slowing from more than
10 and 20 percent respectively in early 2010 tonear zero by September and only began tostrengthen again in October (Figure 1).
Each developing region experienced the crisis
differently. Industrial production in East andSouth Asia hardly declined at all, but growth
rates did slow well below the pre-crisis trend of
10.5 percent in East Asia and 8.6 percent in

The bounce-back phase of recovery was also

Figure 2 Output in most developing countries has rejoined with underlying potential, while gaps remain large insome high-income and developing Europe and Central Asia Economies(% difference between actual and potential GDP in 2010)

Source: World Bank.

3

Global Economic Prospects January 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
1,2

G-7 Countries
United States
Commodity Prices (USD terms)
Non-oil commodities
3

Oil Price (US$ per barrel)
Oil price (percent change)
4

Manufactures unit export value
Interest 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

2008

2009

2010e

2011f

2012f

2.7

-11.0

15.7

8.3

9.6

3.1
3.8

-0.2
-0.4

1.3
1.9

1.1
1.5

1.6
2.0

21.0
97.0
36.4
6.7

-21.6
61.8
-36.3
-4.2

26.6
79.0
28.0
0.7

-0.1
85.0
7.6
-2.9

-4.3
80.4
-5.4
-3.0

3.2
4.8

1.2
1.5

0.5
1.0

0.5
0.8

0.9
1.1

4.5

3.7

4.4

4.4
3.3
7.5
4.1
2.4
3.6
3.5

3.2
3.0
2.2
3.8
2.7
4.3
3.9

4.0
4.0
3.6
4.5
2.4
4.0
4.6

4.0
3.8
4.3
4.4
2.8
3.6
4.9

3.8
3.3
4.4
4.1
2.6
3.9
5.2

1.5
2.6
0.2
0.1
0.3
-1.2
0.0
2.5
5.7
8.5
9.6
6.0
2.5
3.9
5.2
0.7
7.1
4.0
5.1
1.5
6.8
4.2
7.2
2.3
2.4
4.8
5.1
1.6
6.2
5.2
3.7
6.0
1.6

-2.2
-0.8
-3.4
-3.5
-4.1
-6.3
-2.6
-1.8
2.0
7.4
9.1
4.5
-2.3
-6.6
-7.9
-4.7
-7.1
-2.2
-0.2
-6.5
0.9
3.1
4.7
1.4
2.4
7.0
7.7
3.6
5.7
1.7
-1.8
5.6
2.6

3.9
4.8
2.8
2.7
1.7
4.4
2.8
6.7
7.0
9.3
10.0
5.9
7.5
4.7
3.8
8.1
-1.9
5.7
7.6
5.2
8.0
3.3
5.1
1.5
2.4
8.7
9.5
4.4
5.8
4.7
2.7
7.6
5.0

3.3
4.1
2.4
2.3
1.4
1.8
2.8
4.4
6.0
8.0
8.7
6.2
3.2
4.0
4.2
4.1
1.5
4.0
4.4
3.6
4.7
4.3
5.5
3.0
4.1
7.7
8.4
2.6
6.1
5.3
3.5
7.1
5.2

3.6
4.4
2.7
2.6
2.0
2.0
2.9
4.8
6.1
7.8
8.4
6.5
4.2
4.2
4.0
4.3
4.4
4.0
4.3
3.8
4.5
4.4
6.0
3.0
4.1
8.1
8.7
3.8
6.3
5.5
4.1
6.2
5.5

5.8
4.2

3.2
-1.8

7.5
5.2

6.3
4.3

6.3
4.5

2009e

2010f

2011f

2012f

5.9

4.9

5.3

5.7

2.1

1.7

2.3

3.0

5.7

9.2

8.5

8.7

2.6

2.8

3.5

3.2

6.0

5.8

5.9

6.2

5

Real GDP growthWorld
6
Memo item: World (PPP weights)
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
7

Egypt
7
Iran
AlgeriaSouth Asia

7, 8

India
7
Pakistan
7
Bangladesh
Sub-Saharan Africa
South Africa
Nigeria
Kenya
Memorandum items
Developing countries
excluding transition countries
excluding China and India
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 us ing 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.

Egypt
Iran
India
Pakistan
Bangladesh

6. Calculated using 2005 PPP weights.
7. In keeping with national practice, data for Egypt, Iran, India, Pakistan and Bangladesh are reported on a fis cal year basis. Express ed on a calendar year basis,
GDP growth in thes e countries is as in the table on the right.
8. Real GDP at market prices. Growth rates calculated using real GDP at factor cost, which are customarily reported in India, tend to be higher and can varysignificantly from market price GDP. Starting with FY2009-10, factor cost GDP is: 7.7, 8.7,9, 8.5 percent – see Table B5.2 in the regional annex.

4Global Economic Prospects January 2011
August 2008 levels (up from 8.3 percent belowthat level at the beginning of the year).
Developing country exports were some 16
percent higher than pre-crisis levels as ofNovember.

uneven, with countries and regions that were theleast caught-up in the excesses of the boom
period having recovered their pre-crisis growth
paths most rapidly. Thus, as of October 2010,industrial production in many developing
countries had surpassed pre-crisis (August 2008)
activity levels by 10 percent or more (forexample, China, India, Nigeria, Sri Lanka),
while many others had drawn even with their pre-crisis activity levels. However, industrial
activity in other countries—including many high-income countries and developing economies in
Europe and Central Asia— remains some 5
percent or more below August 2008 levels.

While the recovery from pre-crisis levels is
encouraging, trade volumes remain well below
their pre-crisis peaks and the level that might
have been expected to prevail had trade
continued to grow at pre-crisis rates. Indeed,high-income countries export volumes are at thesame level as in the beginning of 2007 (implying
almost 3 years with no growth) and still some 10
percent below their pre-crisis peak of April
2008. Compared with their pre-boom trend, high-income exports are 19 percent below that whichmight have been expected, and developing
country exports are 7 percent lower (Figure 3).
In contrast, high-income imports are 14 percent
below their long-term trend, whereas developing
countries imports are some 7 percent higher thantheir long-term trend.

Simple estimates of whole-economy potential
output suggest that, based on pre-boom period
performance (see Box 1 and annex for moredetails), most developing countries haveregained or are close to regaining full capacity,while several high-income and developing
Europe and Central Asia economies remain
plagued by ample spare capacity (Figure 2).

Despite the recovery in export volumes, much
lower commodity prices (oil prices are 33
percent lower than they were in August 2008)
meant that the U.S. dollar export earnings ofdeveloping countries remained between a quarter

Trade too has bounced backThe rebound in industrial activity was mirroredin the volume of goods traded, which also
regained pre-crisis levels by mid 2010, withalmost 50 percent of the global increase inimport demand emanating from the fastergrowing developing countries. Although overall
activity in high-income countries remains
relatively depressed, by October 2010 theirexport volumes had regained 98 percent of their

Figure 4 Lower-energy prices translate into improved
terms of trade gains for most low-income countries
Terms-of trade impacts (2010 vs 2008), percent of GDP
Kyrgyz Rep.
Ghana
Mali
Tanzania
Zimbabwe
ZambiaMalawi
UgandaBenin
Ethiopia
Togo
Burkina Faso
Eritrea
Kenya
BurundiCambodia
GuineaHaiti
Nepal
Mauritania
Madagascar
RwandaNiger
Sierra Leone
Comoros
Bangladesh
Lao PDR
Centl Afr Rep.
D.R. Congo
Mozambique
GambiaChad
Guinea-Bissau

Figure 3 Trade has yet to recover pre-crisis trend
Log of real merchandise exports, 2005 dollars

14High-income

13
Developing

12
11
10
1991

1994

1997

2000

2003

2006

-15

2009

-10

Source: World Bank.
Source: World Bank.

5

-5

0

5

10

15

20

Global Economic Prospects January 2011
Box 1 Estimating the level of economic slack
Though regaining pre-crisis activity and trade levels are important milestones, the extent of slack in an economy depends on both how far output declined, and its underlying trend growth rate. In fast-growing economies such as China,
with an average annual industrial production growth rate of 14 percent during the first 5 years of the 2000s, merely regaining the August 2008 level of activity would imply an almost 20 percent shortfall in activity compared with whatmight have been expected in the absence of the crisis.
Estimates of potential output attempt to take into account the growth forgone during a crisis, and are based on activity inthe whole economy — not just industry (see Annex for more detail). Such estimates confirm that the difference between
actual demand levels and the productive potential of most economies largely disappeared or is about to disappear(Figure B1.1). Thus, while estimates of this output gap for high-income countries are more than 2 percent of GDP, they
are less than 1 percent of GDP in every developing region except Europe and Central Asia. Even within that region,
spare capacity is concentrated in 6 countries (Bulgaria, Kazakhstan, Lithuania, Romania, Russian Federation, andUkraine). Elsewhere in the region, output gaps are close to zero. Similarly, relatively large output gaps in high-income
countries are concentrated among countries that were most caught up in the excesses of the boom period, including transition economies such as Hungary and the Czech Republic. Unemployment rates in Estonia, Greece, Ireland, Lithuania,
Ukraine, and the United States were in excess of 8 percent in late 2010, more than three times pre-crisis levels in somecases.
Figure B1.1 Spare Capacity is concentrated in high-income and developing Europe and Central Asian economies

Output gaps, difference between actual and potential GDP, % of potential GDP
10
8

2007

2008

2009

2010

2011

2012

6
4
2
0
-2
-4
-6
High-income

East Asia &Pacific

Europe &Central Asia

Latin America & Middle-East &Caribbean
N. Africa

South Asia

Sub-SaharanAfricaSource: World Bank.

and a third lower than pre-crisis levels. Overall, 29
percent of developing countries have seen their export
earnings fall by 20 percent or more, substantiallyreducing incomes. By and large this has been offset bylower import costs. As a result, terms-of tradedevelopments since 2008 have been generally positive
for most non-oil-exporting developing countries—
particularly low-income ones (Figure 4).

global recovery in capital markets, partly reflecting loose
monetary policy in high-income countries and resulting
very low interest rates that have made equity and highyielding bonds more attractive worldwide. As a result,despite still weak banking-sectors and little improvementin overall lending (net lending has increased sharply inpercentage terms but remains quite low), equity markets
in both high-income and developing countries haveregained much of the value lost during the acute phase of
the crisis, though they remain between 25.2-and 16.3
percent below previous peaks. The sharpest increase wasin short-term debt flows (debt with an original maturity

A surge in international capital flows
The rebound in real-side activity was supported by a6

Global Economic Prospects January 2011
Figure 5 Non-bank gross capital flows to developing
countries surged in 2010

Figure 6 While up globally, FDI fell further as a percent
of GDP in three of six developing regions.

$ billions

FDI inflows as a share of GDP (%)
6

180
160

Bank

Equity

5

Bond

140

2008

4

120

2009

2010

3

100
2

80
60

1

40

0
East Asia &the Pacific200Latin America Sub-Saharan& theAfricaCaribbean

Europe &Middle East &Central Asia North Africa

South Asia

2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3

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

The recovery in FDI was more muted, with net
flows to developing countries rising by an
estimated 16 percent to $410 billion after falling
40 percent in 2009. Among developing regions,
Europe and Central Asia recorded the largest
cumulative shortfall in FDI inflows as a share of
regional GDP (Figure 6).

of one year or less). These flows tend to bemostly trade related in developing countries, andjumped to an estimated $86 billion in 2010 from
$6.4 billion in 2009.
Gross equity flows to, and bond issuance by,developing countries increased by more than 60
percent between 2009 and 2010, reaching almost
three-times the level recorded in 2008 (Figure 5).
Private corporations were particularly active,
taking advantage of investor’s search for yield tocompensate for weak bank flows (down 36
percent from 2009). Such firms issued 50
percent of all developing-country bonds –well inexcess of their average 40 percent share during
2008-2009.

An important factor in the rebound of FDI has
been increases in South-South FDI, particularly
from Asia. FDI outflows from developing
nations rose to an estimated $210 billion (1.1
percent of their GDP) in 2010, surpassing theprevious record of $207 billion of 2008. Morethan 60 percent of these flows originated in
Brazil, Russia, India and China, with the bulk
(60 percent) going to other developing nations— mostly in the form of greenfield investment.
In contrast, South-North FDI mainly took the

Figure 7 Capital flows to low-income countries are dominated by FDI and therefore more stable than in middleincome countries.
percent of GDP

Short-term Debt
Bank
Bond
Portfolio Equity
FDI

16
14
12
10
8
6
4
2
0
-2
-4
06-07

2008

2009

Top 9

2010

06-07

2008

2009

2010

ECA (excluding Turkey)

06-07

2008

2009

Other Middle

2010

06-07

2008

Source: World Bank.
Note: Top 9 comprise Brazil, China, India, Indonesia, Malaysia, Mexico, South Africa, Thailand, and Turkey.

7

2009

Low Income

2010

Global Economic Prospects January 2011
Box 2 Sub-Saharan Africa’s increasing attractiveness as a destination for international capital flows

Outside of South Africa, foreign private capital flows into Sub-Saharan Africa come almost exclusively
in the form of foreign direct investment (FDI). And while such flows represent as much as 20 percent of
total gross capital formation in the region, for years FDI inflows have been almost exclusively focusedon the extractive sector. Indeed, the high commodity prices of recent years have supported large capital
inflows to many resource-rich African countries and helped to sustain these flows even during the crisis.

2007‐2008 Average

However, several Sub-Saharan African countries
appear to be better positioned to receive more in- Figure B2.1 Improved investment climate in Africancountries
ternational capital flows in the current cycle. The
Middle Income Average
investment climate in most countries is improving(excluding Africa)
50(Figure B2.1); and many have improved their macNigeria
roeconomic policies and debt sustainability
40
Lesotho Ghana
Angola(Radelet 2010). As a result, market makers are inKenya
30
creasingly talking of several African countries’
being on the verge of an economic takeoff
20
Not Shown:(McKinsey 2010; Young 2009; and Pinkovsiy andSouth Africa (49,67)
10
Xala-i-Martin 2009). In fact, for global investors,
Botswana (55, 67)
Mauritius (54, 56)
several countries in the region represent relatively0
untapped large and rapidly growing markets
0
10
20
30
40
50
1998‐2003
Average(regional GDP is projected to grow by more than 5
1998‐2003
Average
percent annually between 2010 and 2012).
Source: Institutional investor country ratings.

As a result, multinationals are increasingly recognizing Africa’s potential and getting interested in entering the local market to take advantage of the opportunity to service the local economy. The region has been attracting FDI into new sectors in services(telecom, banking). For example, Walmart has made an offer of 13 times the pre-tax earnings of theSouth African MassMart (290 stores in 13 African countries), in order to secure itself a foothold on thecontinent. Africa is also becoming an attractive destination for portfolio investment flows. Countries
like Ethiopia, Ghana, Nigeria, and Rwanda are identified by several fund managers as possible destinations for Africa-centric investment funds.
Increased investment and trade ties with other developing countries have been playing an importantrole. While some of the South-South flows are intra-regional (coming from Tanzania, South Africa and
Kenya), inter-regional South-South investment from China, Brazil, India and Malaysia has surged inrecent years. The recent acquisition of telecom company Zain Africa by Indian Bharti for $10.7 billion
was the largest South-South acquisition ever.
The potential and promise of Africa‘s future is clear. But continued success is not guaranteed. Concerns
about the quality of growth and political stability remain. The realization of Africa‘s promise will depend on the continuation of policy reforms and institutional development that have underpinned the recent improvement in economic performance, building on the foundation that has been laid. And, even if
the potential is realized, the absorption capacity of these countries will be a crucial determining the extent to which they benefits from better access to international capital flows. With limited experience of
dealing with large capital flows, some countries may have difficulty managing the volatility that canaccompany them.
was mainly directed toward middle-income
countries. As a percent of recipient GDP, capital
flows increased significantly in the nine largest
developing economies (Figure 7). But even forthese countries, capital flows as a percent of GDP

form of mergers and acquisitions.
Because most of the surge in international capital
flows was in short-term debt, equity and bonds(notably corporate bonds), the increase in inflows
8

Global Economic Prospects January 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
126.6
1.9

2004
185.0
2.3

2005
322.8
3.4

2006
448.9
4.0

2007
476.7
3.4

2008
434.6
2.6

2009
279.6
1.7

2010e
298.2
1.6

2011f
272.5
1.3

2012f
265.9
1.1

262.3
274.3
178.8
152.5
26.3
83.6
-11.9
-2.5
2.4
-11.8
95.5
38.3
23.1
19.5
-4.4
57.2
-103.5-285.5

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
-127.3-399.9

464.9
528.9
341.1
273.6
67.5
123.8
-64.0
2.7
-40.2
-26.6
187.8
113.3
48.3
70.3
-5.3
74.5
-372.9-414.8610.3 1110.4
679.9 1110.4
451.0
643.2
343.3
508.1
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
-411.3 -495.5-647.9 -1091.7

743.8
716.0
533.9
587.1
-53.2
209.9
27.8
7.3
10.0
10.6
182.1
196.1
24.1
176.8
-4.8
-14.0
-700.2-478.2

597.9
521.5
462.2
354.1
108.2
135.6
76.4
17.7
26.5
32.2
59.2
52.8
51.1
3.2
-1.6
6.4
-250.2-627.3

825.9
753.2
563.0
409.6
153.4
262.9
72.4
19.3
16.3
36.8
190.5
104.1
66.5
37.6

838.6
631.1
486.0
145.1

874.5
724.2
589.9
134.3

207.5

150.3

86.4
-649.0-475.1

23.6
137.4

46.1
159.3

61.6
192.1

130.5
226.7

148.7
278.0

207.5
325.0

153.9
307.1

210.0
325.0

250.0
346.0

275.0
374.0

2003
3.88
4.05
2.64
2.25
0.39
1.41

2004
4.26
4.56
3.03
2.57
0.46
1.53

2005
4.88
5.56
3.58
2.87
0.71
1.97

2006
5.42
6.04
4.01
3.05
0.96
2.03

2007
8.03
8.03
4.65
3.67
0.98
3.38

2008
4.52
4.35
3.24
3.57
-0.32
1.11

2009
3.72
3.24
2.73
2.09
0.64
0.35

2010e
4.40
4.01
3.00
2.18
0.82
1.01

2011f

2012f

4.00
3.01
2.32
0.69
0.99

3.77
3.12
2.54
0.58
0.65

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.

were lower than the pre-crisis period (2006-07).

market.

Low-income countries were subjected torelatively small declines in overall capital flows
during the crisis, and relatively small gains in therecovery, because they receive very little in theform of bonds or equity. Indeed, equity flows
were close to zero in half of the 128 developing
countries for which data exist, and more than 2/3
have never accessed the international bondGiven these patterns, the increase in capital flows
expressed as a share of GDP was uneven acrossregions. Aggregate flows increased in all regions
except South Asia, and the Middle East and North
Africa (see Box 2 on FDI prospects for SubSaharan Africa).
Looking at 2010 as a whole and at capital flows
9Global Economic Prospects January 2011
Tourism is also an important source of income
for some developing countries, representing 10
percent or more of GDP in 13 countries. For
these economies, an estimated 7.6 percent
increase in tourism arrivals in 2010 more thancompensated for the 1.4 percent decline recorded
in 2009 (World Tourism Organization, 2010).
The Middle-East, East Asia, and South Asia saw
the biggest estimated increases in volumes, up
13, 7.6, and 14 percent respectively, with intraregional tourism in the Middle-East and North
Africa playing a big role.

in net terms (new flows less repayments), private
capital flows to developing countries reboundedan estimated 44 percent, reaching about $753
billion, or 4 percent of recipient GDP (Table 2).

Recovery in remittances, tourism andcommodity prices were positives for lowincome countries
Although low-income countries did not benefit
from the recovery in capital flows to the same
degree as middle-income countries, theirrecoveries in 2010 were supported by a modest
pickup in remittances, tourism and commodity
prices.

The strong rebound in metals and minerals
prices, and to a lesser extent energy prices,boosted incomes in resource-rich developing
countries, and helped economies to meet fiscal
challenges.

Remittances are a very important source ofincome for a number of poorer developing
economies, representing more than 20 percent of
GDP in several (Figure 8). Overall, the dollar
value of remittances to individuals living indeveloping countries rose an estimated 6 percent
in 2010, after falling 5.4 percent in 2009 (World
Bank, 2010b). However, the depreciation of the
U.S. dollar against many developing country
currencies reduced the extent to which theincomes of the poor were increased. At theaggregate level, the real-local currency value ofremittances is estimated to have declined 3.9
percent in 2010, with losses in economies that
appreciated against the dollar offsetting gains in
those that were pegged to or depreciated withrespect to the dollar.

A mid-year pause in the recovery
Growing supply-side bottlenecks in countries
where the recovery was most advanced, andongoing restructuring in those most directly
affected by the financial crisis, contributed to a
mid-year pause in growth. In the final quarter of2010, this began giving way to what is expected
to be slower growth more in line with longerterm trends.
The slowdown partly reflected the coming to an
end of the easy ramping up of previously idledcapacity, and of the investment cycle (a standard

Figure 8 Increased tourism and remittances boosted incomes in many low-income countries
Tourism receipts in 2007, % of GDP
0
20
40

Remittances in 2010, % of GDP
0

10

20

30
Seychelles

Moldova, Rep.
LesothoLebanon
Nepal
Kyrgyz Rep.
Honduras
GuyanaHaiti
El Salvador
JordanJamaica
Bangladesh
Albania
Philippines

Source: World Bank.

Cape Verde
Vanuatu
LebanonMauritius
Fiji
Jamaica
JordanCambodia
Gambia, The
Albania
MoroccoBulgaria

Source: World Bank, UN International Tourism Organization.

10

Global Economic Prospects January 2011
Figure 9 Generally strong in 2010 Q3 growthmechanism underpinning recovery) in mostdeveloping countries. As activity rebounded,
investment also picked up, partly driven by theneed to replace depreciating equipment and byimproving growth prospects. By the third quarterof 2010 aggregate investment rates in developing
and high-income countries had regained nearnormal levels. In aggregate, investment remains
depressed in high-income countries, partly
because of ongoing restructuring in some
sectors. In the United States for example, outsideof the residential sector, investment rates arealmost back to normal levels (Box 3).

Chile
India*
China*
SwedenLatviaIndonesia
Japan
IsraelPeru
United Kingdom
MexicoKorea
Germany
DenmarkSouth Africa
United States
Estonia
FrancePortugal
CanadaItaly
Spain
Taiwan, China
Netherlands
Hong Kong SAR, China
ThailandSlovak Rep
Lithuania
Philippines
Malaysia
GreeceRussiaNorwaySingapore

Indeed, the sharp mid-year slowdown inindustrial production and global trade appears tohave reflected an overshooting of activity rather
than a decline in demand. Demand growth in thethird quarter of the year (the same quarter overwhich the production figures appear to havestalled) was actually very strong both in highincome countries, and in most developing
economies reporting quarterly GDP data (Figure9). Negative growth was concentrated among
countries enduring sharp fiscal consolidations orthat are particularly specialized in industrial

-15

-10

-5

0

5

10

15

Third quarter GDP growth rates, % saar

Source: Datastream.

production.
Most concurrent and forward-looking indicators
for the fourth quarter of 2010 point to astrengthening of economic activity. For example,

Box 3 The investment recovery
Figure B3.1 Fixed investment is recovering in devel-

The crisis saw investment rates in both developing and highoping countries
income countries fall dramatically (down 3 percent of GDP
real investment to GDP ratios, percentage points
in high-income and 3.4 percent of GDP in developing coun- 28
tries). With the recovery, investment has rebounded signifi26
cantly. Real investment rates in developing countries, forwhich quarterly Q3 2010 GDP data are available, were less 24
High income
High-income previous peakthan 1/2 of percentage point lower than their pre-crisis peak 22
Developingin 2010 Q2, before falling back to 1.7 percentage point gap 20
Developing previous peakin the third quarter (Figure B3.1). In East Asia investment
18
rates have recovered previous peaks, while in developing
Europe and Central Asia and Latin America investment re- 16
mains relatively depressed, down 5 and 2.5 percentage 14
q1-2008
q3-2008
q1-2009
q3-2009
points from pre-crisis peaks.
Source: World Bank.

q1-2010

q3-2010

As of the third quarter of 2010, the investment to GDP ratio
in high-income countries remained 2.5 percentage points below its pre-crisis peak. This partly reflects the natureof the pre-crisis investment boom. For example, in the United States, although aggregate investment remained 2.7
percentage points below its pre-crisis peak, this mainly reflected continued weakness in the housing sector. Business-sector investment was only 0.1 percentage points below its pre-crisis highs (the nominal ratio is 1.5 percentage points below its long-term average). Aggregate investment rates could take years to fully recover, as the boom
-period overinvestment in housing only slowly works its way out of the system.

11

Global Economic Prospects January 2011rates) was more marked than in developing
countries (5 percentage point increase in growth
rates); but at 7 percent, growth in developing
countries was more than twice as strong as inhigh-income countries. As a result, low andmiddle-income countries contributed almost halfof global growth (46 percent) in 2010.
Moreover, all of developing country growth was
due to increased domestic demand.

the pace of industrial production growth inChina, which came close to zero during the twomonths ending June 2010, had returned to 15.1
percent by November 2010. And other BRIC
countries are also showing signs of accelerating
activity. Similarly, strengthening retail sales dataand purchasing manager’s indexes for the
globe’s largest economies point to a continued
expansion of output (Figure 10). Although recent
export order surveys look less bullish thanearlier in the year, they remain in positive
territory and new orders are accelerating.

Growth in both high-income and developing
countries is expected to slow somewhat in 2011,
mainly reflecting the easing already observed in
the second half of 2010, before picking up again
toward mid 2011, settling at rates close to theirlonger-run potential. Global GDP is projected toincrease by 3.3-and 3.6 percent during 2011 and2012, with developing economies expanding by
6-or more percent in each year, more-than twice
the 2.4 and 2.7 percent growth expected for high-income countries. Unfortunately these growth
rates are unlikely to be fast enough to eliminate
unemployment and slack in the hardest-hit
economies and economic sectors.

Nevertheless, momentum growth rates in the
United States and Europe remain weak, andsome smaller economies continue to suffer from
intense post-crisis restructuring. In addition, therenewed turmoil in European sovereign debt
markets may dampen investment spending,while plans to tighten budget positions are likely
to exert drag on growth — unless deficit
reduction strategies improve consumer andbusiness confidence and spending, by enough tooffset the direct negative effects of reduced
government spending.2

The continued recovery should be supported byfurther strengthening of capital flows todeveloping countries in 2011 and 2012.
However, carry-trade flows are expected to
decline, as monetary policy tightens in highincome countries and interest rates rise. Partly asa result, total inflows to developing countries
will rise less quickly — at just over 10 percent in2011 and under 5 percent in 2012 (Figure 11).
Because nominal GDP is expected to rise faster

Outlook is for steady but slower
growth in 2011 and 2012
After the sharp growth deceleration of 2008 andthe contraction in 2009, global GDP is estimatedto have increased 3.9 percent in 2010. The
pickup in growth among high-income countries(a 6.2 percentage point improvement in growth

Figure 10 Some indicators point to strengthening fourth quarter growth
Purchasing manager indexes point to strengthening
Industrial production may be picking up again
3m /3m saar growth rates

60
58
56

POL

54

PMI

UK

TURIND
FRA

50

KOR

30

USA

DEU

BRICs

20

ITA

ZAF
BRA
ESP

52

E16

CHN

10
0

JPN

48

-10

46
44

-20

GRC

42

-30

40
0

5

10

15

World

High‐income-40
2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07

GDP (trillion dollars)

Source: World Bank.

12

Global Economic Prospects January 2011
Figure 12 Global imbalances have declined substantiallyand are expected to continue falling

Figure 11 Net private capital flows to developing countries$ trillion

1.2

Capital flows as % of GDP(right axis)

Bank

1.0

Absolute value of national current account balances,% of Global GDP
6

percent

ST Debt flows

Bond

9
8

5

0.8

Portfolio Equity

6

0.6

FDI

5

3

4

2

0.4

4

3

0.2
0.0

0

1

-0.2

1995 1997 1999 2001 2003 2005 2007 2009 2011

0

2004

2006

2008

2010e

High-income countries

1

2

2002

Developing countries

7

2012p

Source: World Bank.

Source: World Bank.

High-income countries(10 and 12 percent), despite rising in dollar
terms flow are projected to decline as a share ofGDP, to around 3.7 percent in 2012.

Activity in the United States is expected tocontinue to be characterized by strong domestic
demand growth, but relatively disappointing
GDP growth, as the economy continues to deal
with high-unemployment and the shrinking of an
overgrown housing sector. Notwithstanding the
9 percent real-effective depreciation of the dollar
since January 2009, and stronger exports,leakages, both in the form of imports and capitaloutflows, continue to stymie efforts to grow theeconomy through demand stimulus. Boosted by
the additional stimulus measures passed late in2010, GDP is projected to expand 2.8 percent in2011 and 2.9 percent in 2012.

A combination of lower commodity prices(compared with 2008) and a rebalancing of tradevolumes in favor of high-income countries, hasserved to reduce global imbalances; and thistrend is not expected to be reversed over theforecast period. The absolute value of the current
account balances of the world’s economies has
declined from a peak of 5.6-to about 3.3 percent
of global GDP in 2010 (Figure 12). Most of thedecline reflects smaller imbalances in highincome countries (the current account deficit in
the United States narrowed from 6-to 2.7 percent
of GDP between 2005 in 2009, before bouncing
back to 3.5 percent of GDP in the third quarterof 2010). Imbalances in developing countries
have also declined from 1.5 percent of global
GDP in 2006 to about 1.1 percent in 2010.

In high-income Europe, the recovery willcontinue to face headwinds from the uncertainty
surrounding sovereign debt in several countries
as well as planned fiscal tightening on a wider
scale. Nevertheless, growth in the larger
economies is expected to remain close to- orslightly above past trends, helping to slowly reabsorb unemployment and spare capacity.
Among those high-income European countries
most deeply affected by the crisis, growth is notexpected to be strong enough to reduce
unemployment very rapidly, partly because of
the intense restructuring that some of these
economies are undergoing. Overall, Euro Area
GDP, after expanding 1.7 percent in 2010, is
projected to slow to 1.4 percent in 2011 andpickup to 2 percent in 2012, reflecting both agradual tightening of fiscal policy and the

Looking forward, global imbalances are
expected to decline marginally in 2011 and2012, as whole economy savings in high-income
countries continues to rise. Any tendency for
private savings rates in high-income countries todecline due to cyclical improvements in theeconomy are expected to be countered3 by higher
public-sector savings as fiscal deficits decline
and by an offsetting tendency for private savingsto rise as interest rates increase with thewithdrawal of monetary stimulus.

13

Global Economic Prospects January 2011
Figure 13 Developing country growth rates to stabilize at historically elevated rates

Annual growth in GDP, percent
15
10
5
0
-5

2007

2008

2009

2010e

2011f

2012f

-10
East-Asia &Europe & Latin America Middle-East
Pacific
Central Asia & Caribbean& NorthAfricaSouth Asia Sub-SaharanAfricaSource: World Bank.

region’s reliance on bank lending, as opposed toequity and bond flows, to finance private-sector
investment.

tourism and commodities. The following
paragraphs examine the prospects of developing
countries from this perspective.

After a solid third quarter, Japanese growth isexpected to contract in the fourth quarter of2010, but an anticipated rebound in exports
should see the economy renew growth in the firstquarter of 2011. Overall, growth for 2010 isestimated at 4.4 percent, but is expected tomoderate to 1.8 percent in 2011 and advance by
2 percent in 2012.

Middle-income countries undergoing
restructuring
On average, middle-income countries underwent
a much more pronounced cycle than low-income
countries, with GDP for middle-incomesgrowing only 1.9 percent in 2009, before
rebounding 5.9 percent in 2010. Among thoseeconomies whose underlying structure was mostDeveloping countries

Figure 14 Output gaps in restructuring Europe andCentral Asian economies remain large

In-depth discussion of prospects in the different
developing regions, including country-specificforecasts, are available in the regional annexes tothis volume and online at:
http::\www.worldbank.org\globaloutlook.

Smaller output gaps where less restructuring required
15

10

With the exception of the Europe and Central
Asia region, most developing regions areprojected to enjoy strong recovery (Figure 13),with growth close to underlying potential andoutput gaps close to or approaching zero (Figure14). This apparent homogeneity masks importantdifferences within regions, reflecting among
other factors, countries’ exposure to international
capital flows, and their reliance on remittances,

5 countries
6 countries
Europe & Central A sia countries restructuring
Europe & Central Asia countries restructuring (excl top 6 countries)

5

0

-5

-10
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: World Bank.

14

Global Economic Prospects January 2011

Table 3 Developing country GDP developments by economic category
Real GDP growth
2000 - 2004 2005-2008

2008

2009

2010

2011

2012

Economy-wide
output gap 2010

Fragile states

3.0

4.1

3.8

3.0

5.0

5.2

5.1

-0.7

Countries undergoing restructuring in Europe and Central Asia
5 most affected countries
6 most affected countries
Europe and Central Asia (excl the 6 most affected countries)

6.9
7.2
6.9
6.7

7.3
7.0
7.1
10.9

5.3
4.4
5.0
9.1

-7.3
-8.2
-8.0
1.6

3.2
1.7
3.1
4.7

4.0
3.1
3.9
4.7

4.1
4.3
4.1
4.8

-3.9
-4.4
-4.2
0.2

Top-9 capital inflow countries
o/w those with pre-crisis current account surpluses
o/w those with pre-crisis current account deficits

5.6
8.2
3.8

7.8
10.3
5.5

6.0
8.7
3.5

3.7
7.7
-0.3

8.4
9.4
7.3

6.8
8.1
5.3

6.8
7.9
5.6

-0.1
0.6
-0.8

LIC tourism and remittance dependence countries
Remittance dependent
Tourism dependent

4.8
4.8
5.1

6.1
6.0
8.9

5.6
5.4
8.8

4.3
5.2
4.4

5.3
5.5
6.5

6.4
5.8
9.0

6.3
6.2
7.9

-0.7
0.0
-1.6

LIC: Resource dependent economies
MIC: Resource dependent economies

6.6
4.1

7.2
6.3

5.8
5.1

4.7
1.4

6.4
3.9

6.6
4.5

6.6
4.6

-0.5
-0.8

Other: LIC
Other: MIC

4.6
2.5

7.7
6.5

8.6
4.4

5.7
1.9

6.0
5.9

6.7
4.3

7.0
4.3

-0.3
1.1

Source: World Bank.
Note: Top 5 (6) countries include: Bulgaria, Kazakhstan, Lithuania, Romania, (Russian Federation), and Ukraine.

collapsed by 8 percent in 2009, but the growth
rebound was stronger (3.1 percent) as Russia
benefitted from the recovery in oil prices andstate revenues.

distorted during the boom period and whose
households and banking sectors are mostburdened by bad debt,4 output gaps are morethan 4 percent of GDP and unemployment
remains endemic. To a large extent this reflects
developments in 6 middle-income countries thatexperienced very pronounced booms during theperiod 2003-2007 and whose economies are
currently undergoing severe restructuring.5

Excluding the six most affected economies, thegrowth impact was less severe for Europe andCentral Asia, with positive growth (1.6 percent)in 2009, and expectations for increases in a high4-percent range through the projection period.
Output gaps for these countries are slightly
positive in contrast to the much larger gaps forthe restructuring economies (Figure 14). Indeed,even by 2012, output gaps in the restructuring
economies are expected to remain high, withgrowth coming in at less than half its pre-crisis
rates.

All of these countries are located in the Europe
and Central Asia region. Partly as a result, theregion’s aggregate growth has been slow, with
GDP increasing only 4.7 percent in 2010 after
declining 6.6 percent in 2009 (see earlier Table1). High levels of household indebtedness andwidespread unemployment have held backconsumer demand, while banking-sector
consolidation and large quantities of bad-loans
are limiting new lending. In addition, tepid
growth and financial restructuring in highincome Europe has meant a weak recovery inforeign capital inflows, export revenues andremittances for developing Europe and Central
Asia. In the five countries undergoing the mostintense restructuring, output fell 8.2 percent in2009, and rebounded by just 1.7 percent in 2010
(Table 3). Including Russia in the tally, output

Very strong capital inflows boosted growth insome countries
While most countries experienced a bounce backin capital flows during 2010, GDP in the 9countries6 that attracted the bulk of these flows
surged 8.4 percent in 2010, after rising 3.7
percent in 2009.7 The bounce-back in growth
was strongest among current-account deficit
countries within the group (7.6 percentage

15

Global Economic Prospects January 20112009, rebounded to 5.3 percent in 2010 and isanticipated to sustain rates of about 6.5 percent
throughout the forecast period, as strong
commodity prices continue to support incomesand government finances. The crisis slowed
activity in resource-dependent middle-income
countries more than like low-income countries
mainly as these economies were more financiallyintegrated with the world economy, and werecharacterized by larger manufacturing sectors.
Moreover, many low-income resource-richcountries are still expanding production at a
rapid rate, a process that continued despite thecrisis. Middle-income resource-dependent
economies are expected to grow 4.5-and 4.6
percent in 2011 and 2012, moderately above
their average growth of 4.1 percent during the
pre-boom period 2000-2004.

points) as renewed capital inflows eased
domestic demand growth constraints(particularly investment and private consumption
related).
Both groups have seen output gaps close rapidly,
though gaps in current account deficit countries
remain moderately negative. Growth in bothgroups of countries is expected to remain strong,albeit easing from the very fast rates posted in2010. In the baseline projections continued
strong capital inflows are projected to push GDP
in each group to within 1/2 of a percentage pointof potential by 2012 (Figure 15). However, if
capital inflows accelerate further and growthescalates to above baseline projections, alreadyexisting inflationary pressures and asset pricebubbles could build further — especially among
those countries that continue to resist upward
pressure on their currencies. For others,
continued appreciation will cut into domestic
competitiveness, reducing net exports and help
to mitigate inflationary pressures.

High commodity prices should continue tosupport robust growth among resourcedependent economies
The crisis affected both low– and middle-income
resource-dependent countries less dramaticallythan other countries. For low-income exporters(many of which in Sub-Saharan Africa), GDP
growth eased by about a percentage point into

Further recovery in remittance and tourism
revenues underpins expectations of gradualacceleration
The impact of the crisis on low-income
remittance and tourism dependent countries waslimited, with growth declining from 5.6-to 4.3
percent between 2008 and 2009. Partly as aresult, economy wide capacity utilization isalready back to long-term trend levels (Figure16). Tourism dependent economies were harder
hit by the crisis, as declining incomes anduncertainties in tourism-originating countries
yielded lower tourist volumes and/or reduced

Figure 15 Strong capital flows contributed to rapid closure of output gaps in some countries

Figure 16 Output in remittance dependent developing
countries was broadly stable
Output gaps, difference between actual and potential output as a % of potential

Output gaps, difference between actual and potential output as a % of potential

4

4.0

3

3.0
Deficit2.0

2Surplus

1

1.0

0

0.0

-1
-1.0

-2
-2.0
-3.0
-4.0
1995

1997

1999

2001

2003

2005

2007

2009

-3

Remittance dependent-4

Tourism dependent
World

-5

2011

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: World Bank.

Source: World Bank.

16

Global Economic Prospects January 2011

slowing of growth elsewhere in the world, thepace of expansion in these economies is viewed
to establish a 4 percent pace over the projection
period.

spending.
The rebound in remittances-dependent
economies is expected to be modest over the
next two years, as employment conditions inhigh-income countries improve only slowly.
Tourism is also not expected to bounce backvery forcefully in most countries, as prospects inoriginating countries strengthen only slowly.

Challenges facing the global
economyAssuming no further turmoil, growth in fragile
states is expected to continue accelerating
The impact of the great recession on fragile
countries8 was relatively small, with growthfalling off from 3.8 percent in 2008 to 3 percent
in 2009. Assuming that domestic conditions
continue to improve, growth is anticipated toaverage 5 percent per year or more over 20102012, well above the 3 percent average growthrecorded during the pre-boom period. Of course,
should political conditions in one or morecountries deteriorate, growth could suffermarkedly.

The global recovery has gained strength,
matured and broadened to include morecountries and more components of demand. This
dynamic appears to be well established,particularly among developing countries. As aresult, concerns of a double-dip recession haveeased. However, the recovery remains exposed
to significant short and long-term risks that
could derail it. The remainder of this section
discusses these, beginning with short-term risks
and concluding with longer-term ones.

Short-term risks to the global recovery

Remaining countries are projected tooutperform pre-boom growth rates
Growth slowed in aggregate for the remaining
low-income countries by almost 3 percentage
points between 2008 and 2009; but growth isviewed to pick up to 7 percent by 2012. Thisstrong performance, which is mirrored in othercategories of low-income countries, reflects inpart these countries’ relatively weak links tointernational financial markets, which means
they avoided the worst parts of the “boom-bust”
cycle. However, improved macroeconomic
management andearlier debt relief also
increased their ability to react and adapt tovolatile external conditions.

As discussed earlier, the main short-term risks to

the global economy include: the possibility offurther disturbance and contagion in Euro area
sovereign debt markets; the possibility that very
low interest rates in high-income countries
induces a second “boom-bust” cycle among one
or more developing countries; and the possibility
that rising commodity prices threaten recovery
and/or poverty reduction in developing
countries.

Financial turmoil in high-income Europe
Market concerns about fiscal sustainability andthe crisis resolution system in the Euro area
intensified once again in final quarter of 2010, as
Ireland became the second Euro-area state toreceive external financial support from theEuropean Union and the IMF. The package
amounts to some 54 percent of Irish GDP, ofwhich an amount equivalent to some 11 percent
of GDP will be provided from Ireland’s own
resources. It’s objective is to provide support tothe banking sector. To date, however, calm has
not been restored to the markets.

The remaining middle-income countries(excluding countries that are undergoing
restructuring, receiving hot money inflows orthat are resource rich) have also benefitted fromthe rebound in international financial conditions.
FDI flows, which increased by about 20 percent
to this group, contributed to strong growth of 5.9
percent in 2010. On average, output in these
economies remains high relative to potential.
Partly as a result, and reflecting a near term17

Global Economic Prospects January 2011

Figure 17 Renewed market anxieties concerning European sovereign debt have rebounded

Figure 18 High-income sovereign debt woes have limited
effect on developing countries credit costs

Price credit default swap, basis points

5-year credit-default swap rates, basis points, February 2010-January 2011

1,200
1500

1,000
800

Belgium
Italy
FrancePortugal

GreeceSpain
Ireland
UK

1200

GreeceIreland
Portugal

LMICs with Median < 200
LMICs with Median > 200

900

600
600

400

300

200
0
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10

0
Feb Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov Dec

Jan

Source: World Bank, Datastream

Source: World Bank, Datastream.

Concerns that banking sectors in other markets
might require further support, and lingering
uncertainty about the capacity of currently
existing frameworks to address the potential
financing needs of the economies involved
placed upward pressure on the price of credit
default swaps for Belgium, Greece, Ireland,
Italy, Portugal and Spain during the fall of 2010
(Figure 17). Uncertainties also contributed to a
decline in equity market valuations of between
1.2-and 8.9 percent. Equity markets recovered
somewhat in early December, after the European
Central Bank began to actively purchaseoutstanding bonds, but CDS spreads after an
initial decline continued to rise or remained highthrough to the end of the year.

limited impacts on the real economy — as was
the case in May 2010 when the first bout ofmarket nervousness regarding Euro-Areasovereign debt arose (see World Bank, 2010 formore).

So far, the skittishness of investors concerning
high-income European debt has not been passed
onto the price of swaps of the majority ofdeveloping countries, although the price of CDS
swaps of countries that initially had spreads inexcess of 600 basis points also tended to move
upwards (Figure 18). However, the uncertainty
in November did contribute to an easing in
capital flows to developing countries. Flows also
remained low in December, a seasonally slow
month for capital flows.
The implications of this renewed bout ofinvestor nervousness are unclear. The most
likely scenario, and the one retained in thebaseline projections, assumes that althoughmarket nervousness continues, it will have

However, if market volatility persists, investors
may hold back on investment projects and/or
consumers may delay durable goods purchases.
Such behavior could slow growth and possibly
lead to a double dip recession in some countries.
Moreover, market nervousness may prompt
countries to intensify fiscal consolidation
strategies, further slowing the pace of therecovery in 2011. The simulations in Table 4
assume an 1 percent of GDP additional fiscal
consolidation being introduced in the second
quarter of 2011, and a 2.5 percentage point
Table 4 Estimated impact of increased fiscal consolidation and investor nervousness(Percent deviation in the level of GDP from baseline)

World
High-income
Developing countries
Middle-income
Low-income
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa

Source: World Bank.

18

2010
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0

2011
-0.6
-0.7
-0.1
-0.1
-0.1
-0.2
-0.1
-0.1
-0.1
-0.2
-0.1

2012
-0.9
-1.1
-0.2
-0.2
-0.2
-0.3
-0.1
-0.1
0.0
-0.4
-0.1

Global Economic Prospects January 2011

Another potential transmission channel could bethrough the financial sector. Banks in the
countries under close financial market scrutiny
hold international claims in emerging markets ofaround $0.7 trillion. Albania, Bulgaria, Romania,
and Serbia are economies that have benefitted in
the past from heavy capital inflows from Greek
financial institutions. Similarly, banks in
Portugal and Spain are an important source offinance in Latin America (Figure 20).

reduction in investment compared with thebaseline. This results in a slowing in growth ofas much as 0.6 percentage points in 2011 and 0.3
percentage points in 2012. Most of theslowdown would be borne by high-income
countries (a cumulative 1.1 percentage points).
The more constrained environment would affectgrowth in developing countries to a lesser extent– in part because developing countries are notassumed to implement additional fiscal
consolidation measures.

Overall, the public and private sectors in Latin
America have borrowed some $320 billion or 8
percent of GDP and those in emerging Europe
owe some $400 billion or 13 percent of GDP.
Spanish banks own over 25 percent of bankcapital in Mexico, Chile, and Peru.
Approximately 11 percent of deposits in Latin
America and the Caribbean are deposited with
Spanish banks, while loans from Spanish banks
represent 9 percent of total banking assets in theregion. Portuguese banks play an important rolein Brazil and account for 30 percent or more ofbanking assets in African countries such as
Angola and Mozambique.

Although market nervousness about sovereign
debt in the Euro Area has had limited impacts on
the real economy so far, the consequences of adisorderly resolution to European fiscal tensions,unlikely as it may be, is still an important sourceof uncertainty for both high-income anddeveloping countries—particularly those withclose trading and financial ties with concerned
economies.
As a consequence of the growing financial
integration in the Euro area and the high-income
world in general, there are extensive crossexposures among high-income country banks.
As of the second quarter of 2010, the Bank forInternational settlements estimates that European
Banks held some $1.6 trillion in assets from
Greece, Ireland, Portugal and Spain, or morethan 8 percent of total claims of the European
banking system — down substantially from the
10 percent of claims held in late 2009 (Figure
19).

Should banks in high-income Europe be forced
to re-capitalize or retrench, they (and their clientcompanies) may have to pull back theirinvestments to cover their losses. If this were tohappen capital flows to the developing regions
noted could contract.
That said, capital shortages are unlikely tomaterialize in the case of Latin America and its

Figure 19 European banking-sector claims on assets ofGreece, Ireland, Portugal and Spain$ trillion

Figure 20 Distribution among developing regions of outstanding claims of banks in stressed-euro-zone countries% of total claims

2.5

12.0

Billions of USD

11.5

IrelandShare of Euro Area-4 cross liabilities (right scale)
Total exposure to Euro Area-4 (USD tr.: left scale)
Total exposure to Euro Area-4 (% of claims: right scale)
11.0

Spain

2.0
10.5

Greece
10.0

Italy

9.5
1.5

Portugal

9.0

1.0

8.5

0

8.0

Europe and Central Asia

Latin America & Caribbean

Middle-East and Af rica

Asia

2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2

Source: Bank of International Settlements.

100

200

300

Source: Bank for International Settlements.

19

400

500

Global Economic Prospects January 2011
edition of Global Economic Prospects, suggestthat a major default could have cumulative
impacts as high as -4.1 percent of global GDP in
the event of a serious loss of confidence (World
Bank, 2010).

linkages to the Spanish Banking system, in part
because most of these banks operate as
subsidiaries and are subject to independent
capital and regulatory requirements in the hostcountry. Indeed, the main Spanish banks are
increasingly reliant on earnings from their Latin
American operations, and several have expanded
their developing world holdings in 2010. For
example, Santander bought the rest of its
Mexican division from Bank of America Corp
for $2.5 billion, while the Spanish bank BBVA
took joint control of Turkish peer Garanti Bankin a $5.8 billion deal.

Implications of low interest rates fordeveloping countries
The very different stances of macroeconomic
policy being pursued in developing and highincome countries is another source of short-termrisk. As discussed above, most developing
countries have closed or are near-to-closing
output gaps, while many high-income anddeveloping European and Central Asian
economies are still plagued by highunemployment and GDP levels well below precrisis growth trends.

Beyond these financial linkages, FDI flows may
also be affected, in particular to Latin America.
Approximately 13 percent of FDI flows into theregion in 2009 came from Spain, and that ratio is
as high as 25 percent in Argentina and Mexico.
Moreover, these high-income European
economies are important trading partners formany developing countries (Figure 21). The
Middle-East and North Africa, Europe andCentral Asia and Sub-Saharan Africa regions
have the closest trade ties Greece, Ireland, Italy,
Portugal and Spain. At the country level, thesecountries account for 20 percent or more of theexports of Albania, Azerbaijan, Cameroon, Cape
Verde, Morocco, Tunisia, and Namibia. How
hard these countries are hit, will depend on theextent of the fiscal contraction initiated, and how
successful they are in shifting sales to othermarkets.

As a result, in contrast to the immediate postcrisis period when macroeconomic policy
throughout the globe was strongly expansionary,many developing countries are now tightening
policy, even as high-income countries maintainan overall loose stance.
Thus, fiscal deficits are estimated to be less than
4.5 percent of GDP in every developing region
except South Asia, where the ratio is estimatedto top 8 percent in 2010 (Figure 22). Moreover,though fiscal policy is tightening in some highincome countries, it remains very loose (morethan 10 percent of GDP in the United States,

Simulations conducted in the context of June’s
Figure 21 Trade linkages with stressed economies

Figure 22 Fiscal policy is much more relaxed in highincome countries

Share of Greece, Ireland, Portugal and Spain in exports, percent
9
8
7
6
5
4
3
2
1
0

Fiscal balance, % of GDP

8.1

4.6

4.8

4
2

5.5

0

3.8
2.0

2.6

2.8

-2
-4
-6

East Asia
Latin South Asia Europe &Sub& the America &Central SaharanPacificthe
Asia
AfricaCaribbean

World

Highincome

MiddleEast &
North
Africa

-8
-10
2007

2008

2009

High-income
Europe and Central Asia
Middle-East & North Af rica
Sub-Saharan Af rica

Source: World Bank, Comtrade.

Source: World Bank.

20

2010

2011

2012

East Asia & Pacif ic
Latin America & Caribbean
South Asia

Global Economic Prospects January 2011
Box 4 Alternative policy reactions to increased capital inflows
Policy makers can pursue a variety of strategies, none of which are mutually exclusive, when facedwith strong capital inflows.
Perhaps, the simplest reaction is to allow the currency to appreciate. Such a policy has the advantage ofpreventing capital from adding to inflationary pressures (under perfect flexibility, foreign financial inflows have no impact on the money supply), but does so at the risk of causing long-term damage totheir export and import-competing sectors.
Alternatively, countries can try to manage the upward pressure on the currency by accumulating reserves. This has an initial effect of increasing domestic money supply, which can be countered throughmonetary policy tightening. In some cases, this sterilization strategy may amplify inflows by magnifying the interest-rate differential between the country at the receiving end of the carry trade and the interest rates paid by investors abroad. In such instances, monetary tightening can be pursued throughadministrative rules, like increasing bank’s reserve requirements.
A third option is to try to dampen the capital inflows or encourage outflows with some form of capital
controls or other regulatory strategies. These can involve the relaxation of pre-existing restrictions on
outflows, the introduction of taxes on short-term foreign holdings or even stricter prohibitions on certain kinds of capital inflow.
To the extent that sterilization efforts are stymied in this manner, the capital inflows can expand domestic credit, generate inflation and spur asset bubbles.
contrast, monetary policy in high-income
countries remains extremely loose, with nominal
short-term policy interest rates close to zero, andreal rates in negative territory.

more than 7.5 percent in Japan, and just under
6.5 percent in the Euro area).
Monetary policy is also at odds. Several
developing countries (Brazil, China, India,
Malaysia, Peru, Indonesia and Thailand to namefew) have taken steps to tighten monetary policy
toward a more neutral stance to preempt, or
counter, rising (or already high) inflation. In

Large-scale asset purchases and quantitativeeasing have also pushed down long-term interest
rates.10 As a result, even after the recent surge inyields that followed increased market concerns
about fiscal sustainability in Europe, 10-year
U.S. treasuries are still yielding a very low 3.3
percent, while similar German bonds areyielding 2.9 percent. As a result the gap between
high-income and developing country short andlong-term interest rates are high (Figure 23),
contributing to a carry-trade where investors
borrow in low interest rate high-income
countries and invest in higher interest-rate
developing countries.

Figure 23 Large interest rate differentials between highincome and developing economies.
3-month & 10-year local bond yield spreads over U.S. Treasuries (bps)BrazilTurkeySouth Africa
India
Indonesia
Mexico3-month*

Malayisa

10-year

China

Dealing with surging capital inflows
As discussed above, the recovery in capital flows
to developing countries in 2010 reflects boththese countries strong fundamentals and the very
low opportunity cost of money implied by these
low borrowing rates. Most developing countries

Thaliand
0

200

400

600

800

1000

Source: World Bank, Bloomberg.
Note: 3-month yield data for Indonesia and South Africa are
not available.

21

Global Economic Prospects January 2011
Table 5 Selected measures recently implemented to contain exchange rate pressures
Country
Brazil

·Measures taken
Oct 18: Increased IOF tax on bond inflows to 6% from previously 4% (Oct 5) and 2% (Oct 22,2009);
IOF tax rate on nonresidents' margin deposits for derivative contracts was hiked from 0.38% to 6%

Chile
Colombia··

Administrative measures to reduce exporters' transaction costs
Intermittent $20m daily purchases in spot market for 4 months, started in M arch 2010

M exico···In November 2010, reduced tarrifs
Proposed elimination of tax exemption for foreign borrowing;
Policy of reserve accumulation, central bank selling dollar put options of $600m per month

China

·

Eased restrictions on foreign banks' investments in yuan-denominated Chinese bonds held offshore

Indonesia·

July 7: Implemented a 1-month minimum holding period for central bank money market certificates

Korea

·

Implemented caps on size of banks' FX derivatives books as "macro-prudential measures".

Thailand·

Imposed a 15% tax on interest income and capital gains earned by foreign investors.

Russia·Turkey·South Africa·

The central bank abolished the ruble's R26-41 fluctuation band against the 0.55$/0.45€ currency
basket in place since January 2009
Increased daily foreign exchange purchase auction limits to $140m; increased bank reserve
requirements, reduced short-term interest rates.
Intervention in foreign exchange market to build reserves. Residual exchange controls on residents
will be relaxed further.

·absorbed the increased flows relatively easily,
and these flows have played an important
supporting role in their recoveries. However, forsome others they have created serious policy
challenges.

Policy makers can deal with capital flows
through a variety of strategies including
currency appreciation, sterilized intervention,and different kinds of capital control (Box 4). In
the event, most countries have pursued a mix ofthese strategies. And for most developing
countries the upward pressure on theircurrencies was manageable. Indeed, during thefirst 10 months of 2010, 60 percent ofdeveloping countries appreciated in realeffective terms, either through nominal
appreciation or increased inflation, with many
appreciating by substantial margins (Figure 24).
In contrast, most high-income countries
depreciated only marginally.

Figure 24 Histogram of real-effective appreciations
since January 2010
Number of countries

25
High-income

20

Developing
15
10

However, several countries (mainly middleincome countries with well developed debt andequity markets) were subject to very large
capital inflows that either have caused theircurrencies to appreciate by more than warrantedby their fundamentals, or have forced them totake extraordinary measures to prevent a

5
0
-5

-3

-1

1

3

5

8

11

13

15

18 morePercent change in real effective exchange rate since January 2010

Source: World Bank, JP Morgan, IMF

22

Global Economic Prospects January 2011
Figure 25 Many countries have reserves in excess ofwhat is required for prudential reasonsdisruptive appreciation, including accelerating
the pace at which they accumulate foreign
reserves, enacting administrative measures
aimed at either slowing the rate of capital
inflows (or increasing the pace of outflows),
including policies to boost outward foreign
direct investment (Table 5).

Congo
Malaysia
GuyanaGuineasBissauRomania
JordanChina

Although the benefits of preventing a too rapid
appreciation are real, there are costs associatedwith resisting appreciation. Among countries
that were more successful in resisting the
upward pressure on their currencies, several haveobserved a rapid expansion in the money supply,and signs of mounting inflation pressures in bothconsumer goods and asset markets (Box 5).

Botswana
Thailand
LebanonAlgeria
0

20

40

60

80

100

120

Reserves as a percent of GDP(September 2010)

Source: World Bank, IMF IFS.

For example, taken together the money supply in
Brazil, Russia, China and India grew at a 27
percent annualized pace in 2010, 38 percent in
the case of Russia. At the same time, real-estate
prices have increased an average of 17 percent
per annum since 2007 among the eight East
Asian countries reporting data. And, inflation ishigh or on the rise in many developing countries,
notably China, India, Indonesia and Sri Lanka.
In Europe and Central Asia rising headline

inflation mainly reflects
increases in food prices.

drought-related

In addition, there are real fiscal anddevelopmental costs associated with reserve
accumulation. Several developing countries now
have reserves that exceed 40 percent of their
GDP (Figure 25). The costs of holding suchlarge reserves can be high (especiallyconsidering the exchange rate risk when they areconcentrated in one currency). For example, theBox 5 International capital flows and macroeconomic volatility
International capital flows can play an important role supplementing domestic savings and overcoming deficiencies in domestic intermediation systems. However, they can be disruptive if they are volatile or exceed a country’s
capacity to sustainably absorb them.
The situation can be particularly dangerous when the influence of capital inflows on a country’s currency becomes a factor inducing further flows. Although initially inflows may have been attracted by fundamentals, investors may redouble efforts because of the quick returns that can be made by investing in an appreciating currency.
Such a strategy is inherently unstable. The initially self-reinforcing cycle of expected-appreciation-induced capital
flows will inevitably and abruptly reverse itself when the ultimately unsustainable tensions produced by the
speculative bubble (lost competitiveness, large current account deficits, increased indebtedness) eventually cause
a sudden reversal in expectations. In the interim, for individuals and firms that invest in relatively liquid and or
short-term assets, and who assume that they will be able to exit the market before the currency depreciates, thepotential rewards of betting on further appreciations are large.
Faced with large inflows countries can allow their currency to appreciate, which will reduce the competitivenessof domestic industry, increase imports, reduce exports and lower domestic activity. Assuming that the increase ininflows is permanent and not so large as to exceed the economy’s ability to adjust and appreciation may be thebest strategy for a country to follow.
Alternatively, if the capital inflows are too large or viewed to be the result of temporary or speculative factors andtherefore likely to reverse themselves in the future, a country may choose to resist the upward pressure on its currency. Indeed, as the crisis of 2008 in Europe and Central Asia bears testament, excessive capital inflows can distort the structure of demand and prove very burdensome and costly to unwind.

23

Global Economic Prospects January 2011
cost of holding foreign reserves equal to 50
percent of GDP could be as much as 1 1/2
percent of GDP per year (assuming thesovereign borrowing rate is 300 basis points
higher than the reserves themselves earn). If a
country is financing the deficit by issuing longterm paper, and its reserves are mainly invested
in short-term USD securities — which are
currently yielding less than 1 percent, thefinancing costs could be closer to 3 percent of
GDP.
Not only is maintaining large scale reserves
expensive it denies resources to other growthenhancing activities, such as infrastructure
investment, education and health spending. For
countries like China that have been resisting
upward pressure on their currency for years, therecent decision to allow the currency to float
more freely is likely to bring important
advantages to the economy, including increased
incomes and consumption opportunities for thepoor, while at the same time helping to control
domestic inflationary pressure as the cost ofimported goods decline. Indeed, even more realappreciation in line with underlying productivity
growth differentials may be warranted.

Figure 26 In real-terms food prices remain well below
2008 peaks
Food price indexes, Jan. 2005 = 100

250

200

150

100
Nominal US Dollar
Nominal Euro
Real US dollar
Real developing country

500
Jan-04

Oct-04

Jul-05

Apr-06

Jan-07

Oct-07

Jul-08Apr-09Jan-10Source: World Bank.

yield that low interest rates have induced.
The dollar prices of virtually every commodity
grouping rose during the second half of 2010(see the appendix on commodities for more
information on recent commodity market
developments), suggesting that common factors
may have been at play. Part of the explanation
lay in the depreciation of the U.S. dollar during
the course of the year. While the dollar value ofcommodities was rising, expressed in Euros anduntil mid 2010, commodity prices were morestable (Figure 26).

Nor can the success of such strategies beguaranteed. Despite efforts to control inflows
and resist appreciation, Brazil, Colombia,
Thailand and South Africa were among thosecountries whose currencies appreciated morethan 7 percent in real-effective terms since
January 2010, and by between 20 and 30 percent
since January 2009.11

Indeed, the depreciation of the dollar against
most currencies, and the cumulative effect of therise in price of other goods and services, meansthat during the past few years, the real at-theborder local currency price of internationallytraded commodities in developing countries has
increased much less than the U.S. dollar pricenormally quoted (Table 6). In economies where
currencies have appreciated against the dollar,
until most recently real prices have been broadly
stable.

Among countries where inflows are of a more
temporary nature and where overheating is
becoming an increasing issue, a significant
further tightening of fiscal policy may berequired to tighten demand conditions in thedomestic economy.

For example, despite the rise in the nominal
dollar price of food, across developing countries
considered as a whole, real local currencyinternationally-traded food prices in September
2010 were 25 percent higher than they were in
January 2005 and almost 15 percent below theirmid 2008 peaks. Since, then U.S. dollar prices
have risen a further 17 percent, which has likely
brought these real-at-the-border local currency

The search for yield may also be affecting
international commodity prices
The gap between high-income and developing
country macroeconomic policy has also affectedcommodity markets, both because of exchange
rate movements and because of the search-for-24

Global Economic Prospects January 2011
Box 6 The recent rise in international food prices, implications for poverty
The sharp rise in the dollar price of internationally traded grains in the second half of 2010 induced fears of a repeat of the 2008 food crisis, with potentially dire consequences for poverty. International food prices in dollar
terms ended the year 7 percent below their June 2008 peak. However, they declined less in real currency terms.
For example, between June 2008 and September 2010 (a period for which we have complete data) international
dollar prices declined by 20 percent versus a 15 percent decline in real domestic currency terms. In a longer-term
perspective while dollar food prices are up 84 percent since January 2005, real local currency prices have increased much less (25 percent) as of September 2010 (Table 6).
The real concern lies in the possibility that prices continue to rise, either because energy prices rise (as they did in2008) or because further negative supply shocks result in a second year of bad crops. In such circumstances,
prices could continue strengthening and become once again a major source of increased poverty. And while global
developments ultimately are critical determinants of the long-term trend of local prices, in the shorter-run they are
one of many influences.
Ultimately for the poor, what matters is how the prices of the foods that they consume evolve relative to their own
income. Here the story becomes much more complicated. The vast majority of food consumed in the developingworld is produced locally. Internationally traded maize, rice and wheat represent between 7 and 19 percent of
global production of these grains, and a much smaller share of total food consumption in developing countries.
The price of the food actually consumed by the poor depends more on local crop conditions, taxes, subsidies,transportation and distribution costs, than it does on movements in international dollar prices and exchange rate
movements.
As a result, even as international wheat, maize and rice were rising in the summer of 2010 due to poor crops inseveral major grain exporting countries, prices at the local level were rising even more quickly in countries where
local conditions were weak, and declining much more sharply in countries where local conditions had improved(including in many African countries) — see Table S4.3 in the Commodity Annex. Moreover, consumers havesubstitution opportunities among various food commodities.
While a rising trend in internationally-traded food prices would be of concern, the recent rises have not yet beenreflected in local prices of maize, rice and wheat in many countries. And even where they have, they may overstate the increase in the cost of food actually consumed by the poor.

important role in determining local price changes
over the longer run, both the level of, and shortrun changes in, local prices depend importantly
on local production conditions, trade policies,
infrastructure and distance from major
production centers.

prices closer to their peak 2008 levels.
Of course, what matters for poverty is what
happens to the prices paid by the poor for the
food they consume, relative to their incomes(Box 6). And, while international prices play an
Table 6 Commodities domestic pricing

EnergyMetals and minerals
Agriculture
Food

Septembe r 2010 price relative to January 2005
RealNominalNominalReal USD
developing
USD
euros
country
70
71
50
22
132
133
105
76
90
90
67
26
84
84
62
25

EnergyMetals and minerals
Agriculture
Food

Septembe r 2010 price relative to June 2008
RealNominalNominalReal USD
developing
USD
euros
country
-43
-32
-43
-43
7
27
6
-18
-11
6
-11
-8
-20
-5
-20
-15

Another common factor frequently debated has
been increased investor interest in commodities
as a new asset class, with relatively low
correlation with other assets. According to thisview, the emergence of actively tradedcommodity-based investment vehicles in recent
years has allowed financial speculation incommodity markets to expand, thereby
contributing to higher price volatility. Following
this logic, low interest rates may be driving evenmore investors into taking such commodity
positions. While intuitively reasonable, to-dateempirical studies have produced mixed evidence
on the effect of investment fund activity on

Source: World Bank.

25

Global Economic Prospects January 2011
Box 7 The evidence for and against investment-based demand and the rise in commodity prices
For much of the 20th century regulations in the U.S. and elsewhere limited the extent to which financial investors
could take positions in commodity markets. A reform of these rules in the U.S. in 2000 opened the door for investors to take indirect positions in commodities and commodity futures, mainly in the form of market index funds.
These allow non-commercial actors (e.g., managers of sovereign wealth funds, pension funds, and other entities)
hold commodities in their portfolios to hedge against future inflation (Hamilton 2010), diversification (Gordon andRouwenhorst 2004), higher returns (Rogers 2004), or because of the belief that commodities (especially from extractive industries) have entered a long period of increasing prices, also known as the super-cycle hypothesis (seeHeap (2005), Jerrett and Cuddington (2008), and Radetzki and others (2008)).
Investment in financial vehicles has grown rapidly during the past 5 years. As of mid-2010, $320 billion were invested in commodities (more than half in energy), about 1 percent of the assets held by global pension and sovereign wealth funds.
Despite the “smoking gun” of a substantial rise in the price of commodities along with the increase in financial
investment in commodities, most industry and econometric studies (see Baffes and Haniotis, 2010 for a review)
have failed to establish a strong link between these investments and the rise in commodity prices. However, more
recent academic papers are increasingly leaning towards the view that investment has been responsible for at least
part of the volatility in commodity prices during the post-2000 period.

demand). For most metals and energy sources,
experts concur there are no impending supply
constraints, and that today’s prices (or prices
close to them) will induce sufficient newinvestment and supply so as to meet demand.

commodity prices (see Box 7).
A final factor cited, and one that underpins somemarket expectations that commodity prices(especially metals and minerals) are destined tocontinue rising relative to other goods andservices, is based in the strong growth ofdeveloping countries, their rising share in global
commodity demand and their growing economic
weight. According to this view, the world may
be entering into a super-cycle during which
commodity prices will continue to rise (or stayelevated) as supply seeks to meet demand.

However, there are investment lags and long
lead-times necessary to develop large, complex
projects. Moreover, there are issues concerning
access to resources, rising monopoly power (inthe case of oil), higher costs, and diminishingreturns. Technological change, substitution
toward relatively abundant alternatives and thecost-structure of known but as yet unexploitedreserves are among the factors likely to limit theincrease in prices over the medium term.

Once again, the evidence is mixed. The growing
size of developing countries and theirprogression up the income scales are all factorsthat are likely to increase their demand forcommodities. The issue, however, is whether or
not supplies can keep pace. Although supply
growth over the past 15 years in a number ofmetals and energy products has been relatively
slow, this reflects a period when prices were low
and demand growth slower.

Longer-term risks and policy challenges
How policy moves forward in the near term may
have important long-term consequences as well.
Currently, policy continues to be focused on
dealing with the immediate (mostly demandoriented) repercussions of the global financial
crisis. So far, this focus has paid dividends andspared the global economy from what could
have been a much deeper and long-lastingrecession. Increasingly, however, the remaining
challenges are structural rather than cyclical innature, implying a decreasing role for demand
management going forward. Policy needs toPrices are now higher, making economically
viable exploration projects and known reserves
that could not be profitably pursued when prices
were lower. The question is whether supply will
respond rapidly enough to meet that demand(and importantly how higher prices will affect26

Global Economic Prospects January 2011by reducing the extent of subsidization while atthe same time increasing taxes so as to better
mobilize domestic resources (tax revenues inseveral countries are less than 10 percent ofGDP). In Latin America and the Caribbean thefocus needs to be more on putting in placecountercyclical fiscal tightening, both to reduce
inflationary pressures, and to restore the fiscal
buffers that served the region so well in
responding to the acute phase of the financial
crisis.

begin shifting its attention to dealing with thesemore difficult problems if solid medium-term
growth rates are to be re-established.

Restoring market confidence by implementing
credible fiscal consolidation packages that
support structural reform
The strong counter-cyclical fiscal policy
response in the immediate wake of the crisis
played an essential role in ensuring that a moreworrisome and deeper downturn was avoided.
However, the current stance of policy in many
countries cannot be maintained without running
into serious debt sustainability issues.

Conclude the financial-sector reform agenda
While financial markets have withdrawn frommany of the activities that generated the worst
excesses of the boom period, and which lay at
the center of the crisis, the re-regulation agenda
is not yet complete. As a result, the risk is thatthe same (or different) kinds of behaviors may
redevelop, setting the stage for a new crisis.
Indeed, the very low interest rates thatcharacterize the current policy environment,
while designed to prevent deflation in highincome countries, are promoting many of thesame kind of risky behaviors that preceded thecrisis, including capital inflows attracted byunsustainable expectations of currency
appreciation, search-for-yield motivatedinvestment in risky ventures, and bubbles in realestate and financial markets.

While fiscal consolidation measures can havenegative impacts on growth in the short-run, they
can make important positive contributions tofuture growth, especially when compared with asituation where debt dynamics are allowed to
grow to the point they become or are expected to
become destabilizing (see for example, European
Commission 2010).
For maximum efficiency, the path back to asustainable fiscal stance needs to be clearly
articulated and credible (i.e., market participants
need to believe that they are achievable and thatgovernments are committed to carrying throughwith them). Simulations suggest that, if credible,
the negative short-term effects of even a largescale fiscal consolidation program can bequickly overcome by the positive effects it has
on borrowing costs and the expectations ofinvestor about future tax rates (see World Bank,
2010 for the case of fiscal consolidation among
G-20 countries).

The nature that these reforms should take, andthe balance that they should strike between
encouraging more responsible lending on the one
hand and prudent risk-sharing on the other, goesbeyond the scope of this report. But given the
integrated nature of global financial markets,
reforms will need to extend beyond individual
national efforts. Strong global coordination may
not be required. However, recent efforts within
the context of the G-20 to agree a set ofprinciples (including cooperation among national
supervisory authorities) that take account ofdeveloping-country concerns and could be
implemented at the national level are likely to bea critical element in the final reform.

To maximize their effectiveness, consolidation
measures need to re-establish the long run
sustainability of public finances and contributeto resolving pre-existing structural problems ineconomies. For example, in many high-income
European and developing Europe and Central
Asian economies with aging populations, a welldesigned consolidation program might include
reducing age-related contingent liabilities suchas benefits in unfunded pay-as-you-go pension
systems. In South Asia, plans might combine
efforts to improve the efficiency of expenditure

Reforms might include greater global regulatory
and supervisory coordination, the inclusion of
explicit macro-prudential risk assessment

27

Global Economic Prospects January 2011
Box 8 How much demand slack is there?

Among the many challenges facing policymakers following a major financial crisis is determining how
much of the resulting slack is structural and how much reflects insufficient demand. The January 2010
edition of Global Economic Prospects (World Bank, 2010a) explored the sensitivity of potential output
to investment rates, while the fall edition of the IMF’s World Economic Outlook (IMF, 2009b) examined the impact of past financial crisis on potential output of those countries most directly involved.
The World Bank study indicated that even for countries not directly involved in the excesses of theboom period, scarcer capital and higher borrowing costs could reduce potential output growth rates by
as much as 0.5 percentage points for several years resulting in a reduction in potential output of about 4
percent. The IMF work, which is explored in more detail in Abiad and others (2009), reports that on
average for countries directly involved in a financial crisis, potential output was 7 percent lower than it
would have been in the absence of the crisis even 7 years afterwards.
The very concentrated nature of unemployment in the United States, high-income Europe and developing Europe and Central Asia suggests that some significant portion of current joblessness may be structural in nature.i In the United States 46 percent of all the job losses between August 2008 and September 2010 were in the construction and manufacturing sectors, sectors that combined represented only
15 percent of employment at the outset of the crisis. Similarly, of the net job losses in the EU (over 4
million) between 2008 and 2009 occurred in these two sectors. In Russia, for instance, almost 2/3 ofthe two million jobs lost between 2008 and 2009 were in manufacturing and construction. Those job
losses were concentrated in western Russia, Moscow and the Urals — the industrial heartland of both
the Russian Federation and the whole CIS region.
Moreover, in Europe job-losses have been geographically concentrated, with Spain accounting for overa third of all EU job losses between 2008 and 2009. Indeed, unemployment in Germany is actually
lower now than it was in August 2008 in stark contrast with Greece, Slovak Republic, Ireland andSpain where it increased by 4 percentage points or more.
i

IMF (2010) estimates that between 1 and 1¾ percentage points of the 3.5 percent of the labor force increase in unemployment
since August 2008 may be structural in nature. Similarly, Fujita (2010) finds that the extension of unemployment benefits hascaused workers that would have otherwise left the labor force to remain, raising the reported unemployment by between 0.9
and 1.7 percent of the labor force.

prepare for downturns in times of windfall
profits. Increases in the capital requirements ofbanks may also be required so that they are
better able to deal with losses (this discussion isincorporated in the so-called “Basel III” rules).
Additionally, the role of credit rating agencies insanctioning certain types of risk provisioningand “herd-like” investment behavior by banks
and other economic agents (like investment andpension funds) should be addressed.

mandates with a cross sectoral focus that
addresses those weaknesses. Also, the“perimeter” of the regulatory and supervisory
frameworks should be widened, to include what
is sometimes called the “shadow banking
system” (hedge funds, OTC derivative markets,etc.), previously largely excluded from usual
supervisory and prudential requirements. The
creation of the Financial Stability Board tocoordinate the development and implementationof effective regulatory, supervisory and otherfinancial sector policies may help in this regard.

As fiscal policy is scaled back, greater
emphasis should be placed on targetingmeasures that support structural and labormarket adjustment

Similarly, G-20 commitments to reduce procyclicality in financial regulation are welcome
steps, such as the promotion of over-the-cycle
provisioning should be introduced, so that banks

As the recovery progresses and the extent ofdemand slack in the economy shrinks (Box 8),28

Global Economic Prospects January 2011
Figure 27 Increased volatility of major reserve currencies may be of long-term concern

an increasing share of it will be concentrated inthose sectors, such as construction, that grewunsustainably large during the boom period. To
be effective, fiscal policy needs to become
increasingly targeted on assisting unemployedworkers in these sectors to move into new areas,
both to avoid the potential scarring effect of an
extended period of unemployment, but also to
support growth in new healthy sectors of theeconomy. In this regard, studies suggest that thegrowth impact of targeted fiscal measures can belarger than those of untargeted actions (European
Commission, 2010a). For example, investment
support measures can have effects 4 times aslarge, and credit to liquidity constrainedhouseholds up to 2 times as large as blanket
support measures. In regions such as Europe andCentral Asia where significant barriers to labormobility remain, targeted reforms can deliver
between 50 and 80 percent of their long-run
growth gains in as little as two years after
implementation.12

Standard deviation of real‐effective exchange rateduring the preceding 12 months
7
6

United States

5
4
3
2
1
Euro (DM before 2000)

0
1992M01

1995M01 1998M01 2001M01 2004M01

2007M01 2010M01

Source: World Bank, IMF IFS, JP Morgan.

the crisis. In contrast, those that went into thecrisis with less flexible regimes, suffered themost in terms of inflationary pressures, asset–
price bubbles and the accumulation of(unhedged) external liabilities. During therecovery phase, some of these countries have
moved toward more flexible frameworks(Belarus, Russia and Ukraine), that have allowed
for necessary adjustments to proceed in asmoother fashion.

Policy may also need to focus on improving
competitiveness, both through productivity
enhancing micro-economic reforms (including
governance, investment climate, infrastructure,
education, and energy efficiency), and bettermacroeconomic management. Research suggeststhat increasing competition in wholesale sectors
and the reduction of the administrative burden(area-wide weaknesses) and some labor-market
reforms (reduction of benefit replacement rates
and wage mark ups) are relatively fast-acting(European Commission, 2010b).

Stresses in the United States and the euro zone
may have longer-term implications for theinternational financial system
The very loose monetary policy and thedepreciation of the dollar may be having impacts
on global confidence in the dollar as theinternational reserve currency, which could haveimportant and potentially unforeseen longer-term
consequences. The situation is made all the more
uncertain given that globe’s second major
currency, the euro, is also facing serious
challenges arising from the sovereign debt crisis.
Although unlikely, should conditions insovereign debt markets and the economies
concerned deteriorate much further, confidence
in the euro as a reserve asset could be affected.

Finally countries may wish to accelerate
moves towards more flexible exchange rate
regimesAmong the lessons to be learned from the crisisand the ensuing recovery, which is consistent
with lessons from the great depression(Eichenberg and Wilson, 2010) is that
economies with floating exchange rate regimes,
suffered less economic distortions during the
upswing of the cycle and therefore lessdisruption during the crisis. For example,
countries in Europe and Central Asia that
followed less tightly managed exchange rate
regimes were better able to absorb the shocks ofIndeed, over the past several years, both thevalue of the euro and the U.S. dollar have
oscillated a great deal (Figure 27), potentiallyreducing their qualities as a stable store of valuethat partly explains their use as international

29

Global Economic Prospects January 2011of domestic conditions, when opportunities
present themselves to pursue domestic policy
objectives in a manner that support adjustment
elsewhere in the global economy these should betaken up.

currencies. Although the past offers little in theway of strong parallels, earlier episodes ofsustained weakness in the international monetarysystem have been associated with significant
economic upheavals. Both the abandonment of
the gold standard during the great depression,and the collapse of the Bretton Woods system
during the 1970s were associated with extended
periods of slow growth.13

In general, for developing countries,
macroeconomic policy needs to tighten. For
many countries this implies reducing fiscal
deficits and replenishing some of the fiscal spacethat was expended in the immediate wake of thecrisis. It also means tightening monetaryconditions. This can be achieved both throughhigher interest rates and regulatory changes, butalso through controlled currency appreciation inline with underlying differentials in productivity
growth— something that the recent easing in
capital inflows may make easier.

To date the dollar remains and is likely to remain
for a long-time the dominant reserve currency inthe global economy (as witnessed by financial
markets return to dollar safe-haven assets during
times of crisis). In the long-run a gradual movetoward reliance on new or additional currencies
is both likely and arguably desirable. In themedium-run, however, were the dollar and euro
to cease anchoring the international monetarysystem as they have until now (as unlikely as
such an event may be), this could give rise to afurther bout of protectionism and disruptive
exchange rate volatility, with damaging effects
for global growth and poverty reduction.

Notes
1. Alternatively pre-crisis production levels
could be dated mid 2007, the point whenindustrial production in high-income
countries began to decline. The August 2008
date has the advantage of being more
directly related to the financial crisis, andpreceding the point in time when activity
collapsed. Indeed, arguably the process ofuntil-then orderly unwinding of domestic
and global imbalances was unfinished inAugust 2008 and both trade and industrial
production were above their equilibrium
levels.

Concluding remarks
The global economy is transitioning from thebounce-back phase of the recovery toward a
period of slower but more sustainable growth.
Growth in most developing countries isincreasingly running into capacity constraints,
while in high-income and developing Europe
and Central Asia growth is hampered by theconcentrated nature of slack and ongoing
restructuring. In this environment, policy needs
to be moving away from short-term demand
stimulus toward measures that generate
additional employment by enhancing the supply
potential of economies.

2. Although in the classical Keynesianframework a tightening of fiscal policy
would result in slower growth, under
Ricardian equivalence this effect may beoffset if firms and consumers recognize thatthe increased frugality now means less taxes
and stronger income growth in the future (ascompared with the no action alternative) andtherefore spend more now.

The global policy environment has become
highly charged and uncertain, and presents
multiple risks to prospects for developing
countries. As emphasized at the recent G-20
meetings in Seoul (G-20 2010), both developing
and high-income countries will need to take careto minimize the negative external consequencesof their domestic policy actions. Concretely, thismeans that while countries must remain mindful

3. At this stage, the cyclical recovery is broadly
complete among developing countries so nofurther increase in savings rates isanticipated.

30

Global Economic Prospects January 2011

11. Of course, higher inflation and an
appreciating real exchange rate are part andparcel of the process of economic
development, and therefore all emerging
economies shall experience that. Here we
distinguish between this long term,
unavoidable and ultimately beneficial trend
and the short run overshooting caused byunsustainable capital flows.

4. The countries in the Europe and Central Asia
that are undergoing significant restructuring
include: Albania, Armenia, Azerbaijan,
Bulgaria, Belarus, Georgia, Kazakhstan,
Kyrgyz Republic, Lithuania Moldova,
Macedonia, FYR, Romania, RussianFederation, Ukraine and Uzbekistan
5. The 6 developing countries undergoing themost serious restructuring include: Bulgaria,
Kazakhstan, Lithuania, Romania, RussianFederation, and Ukraine.

12. In particular, the reduction of mark-ups inwholesale sectors and the reduction of theadministrative burden (region-wide
weaknesses) deliver between 50 and 80% of
all their long-run growth gains in as little as
two years after implementation (European
Commission 2010).

6. Nine countries (Brazil, China, India,
Indonesia, Malaysia, Mexico, South Africa,
Thailand, and Turkey) received 95% of
portfolio equity and 74% of short-term debt
flows and almost half of bond flows in 2010.

13. As today, the causality is likely two way.
Real-side weakness contributed to a dilutionof international confidence in theinternational monetary system, which
exacerbated the real-side crisis. (seeEichengreen and Irwin 2010 for aninteresting discussion in the context of Great
Depression and the end of the gold
standard).

7. Maldives, Lesotho, Costa Rica, Venezuela
and Kiribati also appreciated sharply fordiverse reasons — including being pegged toan appreciating middle-income currency andhigh inflation.
8. A fragile state is defined as an IDA-eligible(International Development Association),
low-income country or territory (including
those countries which may currently be inarrears) with a Country Policy andInstitutional Assessment (CPIA) score of 3.2
or below or those countries without a CPIA
score. CPIA rankings are revised annually
and are available at http://
www.worldbank.org/ida/idalloc.htm.

References
Abiad, Abdul and Ravi Balakrishnan, Petya
Koeva Brooks, Daniel Leigh, and Irina
Tytell (2009). “What’s the Damage?
Medium-term Output Dynamics After
Banking Crises”. IMF Working Paper. No.
09/245.

9. The EU/ IMF funded Irish package came inat €85 billion versus market expectations of€100-120 billion, with €17.5 billion of it isactually to come from Ireland’s own pension
fund.

Baffes, J. and Haniotis, T. (2010). “Placing the
Recent Commodity Boom into Perspective”.
In Food Prices and Rural Poverty, pp. 40-70,
ed. Ataman Aksoy and Bernard Hoekman.
Center of Economic and Policy Research andthe World Bank.

10. Initially the primary motivation for these
non-traditional interventions was to stabilize
these markets (including those for long-term
government bonds, secondary mortgages,
and corporate bonds). Increasingly, theyseek to stimulate demand by reducing longterm real interest rates both by lowering
nominal rates and raising inflation
expectations.

Eichengreen, Barry and Douglas A. Irwin. 2010.
“The slide to protectionism in the great
depression: who succumbed and why?”.
NBER Working Paper Series. No. 15142.
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Heap, Alan (2005). “China—The Engine of a
Commodities Super Cycle.” Citigroup Smith
Barney, New York City.

Outlook”, in European Economy. Vol 7,
2010, European Commission, Brussels,
Belgium, November 2010, pp 31-47, http://
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european_economy/2010/pdf/ee-20107_en.pdf.

IMF. 2009a. Global Financial Stability Report,“Navigating the Financial Challenges
Ahead”, October 2009.

______, 2010b. “Regulatory Changes in the
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_____. 2009b. World
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Jarrett, Daniel and John T. Cuddington. 2008.
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Lilien, D, 1982. “Sectoral Shifts and Cyclical
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Freund, C., 2009, “The Trade Response to
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McKinsey Global Institute, “Lions on the move:
The progress and potential of African
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Fujita, Shigeru. 2010. “Effects of the UI Benefit
Extensions: Evidence from the Monthly
CPS”. Working Papers. No. 10-35. Federal
Reserve of Philadelphia, research
Department, November 2010.

Nabli, M. (editor), 2010, The Great Recession
and Developing Countries. Washington, DC:
World Bank.

G-20. 2010. “Appendix E1”. The G20 SEOUL
summit leaders’ declaration, November 11 –12, 2010

Parker, Jeffrey. 1992. “Structural
Unemployment in the United States: The
Effects of Interindustry and Interregional
Dispersion”. Economic Inquiry, Vol. 30

Giorno, C., Richardson, P., Roseveare, D.
andvan den Noord, P., 1995,, “Estimating
Potential Output, Output Gaps and Structural
Budget Balances”, OECD Economics
Department Working Papers 152. Paris:
OECD

Pinkovskiy, M. and X. Xala-i-Martin, 2009.
African Poverty is Falling...Much Faster than
You Think!, New York, Columbia
University, mimeo;

Gordon, Gary and K. Geert Rouwenhorst. 2006.
“Facts and Fantasies about Commodity
Futures.”. Financial Analysts Journal. 62: 4768.

Radelet, S., 2010. Emerging Africa: How 17
Countries Are Leading the Way, Washington
D.C., Center for Global Development.
Radetzki, Marian, Roderick G. Eggert, Gustavo
Lagos, Marcos Lima, and John E. Tilton.
2008. “The Boom in Mineral Markets: How
Long Might It Last?” Resources Policy 33:
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www.econbrowser.com/archives/2010/10/
the_market_move.html

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Rogers, Jim. 2004. Hot Commodities: How
Anyone Can Invest Profitably in the World’s
Best Markets?. Random House, New York.
World Bank. 2010a. Global Economic Prospects
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Factbook, 2011 Washington, DC: WorldBank.
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Tourism Barometer, Update. August 2010.
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33

Global Economic Prospects January 201134

Global Economic Prospects January 2011: Annex

Topical Annex
Estimating the degree of economic
slack: capacity utilization andpotential output

Figure S1.2 Global industrial production growth slowing
Percent
20

After plunging at annualized rates of nearly 25
percent in early 2009, global industrial
production growth peaked at 15.6 percent in
February 2010, then declined moderately in thefirst and second quarters, slowing abruptly
during the third quarter, with growth effectively
stalling by October 2010 (Figure S1.1).
Notwithstanding the sharp rebound in activity
during the first half of 2010, by October 2010global industrial production was 1 per centabove its pre-crisis levels (August 2008).
However, industrial production was 4.6 percent
away from where it would have been if “normal”
trend growth had been maintained, where during
the boom period 2005-2010 trend growth isassumed to be equal to the median growth rate
observed over 2000-2005 of Hodrick-Prescottsmoothed industrial production (Figure S1.2).1, 2

10

0

-10

-20

-30
Developing countries

levels and how much spare capacity remains.
When October 2010 industrial production levels
are compared to their respective 2008-peaks(defined as maximum monthly industrial
production level attained during calendar 2008),
then developing countries (largely on the back ofChina and India), have surpassed earlier peaksby 11.99 percent, while high-income country andworld production is still 11.3 and 0.7 percent
respectively below pre-crisis peaks (FigureS1.3). However, if current levels of production
are compared to where it would have been in theabsence of a boom and bust cycle between 2005
and 2009, developing countries production isalmost back to its underlying trend levels, which
we define here as full capacity utilization (FigureS1.4).3
Based on this notion, developing
countries considered as a whole have regained
full capacity utilization, although industrial
activity in the Europe and Central Asia region
remains some 17.0 percent below capacity, while
in China and India it is about 0.5 and 6.1 percent
above. For the remaining developing countries,
as of October 2010 there remains about 5.7
percent spare capacity.

Figure S1.1 Global industrial production yet to fully
recover from crisis
Industrial production index, Aug 2008 = 100
110
105
100
95
90
85
80
75
70
Global industrial production

World

Source: World Bank.

The industrial production growth cycle has beenhighly synchronized across developing and highincome economies (Figure S1.1). However, thismasks large differences in the depth of post
crisis troughs across regions, and the extent towhich the subsequent recovery has managed tobring industrial production back to pre-crisis

65

High income countries-40
2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07

Global industrial production (trend)This sharp divergence between the amount of
spare capacity available in developing and highincome countries is not only related to the extent

60
1995M01 1997M01 1999M01 2001M01 2003M01 2005M01 2007M01 2009M01 2011M01

Source: World Bank.

35

Global Economic Prospects January 2011: Annex
if production were to fall by similar percentages
across all regions, high income country troughs
would have been much deeper, due to thealready below “trend” industrial productionlevels when the crisis started.

Figure S1.3 industrial production recovery when compared to 2008 peak
Percent
15
Developing countries
10

High-income countries

However, because the financial crisis having
directly originated in high-income countries andbecause of very strong North-North trade
linkages, industrial production in these
economies plunged sharply and more steeply
than in developing countries. Moreover, as
markets stabilized and recovery set in, therebound was not as strong as in some developing
countries. The peak annualized growth rate ofhigh-income country industrial production
during the rebound period was 12.6 percent in
May 2010 versus 15.8 percent for developing
countries, despite the fact that the troughs wasdeeper in high-income countries. As a result of
this steep decline, deep trough and more“moderate” recovery, by October 2010 highincome country industrial production was stillsome 11.3 below pre-crisis peaks, while sparecapacity was estimated to be in the order of 9.6
percent (Figure S1.5). For example, as of
October 2010, there remains 8.3 and 9.8 percentof spare capacity in the United States and theEuro Area.

5
0
-5
-10
-15
-20
-25
2008M01

2008M07

2009M01

2009M07

2010M01

2010M07

2011M01

Source: World Bank.

Figure S1.4 industrial production recovery compared
to “trend”
Percent
10Developing countries
High-income countries
World

5

Developing countries (excl China, India, Europe & Central Asia)

0

-5

-10

-15

With developing countries less directly affectedby the financial crisis, industrial production was
not only less affected, but the recovery started-20
2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07 2010M12

Source: World Bank
Figure S1.5 High income country industrial production
remains well below trend & spare capacity highof production decline during the crisis, but also
to where the respective economies were in thecycle, when the crisis started. Due to the precrisis boom, plants in developing countries wereoperating at levels significantly above “trend”.
Although developing country industrial
production was already decelerating (andmoving back to trend), it was still some 1.5
percent above full capacity in August 2008—justbefore the onset of the crisis. At that point,
industrial production in high-income countries
was already operating at some 2.6 percent below“trend”, while overall global production(reflecting the weighted share of developing andhigh-income country industrial production) was
marginally below “trend”. This implies that evenIndustrial production index, Aug 2008 = 100
110
105
100
95
90
85
80

High-income country industrial production
High-income country industrial production (trend)

75
70
1995M01 1997M01 1999M01 2001M01 2003M01 2005M01 2007M01 2009M01 2011M01

Source: World Bank.

36

Global Economic Prospects January 2011: Annex
industrial output levels are still around 17
percent below pre-crisis trend levels, output isabout some 6.7 percent below pre-crisis peaks.

earlier and the rebound was stronger (albeit froma higher base). For instance, at its trough,industrial production was only 6.2 percent below
pre-crisis peaks, at that point translating into justmore than 5.7 percent spare capacity. Moreover,the pace at which output contracted indeveloping countries -15 percent (saar) was
about half the 30 percent pace recorded in highincome countries (Figure S1.6), while therebound was stronger - (15.8 percent versus 12.6
percent in high-income countries.

Excluding China, India and developing Europe
and Central Asia, industrial production in theremainder of developing countries was 0.8
percent below pre-crisis peaks in October 2010
and there was about 5.4 percent of spare capacity(Figure S1.7). With the exception of Europe &Central Asia, Middle East & North Africa and
Sub Saharan Africa (and in the latter case,almost entirely driven by Nigeria and South
Africa which makes up 75% of monthly
available industrial production data for theregion), spare capacity in most countries anddeveloping regions have either surpassed or arevery close to trend production, with virtually nospare capacity remaining (Figure S1.8).

Figure S1.6 Developing country industrial productionlevels fully recovered from crisis & nearly back on
trend
Industrial production index, Aug 2008 = 100120110Developing income country industrial production
Developing income country industrial production (trend)

100
90

Figure S1.7 Industrial production recovery in developing countries (excl China, India and ECA)

80
70

Industrial production index, Aug 2008 = 100

60

120

50

110

40
1995M01 1997M01 1999M01 2001M01 2003M01 2005M01 2007M01 2009M01 2011M01

100

Source: World Bank

90

Developing countries (excl China, India & Europe & Central Asia)
Developing countries (trend) (excl China, India & Europe & Central Asia)80

But even among developing countries there are
significant divergences between the size of postcrisis troughs, the extent of the recovery and theremaining spare capacity. The global recovery
was to a large extent driven by the turnaround in
China, where output growth reached 27.2
percent in May 2009. Despite slowing thereafter
to more sustainable rates, by November 2010,
Chinese industrial production was 32.8 percent
higher than its August 2008 level and exceeded
its pre-crisis trend levels by 0.5 percent. Output
in India followed a similar pattern, with output
exceeding pre-crisis level by 21.1 percent in
October 2010.

70

60
1995M01 1997M01 1999M01 2001M01 2003M01 2005M01 2007M01 2009M01 2011M01

Source: World BankThe extent of spare industrial spare capacity is
only a partial and limited measure of slack in an
economy, where in many countries the majorityof employment and GDP is in the services andagricultural sectors. The notion of potential
output is the whole economy analog ofmanufacturing capacity. The World Bank’s
econometric model comprises estimates ofpotential output for some 156 countries, basedon a somewhat more sophisticated approach thanthe one outlined above for industrial production.

In contrast, output in the developing Europe andCentral Asia region was hard hit by the crisis,
and as a result, as with high-income countries,
there remains significant spare capacity. Current

37

Global Economic Prospects January 2011: Annex
Box S1.1 Estimating potential output in developing countries
The notion of potential output used here was introduced in the 2010 edition of Global Economic Prospects: Finance, Crisis and Growth, and is based on a hybrid production-function model of potential output similar to thatused by the Congressional Budget Office (CBO) in the United States, the OECD, the European Commission andthe Federal Reserve Board (CBO, 2001, OECD 2008; Cournède, forthcoming; and Denis and others 2006). In thismodel the supply side of GDP is described by a simple Cobb-Douglas function of the form

where GDP is gross domestic product, K is the capital stock, and L is labor employed. Potential output is the levelof output attained when the entirety of the capital stock and effective labor supply is employed. Replacing L withthe working-age population (P1565), the labor force participation rate (Pr), and the unemployment rate (UNR)
gives

And stating everything in growth terms gives

Assuming that all of the capital stock and all of the labor force are fully employed (UNR and Pr equal their equilibrium values), that all of the services of the available capital stock are used, and that total factor productivity(TFP) is growing at its trend rate gives an expression for the rate of growth of potential. For most developing
countries, we do not have reliable economy-wide data for Pr and UNR, so for the purposes of calculating the rateof growth of potential, it suffices to assume that the equilibrium unemployment and participation rates are constant, which leaves us withas an expression for the rate of growth of potential output.
The capital stock in the World Bank model is estimated using the perpetual inventory method from investment
data (running from 1960 in the case of most countries) and assuming a depreciation rate of 7 percent (IMF 2005).
TFP is calculated as the Solow-residual, i.e. it is equal to the change in value added (GDP) not explained by thesum of the weighted changes in labor- and capital inputs. This TFP calculation includes the 2010-2012 period,
where GDP, labor and capital stock values are based on a first-run model forecast. The TFP series is thensmoothed using a Hodrick-Prescott filter. However, to address Hodrick-Prescott filter end-point problems, the calculated TFP series is extended to 2020 on the assumption that TFP growth over 2013-2020 is equal to the median
TFP growth rate observed between 1995 and 2005 (i.e. excluding the excesses associated with the boom period).
The calculated TFP values over the entire period (i.e. 1960 - 2020) is then smoothed using a Hodrick-Prescott filter. The model is now solved for a second time, this time using the smoothed Hodrick-Prescott filtered TFP growth
rates, to calculate potential output and output gaps.

actual GDP is larger than potential output andvice versa. And a negative output gap of 5
percent is analogous to a positive 5 percent levelof spare capacity, except that the first measurerefers to the whole economy and the second only
to the industrial sector.

In that approach potential output is based on aconstant returns-to-scale Cobb-Douglas
production function with fixed factor shareparameters4 and Hicks-neutral technology.
Potential output is thus the level of output
attained when the entirety of the capital stock5
and effective labor supply6 is employed, while
total factor productivity (TFP) is growing at its
trend rate.7 The output gap (or economy wide
capacity utilization) in turn refers to the gap
between actual and potential GDP. For example,
a positive output gap (or positive economy-wide
capacity utilization figure) would imply that

Because the industrial sector of the economy
was among those hardest hit by the crisis,
economy-wide gaps in 2010 are in most
instances significantly smaller than industrial
spare capacity—depicted in the figure as anegative (Figure S1.8).

38

Global Economic Prospects January 2011: Annex
observed physical capacity. Capacity
utilization is defined as actual industrial
production divided by industrial capacityand expressed as a percentage, while thedeviation from full (i.e. 100 per cent)capacity utilization gives our notion of sparecapacity.

Figure S1.8 Industrial spare capacity and economy
wide capacity utilization across regions
Industrial & whole-economy output gaps, percent of potential
5

0-5Industrial

Economy4. The share of capital (labor) in total output
was assumed to be a uniform 30 (70) percent
in all developing countries.

-10

-15

-20
World

High-income Developing South Asia East Asia &Latincountries countries
the Pacific America &theCaribbean

SubSaharanAfrica5. Capital stock was estimated using theperpetual inventory method from investment
data (running from 1960 in the case of mostcountries) and assuming a depreciation rateof 7 percent (IMF 2005).

Middle East Europe && North Central Asia
AfricaSource: World Bank

6. Effective labor supply here refers to a labor
force which is fully employed, i.e. thenatural rate of unemployment is inequilibrium.
7. TFP is the smoothed Hodrick-Prescott filter
values of the Solow-residual. For more
information, see Box A2.1.

Notes:
1. Trend output was estimated using a HodrickPrescott filter (Lambda 14400), fitted
through monthly data spanning the period
1995 – 2005. The chosen period thus
excludes the excesses associated with the pre-crisis “boom” years in the sustainable(industrial capacity) trend calculation. Post
2005, trend growth was set at the median HP
filter trend growth rate observed between
2000 and 2005.
2. Hodrick-Prescott filters have well-known
shortcomings, including ignoring theunderlying productive structure and endpoint bias. In some studies Kalman filters
has been used to address these shortcomings(See for instance D’Auria, F. et all, "The
Production Function Methodology for
Calculating Potential Growth Rates and
Output Gaps", European Commission,
Economic Papers. 420. July 2010. Brussels.)
3. Industrial capacity refers to the HP filter
values of industrial production (see previous
footnote) – and may/may not relate to actual39

Global Economic Prospects January 2011: Annex
36 percent in 2008 and 27 percent in 2009 thatbrought net flows from $1.1 trillion (8.1 percent)in 2007 to $522 billion (3.2 percent) in 2009
(Figure S2.1). All types of flows have improved.
Portfolio equity and bond flows increased by a
40 and 30 percent, respectively; while FDI
inflows rose a relatively modest 16 percent. In
percentage terms, short-term loans (less than one
year’s maturity) rose the most 1250 percent, andnet medium and long-term bank lending thesecond most (1000 percent), but both came fromclose to zero levels in 2009. While short-term
debt flows reached more than 75 percent of theiraverage 2005-2007 level, longer-term banklending remained only one-third of past levels.

Prospects for financial markets
 The on-going recovery in international capital

flows reflects both push factors and pull
factors. Push factors include low short-term
interest rates in advanced economies and theirsluggish growth prospects and heightened risk.
Among pull factors are the strong growthprospects of developing countries, their higher
interest rates, and their generally strong
fundamentals, which has contributed to
improving credit quality and ratings,
particularly as compared with high-income
countries.
 The recovery has been sharp in short-term

Figure S2.1 International capital flows, 2007-2010elending (mostly in form trade credit),considerable in portfolio equity and bondflows; modest in FDI (supported also by
increasing South-South FDI). While net
medium and long-term bank lending also
improved significantly relative to 2009 levels,
it remains well below its historical average.
The nature of the recovery generated
challenges for several middle income countries
to preserve competitiveness during a sluggish
economic recovery.

$ trillion
ST debt
Bond
FDI

1.2
1.0

Bank Lending
Portfolio Equity$ billions (Januray 2011)

0.8
0.6
0.4
0.2
0.0
-0.2

 The share of developing countries in global

2007

financial flows increased considerably in 2010,
continuing a trend that began in the early
2000s, reflecting improved fiscal deficits anddebts, more effective monetary policy regimes,
and improved credit ratings.

2008

2009

2010estSource: World Bank.

Short-term debt flows (debt with an original
maturity of one year or less) to developing
countries jumped to an estimated $86 billion in2010 from $6.4 billion in 2009.1 These flows
were highly concentrated in few middle income
countries, and considerable portion of it is trade–
related. The largest jump was in China, where
the stock of short-term debt reached a record$440 billion in the second quarter of 2010,
almost half of all short-term debt owed bydeveloping countries.

 While economic rationale is in favor ofdeveloping countries with higher growth andimproved risk profile, policies in developed(monetary tightening/protectionism in the faceof high unemployment) and developing
countries (capital controls) will shape the level
and the composition of the capital flows incoming years.

Bond and equity flows both increased by morethan 30 percent reaching $153 and $67 billion,
respectively. Sixty-seven percent of the increasein bond financing was due to increased issuanceby private sector borrowers, who took advantage
of high-income investor’s search for yield toissue bonds, partly compensating for still weakInternational capital flows to developing
countries recovered strongly in 2010. Net
private capital flows to developing countries
rebounded by 44 percent in 2010 reaching an
estimated $753 billion (4 percent of GDP). The
rebound came after two years of sharp declines:

40

Global Economic Prospects January 2011: Annexloans to developing countries increased by $34
billion in 2010, while repayments fell by $4
billion (Figure S2.3). As a result net flows $3.2
billion to $38 billion. The fall in repayments was
the first during the decade and reflects the sharp
decline in new loans in 2009. Gross syndicatedbank loans also increased in 2010 totaling $100
billion up from $76 billion in 2009.

bank-lending. Several developing country
sovereign also successfully floated bonds at
attractive yields. Developing country corporates
also raised capital through initial public offerings(IPO) and equity issuance in international
markets with two record breaking deals in 2010,
including a world record $22.1 billion IPO (bothdomestic and international) by first Agricultural
Bank of China, and another world record equity
sale of $70 billion by the Brazilian oil company
Petrobras in September. Because the Brazilian
government took a large stake in the deal, only
$26.5 billion was recorded as foreign capital
inflows.

Figure S2.3 Disbursements on bank loans increased,
while repayments decline slightly$ billion
Principal repayment

500

Disbursements

400
300

The 16 percent recovery in FDI inflows in 2010
was more modest than that of other flows,
especially considering the sharp 40 percent
decline that was observed in 2009. FDI inflows
to developing countries totaled an estimated$410 billion in 2010 and remain the largest
component of the international capital flows todeveloping countries. The recovery was not evenacross regions, however. As a percentage ofGDP, FDI flows expanded significantly in East
Asia and Pacific and Latin American regions andslightly in Sub-Saharan Africa. Elsewhere, FDI
continued to declines as a percent of GDP(Figure S2.2). Outward FDI flows originating indeveloping countries rebounded almost twice as
quickly (up 35 percent), with South-Southflows—particularly from Asia—among thefastest growing categories of FDI (Box S2.1).

200
100
0
-100
-200
-300
-400
2005

FDI inflows as a share of GDP (%)
6
5
2009

2010

3
2
1
0
East Asia &the Pacific

Latin America Sub-Saharan
Europe &Middle East && theAfricaCentral Asia North Africa
Caribbean

2008

2009

2010estThe share of developing countries in global
financial flows increased considerably in2010, continuing a trend that began in theearly 2000s. Due to progress in capital accountliberalization, improved macroeconomic
conditions, and stronger investment climates,
financial markets increasingly view developing
countries as being less risky. As a result, thepremium charged to developing country
borrowers have been declining, a process that theevents of the past two years have accelerated. In
particular, the Euro area turmoil in May andNovember of this year saw risk premiums on thedebt of several high-income countries rise, evenas those of developing countries did not (seeFigure 17 in the main text). As a consequence,
there has been a sharp decline in international
financial flows such as FDI, bank lending andequity flows to these high-income countries.
Meanwhile, the resilience of developing
countries during the crisis plus their better
growth prospects has increased their
attractiveness as a destination for externalfinancial (and real) investment.

Figure S2.2 Uneven rebound in FDI inflows acrossregions

2008

2007

Source: World Bank.

Disbursements of medium and long-term bank

4

2006

South Asia

Source: World Bank.

41

Global Economic Prospects January 2011: Annex
Box S2.1. Outward FDI flows from developing countries are increasing, notably South-South FDI flows.
After a short-lived setback in 2009, investment flows from developing countries are back on their upward trend
and reached an estimated $210 billion (1.1% of GDP) in 2010. The economic crisis had dampened developing
countries’ outward investment in 2009, when FDI declined by 28 percent to $149 billion following $207 billion in2008. Despite its severity, that decline was significantly below the 45% drop in FDI flows from developed countries. Normally FDI is relatively resilient, but these sharp declines reflected parent companies reliance on international debt markets to finance their overseas expansions
and the drying up of this kind of financing. FDI out- Box Figure S2.1 FDI flows from developing countries
flows from developed countries did not expand as rap- recovered in 2010
idly as FDI from developing countries and as a result theshare of developing country in global FDI outflows FDI outflows from developing countries, by destination
reached 18 percent, almost double the 10 percent aver$ billion
South-Northage of previous three years.
350
South-SouthFDI outflows from the BRIC (Brazil, the Russian Fed- 300
Net FDI outflows
eration, India and China) continue to lead, accounting 250
for more than 60 percent of outward FDI (OFDI) flows 200
from developing countries. In terms of destination, de150
tailed cross-border M&A and Greenfield data shows thatsixty percent of the OFDI flows from developing coun- 100tries went into other developing countries, mostly in the 50
form of greenfield investments. Developing country FDI
0
2004
2005
2006
2007
2008
2009
into high-income country mainly takes the form ofmergers and acquisitions (M&A). The difference beSource: World Bank Global Development Horizons
tween the sum of the M&A and greenfield data and
OFDI may be the result of underreporting of OFDI (2011), forthcoming.
flows from developing countries as well as the fact that
actual cross-border flows from an M&A transaction might be less than its face value.

2010

With the sharp decline of OFDI flows from developed countries since the crisis, the importance of investment
from other developing countries (South-South FDI) increased and accounted for an estimated 34 percent in 2010
compared to 25 percent in 2007. With the acquisition of telecom company Zain Africa by Indian Bharti for $10.7
billion earlier this year—the largest South-South M&A deal and other large mergers in the sector, services sector
contested the dominance of extractive sector in South-South flows in 2010.

As a result, the trend rise in the share ofdeveloping countries in global asset allocation
has intensified, even though in some cases
because of lower global flows this amounts to alarger share of a smaller pie. For example, theshare of developing countries in global FDI
inflows increased to 37 percent in 2010 from anaverage 30 percent in previous three years(Figure S2.4). Similarly, increased equity flows
have boosted market valuations in developing
countries such that their share in global market
capitalization has risen from about 14 percent in2005 to roughly 30 percent in 2010—more orless in line with their share in global GDP.
International banks also appear to be shiftingfunds towards fast growing emerging markets.
Provisional data through September 2010 showthat while total claims (both international andlocal currency) by BIS reporting banks on highFigure S2.4 Investors are shifting their asset allocations towards developing countries

Sh are of developing countries (% of global)
percent
40

Stock Market Capitalization

35

Bank lending

30

GDP

FDI Inflow

25
20
15
10
5
2003

2005

2007

2009

Source: BIS, Global Stock Market Factbook, and WorldBank .

42

Global Economic Prospects January 2011: Annex
all types of capital flows except bond flows
increased and contributed to the recovery in2010.

income countries continued to decline. In
contrast BIS claims on developing countries
increased, raising their share in BIS banks total
claims to 19 from 15 percent in 2007.

The recovery was more subdued for othercountries and mostly supported by the reversalof short-term debt flows from negative topositive territory (i.e. short-term debt stock in2010 was higher than its 2009 level). For Europe
and Central Asian countries, improved access tointernational bond markets also helped tocompensate for the continuing sharp declines in
FDI and bank lending. These countries entered
the crisis with excessive reliance on external
debt flows and were most affected by it.
Currently, although capital flows to the region
are well off their boom-period highs, expressed
as a share of GDP they are now much closer tothe levels observed in other developing
countries.

The nature of the recovery in capital flows
has concentrated the benefits in a few middle
income countries. Much of the recovery incapital flows has been in portfolio equity, bondfinancing and short-term debt, all of which arehighly concentrated among middle-income
countries, in contrast with FDI inflows and banklending, which tend to be more evenly
distributed among middle- and low-income
countries. Ninety five percent of portfolio equity
flows, 78 percent of short-term debt and almost
half of bond flows go to the top 9 countries(China, Brazil, India, Turkey, South Africa,
Mexico, Indonesia, Thailand and Malaysia) that
account for 63 percent of developing country
GDP. In fact, half of the 128 developing
countries received no portfolio equity flows in2010 and almost 70 percent of them have neveraccessed international bond markets.

Other middle income countries (excluding the
top 9 and those in developing Europe andCentral Asia) and low income economies
benefited from stable FDI flows as a percent of
the GDP in addition to the rebound in short-term
debt. In particular, FDI remains the mostimportant capital flow for low income counties
and helped these economies to weather the crisis
relatively better than the middle income
countries in terms of capital flows.

International capital flows to the top-nine
countries increased from 3.4 percent of their
GDP in 2009 to an estimated 4.3 percent in2010. Nevertheless, it remained well below the
6.1 percent during the 2006-2007 pre-crisis
period (Figure S2.5). As a percentage of GDP,

Figure S2.5 The recovery was more evident in few middle income countries and relatively modest in other countries
percent of GDP

Short-term Debt

16
14
12
10
8
6
4
2
0
-2
-4

Bank
Bond
Portfolio Equity
FDI

06-07 2008 2009 2010 06-07 2008 2009 2010 06-07 2008 2009 2010 06-07 2008 2009 2010
Top 9

ECA (excluding Turkey)

Source: World Bank.

43

Other Middle

Low Income

Global Economic Prospects January 2011: Annex
While these net flows are high, they do not fullyreflect the capital inflows countries arereceiving, partly because stronger gross inflows
have been offset to varying degrees by large
outflows (Figure S2.7).

The surge in capital flows generated
challenges for the top recipient countries.
Over the past two years, record low interest rates
in the U.S., Japan, and the European Union haveprompted investors to borrow cheaply and invest
in high-yielding markets. Investors are attracted
to developing countries both because of theirstronger growth potential, and because as thesecountries move to tighten monetary policy theirinterest rates are rising even as they remain low
in high-income countries. Resulting capital flows
have accentuated the attraction putting upward
pressure on the currencies of several countries.
Inflows into fixed-income and equity funds
focusing on emerging markets, for example,
have received record volume of $150 billion in2010 compared to $110 billion in 2009 and $82
billion in 2007. Emerging market exchangetraded funds have also attracted robust inflows
as well, with an estimated $35 billion, comparedwith $14.4 billion in 2009. These factors
continue to fuel large cross-border inflows toequity and debt security markets in Brazil,
Turkey, South Africa and few Asian economies(Figure S2.6).

While some countries have resisted the upward
pressure on their currencies through sterilizedinterventions (see main text for a description of
the some of the measures undertaken), others
have either allowed their currencies to appreciate
or been unable to prevent them from doing so. In
countries like Brazil, South Africa for example,
the local currency has appreciated by more than
30 percent in real-effective terms since January
2009, significantly reducing the competitiveness
Figure S2.7 Gross foreign portfolio investment flows to
Brazil have been much higher than the net flows$ billions
100
80
60
40
20
0
-20
-40
-60
-80
-100
2007 Q1

By the end of October 2010, the portfolio
investment flows (portfolio equity and local debt
securities) had surged in Turkey (reaching 17.8
billion) and South Africa ($13.4 billion).
October flows were particularly strong for both
Brazil and India, as they were $14.5 billion and$28.7 billion, totaling $62.7 billion and $50
billion in the first ten months, respectively.

2008 Q3

2009 Q2

2010 Q1

Figure S2.8 Real effective exchange rate appreciationin selected economies

Foreign portfolio investment flows, % of GDP

Index, January 2009=100

8150

BrazilTurkeySouth Africa
India

4

2007 Q4

Equities Credit
Debt securities Credit

Source: Central Bank of Brazil.

Figure S2.6 Large inflows to their stock markets andlocal debt securities

6

Net Portfolio Investment
Equities Debit
Debt securities Debit

140

BrazilThailand
Malaysia

Indonesia
South Africa
TurkeyMexico
India

130
2

120

0
-2

110

-4

100

-6
2006 Q1

2007 Q1

2008Q1

2009Q1

90
2009M012010 Q1

Source: Central Banks and World Bank.

2009M06

2009M11

2010M04

Source: International Monetary Fund.

44

2010M09

Global Economic Prospects January 2011: Annexof domestic exporting and import-competingfirms (Figure S2.8). In other countries, efforts toresist exchange rate appreciation have resulted in
rapidly rising credit and localized asset bubbles(for example real-estate prices have been rising
at a 17 percent annualized pace in several Asian
economies).

higher average price/earnings (P/E) ratio. This
said some of high P/E ratios can still be justified
by high-returns on equity, low real interest rates
and robust growth prospect in developing
countries. Furthermore, the benchmark index fordeveloping-country stocks has not yet reached
the peak levels of 2007, suggesting that there is
still room for further outperformance.

Other signs of bubble include the tendency for
emerging markets equities to continue rising inprice, even though they are no longer cheap
relative to developed countries. Developing
country equities are currently trading at apremium over mature markets with the relatively

After the U.S. Federal Reserve announcement of$600 billion of long-term government bondspurchase in November 2010 (so-called
quantitative easing or QE2), pressures oncurrencies were expected to be maintained or

Box S2.2. Change in policies toward capital flows: more of this, less of that
Efforts to contain the surge in hot money flows have been widespread among developing countries. Brazil, forexample, raised its financial operations (IOF) tax on foreign investments in fixed income securities twice so far:first, from 2 to 4 percent on October 5th, and then to 6 percent on October 18th. The impact of these hikes was
short-lived and limited, and was therefore followed by further increases in the IOF tax and reintroduction of 15
percent withholding tax on federal securities are being contemplated. Indonesia imposed a 1-month minimum
holding period on central bank money market certificates on July 7th and introduced new regulations on the net
foreign exchange positions of banks. Meanwhile, Thailand implemented a 15 percent tax on interest income andcapital gains by foreign investors.
On the contrary, China, South Africa, India, and Turkey, which receive high levels of cross-border flows, have notintroduced any new measure so far. Rather than new measures, China announced that it will intensify the checks
based on existing measures. Also to ease some of the tension, China and South Africa have started to promote
capital outflows. China has boosted its support to outward FDI by its state-owned enterprises, state banks and
SWFs by a new round of administrative reforms and lowered the quota for its institutional investors to get a license to invest abroad. Similarly, South Africa will relax any exchange control on residents and is planning tochange the prudential framework so that pension funds can invest abroad.
The effectiveness of the capital controls in reducing the short-term capital flows is still in question. Empirical evidence suggests that effectiveness of capital controls is of limited duration, and best used when the capital surge is
temporary (IMF 2010). In fact, the impacts of the two hikes in IOF tax in Brazil and imposition of 1-month minimum holding period in Indonesia were both short-lived. Also, these types of restrictions on a certain type of flow
tend to change the composition of capital inflows rather than their levels, hence may do very little in easing theexchange rate pressures. In some cases, shifting the composition (from short-term to long-term) might be the intended result, as countries would like to receive less short-term capital inflows and more FDI inflows—since FDI
flows tend to be more stable and have a stronger impact on economic growth.
The differences in policies across different asset groups may have unintended consequences. For example, when
Chile restricted short-term hot money inflows (investment with a horizon of less than one year) in the 1990s, someforeign investors created firms in Chile—technically FDI, whose only purpose and investments were short-term
fixed-income instruments. Chile later further tightened its capital controls to prevent such avoidance of inflow
controls (Roubini 2010). This type of capital control avoidance might be something to watch as most countries,
including those that try to curb hot money flows, have also further liberalized their policies to promote FDI inflows since 2009. India, Indonesia and Malaysia raised the cap on foreign–ownership in certain sectors. China
lifted the threshold level of investment that requires state approval. Several regulations were relaxed in most developing countries. Recently, in order to limit similar issues, China announced the intensification of audits of fundrepatriation by Chinese companies listed abroad and investments by existing foreign-invested Chinese companies.
Source: IMF Global Financial Stability Report April 2010; Roubini, Nouriel. “How should emerging markets
manage capital inflows and currency appreciation?” Roubini Global Economics, November 14, 2010.

45

Global Economic Prospects January 2011: Annex
even intensify. And despite the uptick in market
nervousness in November due to the sovereign
debt crisis in Europe, flows toward developing
countries eased only temporarily.

Figure S2.9 Prospects for capital flows
percent
1.2
1.0
0.8

However, portfolio investment and short-term
debt flows can be volatile and react quickly tochanging market conditions (such as a shift ininvestors’ sentiment or monetary tightening indeveloped economies). Several developing
countries have experienced net disinvestment
more than once over the years. They were first to
fall and plummeted sharply in the last quarter of
2008, for example, as investors retreated fromrisky assets all around the world including
emerging markets but they were also first to
recover.

Capital flows as % of GDP(right axis)

ST Debt flows
Bank
Bond
Portfolio Equity
FDI

9
8
7
6

0.6

5

0.4

4
3

0.2

2

0.0

1

-0.2

0

2002

2004

2006

2008

2010e

2012p

Source: The World Bank.

be in FDI inflows. While FDI is driven by
growth prospects like other flows, the modest
recovery in FDI flows vis-a-vis others in 2010
was mainly because of the remaining
uncertainties in global economy. According to a
recent survey of large multinational companies,
extensive downside risks for growth at the
beginning of the year, tight credit conditions,and high commodity and food prices thatgenerated fears about cost of production andtransportation in the medium term caused many
to postpone investment until 2011. These typesof uncertainties hinder FDI more than otherflows because FDI investment has a longer time
horizon (decision to actualization) and exit costs
are much higher. As uncertainty surrounding the
economic recovery has eased—especially amongdeveloping countries, the momentum of M&A indeveloping countries and greenfield investments
accelerated in the second half of 2010,
suggesting further gains in 2011 and onwards.
As a result, FDI inflows to developing countries
are projected to reach $590 billion (2.5 percent
of GDP) by 2012. Net bank lending is also
expected to rise further up to $42 billion as thehealth of global banking system improves.
Nevertheless, bank-lending levels will be much
lower than the recent historical average bothbecause of endogenous deleveraging by global
banks, and because of the implementation of
new regulations in 2011 that will effectively
increase capital requirements and thereby restrictlending.

Several emerging economies have voiced
concerns about the impact of hot money flows intheir economies and signaled further actions tocurb them. So far, policy responses to mitigate
the short-term impact of these flows have varied
from introduction of capital controls (such as
Brazil’s IOF tax) with limited impact,
improvement in screening and implementing
existing restrictions on cross-border inflows(such as China) and promoting further capitaloutflows such China and South Africa (BoxS2.2). Some governments have also taken steps
to improve their regulations to restrain assetbubbles. China and Vietnam, for example, havetightened mortgage lending standards or raised
the provisioning for the real-estate sector, wheresuch bubbles are believed to have been building.

Prospects: More even recovery ahead
Developing countries with higher growth rates,
improved risk profile, and higher interest rates
than in high-income countries will continue to be
attractive destinations for international capital
flows for some time.
Cross-border flows to developing countries areprojected to increase further in nominal terms inthe medium-term, but with a slower pace thantheir nominal GDP growth reaching $875 billion(3.8 percent of GDP) by 2012 (Figure S2.9,
Table S2.1). Much of the increase is expected to

Toward the middle of 2011, the authorities are46

Global Economic Prospects January 2011: Annex
bond issuance over the projection period.
Similarly, portfolio equity flows are expected to
decline slightly next year as the rise in asset
prices will gradually limit the return on
emerging market assets. Also, there will be aslight contraction in short-term debt flows by
2012 with trade-related flows remaining solidand its speculative portion falling.

expected to begin unwinding the extraordinary
monetary measures that have lowered short- andmedium- to long-term interest rates. As interest
rates in high-income countries return to morenormal levels, search-for-yield induced capital
flows to developing countries are expected toease. This will make the international bondmarkets less favorable for developing country
issuers, particularly their non-investment grade
corporate borrowers. In addition, many
sovereign borrowers have taken advantage oflow yields to pre-finance future borrowing
requirements and are less likely to issue in 2011
in the face of higher interest rates. Both of thesefactors will contribute to a modest reduction inWith stronger FDI inflows and rising banklending, both of which are more evenly
distributed across countries than other capital
flows, low-income countries are expected tobenefit more from the increase in flows in 2011
and 2012.

Table S2.1 Capital flows forecast table$ 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
126.6
1.9

2004
185.0
2.3

2005
322.8
3.4

2006
448.9
4.0

2007
476.7
3.4

2008
434.6
2.6

2009
279.6
1.7

2010e
298.2
1.6

2011f
272.5
1.3

2012f
265.9
1.1

262.3
274.3
178.8
152.5
26.3
83.6
-11.9
-2.5
2.4
-11.8
95.5
38.3
23.1
19.5
-4.4
57.2
-103.5-285.5

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
-127.3-399.9

464.9
528.9
341.1
273.6
67.5
123.8
-64.0
2.7
-40.2
-26.6
187.8
113.3
48.3
70.3
-5.3
74.5
-372.9-414.8610.3 1110.4
679.9 1110.4
451.0
643.2
343.3
508.1
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
-411.3 -495.5-647.9 -1091.7

743.8
716.0
533.9
587.1
-53.2
209.9
27.8
7.3
10.0
10.6
182.1
196.1
24.1
176.8
-4.8
-14.0
-700.2-478.2

597.9
521.5
462.2
354.1
108.2
135.6
76.4
17.7
26.5
32.2
59.2
52.8
51.1
3.2
-1.6
6.4
-250.2-627.3

825.9
753.2
563.0
409.6
153.4
262.9
72.4
19.3
16.3
36.8
190.5
104.1
66.5
37.6

838.6
631.1
486.0
145.1

874.5
724.2
589.9
134.3

207.5

150.3

86.4
-649.0-475.1

23.6
137.4

46.1
159.3

61.6
192.1

130.5
226.7

148.7
278.0

207.5
325.0

153.9
307.1

210.0
325.0

250.0
346.0

275.0
374.0

2003
3.88
4.05
2.64
2.25
0.39
1.41

2004
4.26
4.56
3.03
2.57
0.46
1.53

2005
4.88
5.56
3.58
2.87
0.71
1.97

2006
5.42
6.04
4.01
3.05
0.96
2.03

2007
8.03
8.03
4.65
3.67
0.98
3.38

2008
4.52
4.35
3.24
3.57
-0.32
1.11

2009
3.72
3.24
2.73
2.09
0.64
0.35

2010e
4.40
4.01
3.00
2.18
0.82
1.01

2011f

2012f

4.00
3.01
2.32
0.69
0.99

3.77
3.12
2.54
0.58
0.65

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

47

Global Economic Prospects January 2011: Annex
reversal in capital flows to developing countries,
with a potentially disproportionate impact on
countries in developing Europe and Central
Asia, whose economies are more closely tied tothose in high-income Europe.2 Second,
international capital flows will remain sensitive
to differences in the stance of policy between
developing and high-income countries. If highincome countries shift toward a tighter policy

The outlook for capital flows is still subject toseveral downside risks, however. First and mostimmediate is the European debt crisis. While its
impact was limited and temporary in 2010, an
unexpected disorderly resolution of the debt
problem in 2011 might prompt a broad-basedrisk-aversion in global financial markets driving
capital flows toward safe assets—such as US
Treasury bonds. This could lead to a sharp
Table S2.2 Regional summary table

Net private inflows (equity+debt)$ billions
2002
Developing Countries
147.7
East Asia & Pacific57.3
Europe & Central Asia
32.7
Latin America & Caribbean
28.0
Middle East & North Africa
12.4
South Asia
9.8
Sub-Saharan Africa
11.8

2003
274.3
83.6
85.8
57.5
15.6
18.6
13.2

2004
366.3
132.2
107.2
67.3
16.4
21.5
21.7

2005
528.9
174.2
156.2
116.6
22.4
25.6
33.9

2006
679.9
201.7
248.9
86.1
25.7
73.1
44.4

2007
1110.4
286.1
413.5
218.5
28.4
113.3
50.7

2008
716.0
184.3
251.0
170.7
22.9
52.8
34.3

2009
521.5
186.9
57.6
147.5
25.5
68.2
35.8

2010e
753.1
283.3
111.0
203.4
25.8
80.7
49.3

2002
154.3
59.4
14.0
55.2
8.1
6.8
15.2

2003
152.5
56.8
23.8
43.3
10.0
5.4
13.3

2004
206.7
70.4
41.9
65.9
9.7
7.8
11.0

2005
273.6
104.3
51.1
72.2
16.8
11.2
18.0

2006
343.3
105.7
92.3
72.0
27.2
26.0
20.2

2007
508.1
177.1
133.2
109.4
27.6
32.3
28.5

2008
587.1
186.6
160.1
127.9
29.3
48.7
34.5

2009
354.1
102.5
85.1
73.6
24.4
38.3
30.3

2010e
409.6
150.2
79.0
99.3
20.8
28.3
32.0

2002
8.3
3.8
2.7
1.4
-0.5
1.1
-0.4

2003
26.3
12.5
1.5
3.3
0.2
8.0
0.7

2004
36.9
19.3
1.8
-0.6
0.7
9.0
6.7

2005
67.5
25.7
6.7
12.2
2.4
12.4
8.1

2006
107.7
56.2
12.3
11.0
1.0
10.4
16.8

2007
135.1
35.1
27.0
28.8
-2.1
36.1
10.1

2008
-53.2
-7.3
-15.1
-9.7
0.4
-15.8
-5.6

2009
108.2
29.9
5.0
41.6
1.2
20.5
10.0

2010e
153.0
37.0
7.0
54.0
1.4
43.0
11.0

2002
-14.8
-5.9
16.0
-28.6
4.8
2.0
-3.0

2003
95.5
14.3
60.5
10.9
5.4
5.1
-0.8

2004
122.7
42.5
63.5
2.0
5.9
4.7
4.0

2005
187.8
44.2
98.4
32.2
3.2
2.0
7.9

2006
228.9
39.9
144.3
3.1
-2.5
36.7
7.4

2007
467.2
73.9
253.3
80.3
2.8
44.9
12.1

2008
182.1
5.0
106.0
52.5
-6.8
19.9
5.5

2009
59.2
54.5
-32.5
32.3
-0.1
9.3
-4.4

2010e
190.5
96.1
25.0
50.1
3.6
9.4
6.3

FDI ($ billion)
Developing Countries
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
Portfolio Equity ($ billion)
Developing Countries
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
Net Private Debt flows ($ billion)
Developing Countries
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
Source: World Bank.

48

Global Economic Prospects January 2011: Annex
stance 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—raising the cost ofcapital for developing countries and likely
weakening flows. On the other hand, if policy
remains loose and pressures on the currencies ofdeveloping countries intensify they may takefurther steps to restrict flows finance, withpotentially negative impacts on investment andgrowth and in a worst case scenario could resultin an escalation of protectionist trade measures.

Notes
1.

Short-term debt flows are calculated as thechange in short-term debt stocks at the endof the year. Hence, flows do not reflect the
short-term debt that is issued and repaid
during the year.

2.

Of course a less severe scenario could see
the relative position of developing countries
improve and capital flows shift from highincome countries to developing countries.

49

Global Economic Prospects January 2011: Annex
percent among developing countries. By
September 2010, high-income countries export
volumes were still some 2 percent below theirpre-crisis levels, whereas developing countries
were 16 percent above their pre-crisis level by
November 2010. All developing regions, haveattained their pre-crisis output levels with the socalled BRIC countries charging ahead with
export volumes some 21 percent above August
2008 levels in November 2010, whereas Europe
and Central Asia lagged behind at 9.2 percent.

Developments in trade
Just as the unprecedented 17 percent decline intrade during 2009 was one of the major channels
for the diffusion of the crisis, it has been a major
factor underpinning the recovery in 2010. Global
trade began recovering in the second quarter of2009, and continued growing rapidly for four
consecutive quarters, expanding at a 11.9 percent
annualized pace during the first ten months of2010.
World export volumes have regained precrisis levels (August 2008). As of October 2010,
world export volumes regained all of the losses
sustained during the acute phase of the crisis andstood some 0.8 percent higher than their August
2008 levels (Figure S3.1). Although pre-crisis
levels have been surpassed they remain below
their pre-crisis peaks and about 13.6 percent
lower than what might have been expected had
the crisis not occurred. Despite the recovery in
trade volumes, because of lower commodity
prices, the value of merchandise trade remains
8.0 percent lower than its pre-crisis levels.

Developing countries imports drove therebound. Much of the increase in world trade
was on account of rapidly growing demand fromdeveloping countries. Three quarters of theincrease in high-income country exports during
the first half of 2010 was sold to developing
country importers, and overall developing
country imports accounted for 58 percent of theincrease in global exports during that period.
Much of that import demand was in the formof capital goods, a sector of global activity still
dominated by high-income countries. The
downturn in global trade was concentrated ininvestment and durable goods, expenditures
upon which can be delayed during periods of
uncertainty. Indeed, whereas exports ofconsumer non-durables fell 20 percent during thecrisis, durables and machinery, transportation as
well as minerals fell 30 percent. As a result,much of the recovery in trade was in these same
categories

Figure S3.1 World trade reaches pre-crisis levels
Volume index (August 2008=1)
1.2
1.1
1
0.9
0.8
0.7
0.6

High-income countries

With the commencement of the recovery and a
firming up of demand, businesses begun
replacing their depleted inventories andconsumers, aided-on by various government
incentives programs, stopped holding back onsome big-ticket expenditures such as
automobiles. These factors together helped in therebound in capital goods and consumer durables
which account for the bulk of global trade(Figure S3.2).

Developing
0.5

World

0.4
2000M01 2001M04 2002M07 2003M10 2005M01 2006M04 2007M07 2008M10 2010M01

Source: World Bank.

The recovery in trade is more advanced
among developing countries than in highincome countries. During the first ten months of2010, high-income country export volumes grewat a 10.4 percent annualized pace versus 15.5

50

Global Economic Prospects January 2011: Annex
experienced a surge in export revenues. For
instance, export revenues in Zambia rose bysome 45 percent in 2010 on account of highcopper prices. Further, increased remittances todeveloping countries (up by 6 percent in 2010,
compared with a decline of 5.5 percent in 2009)
provided support to their current accounts (Box
S3.2).

Figure S3.2 Capital goods exports lead trade recovery
in high-income countries (2008=1)
Volume index (2008=1)
1.20
1.10
1.00
0.90
0.80
0.70

USA
Japan

0.60

Germany

0.50
Nov-07

Apr-08

Sep-08

Feb-09Jul-09Dec-09

May-10Global trade in services, which proved more
resilient to the crisis than merchandise trade,is also on the recovery path. In 2009, services
trade fell by 15.5 percent, with the largest
decline occurring in the financial, transportation,
construction and personal and recreational
services. Insurance services fell the least 6
percent. The United States remains the world’s
leading exporter of services, accounting for 14.8
percent of services trade in 2009. After services
exports declined by 6 percent in 2009, it
increased by 8.4 percent in the first ten monthsof 2010, with passenger fares and other travel
services leading the way.

Oct-10Source: World Bank.

In the euro area, capital goods exports to the restof the world expanded at a 12 percent annualizedpace in the first 7 months of 2010, versus 9
percent for consumer goods. In Japan the boom
was more intense, with capital equipment
exports rising 40 percent during the 8 months
ending August 2010 as compared with the same
period the year before. Trade in consumer goodsrose less than half as quickly. Similarly, in the
US exports of capital goods (excluding
automobiles) expanded at 14.0 and 11.5 in thefirst and second quarters versus 11.0 and minus
4.6 percent for consumer goods.

Tourism services, which remains critical formany developing countries also rebounded in2010. International tourist arrivals fell by 4.2
percent in 2009 (World Tourism Organization),but advanced 7 percent during the first six
months of 2010, mainly driven by rising activity
in developing economies. Arrivals rebounded in
all regions with Asia and the Pacific, the second
most visited region globally recording a 14
percent increase in international arrivals.
Supported by hosting the FIFA World Cup, subSaharan Africa, the only region to haveexperienced an increase in tourist arrivals in
2009, sustained its growth trajectory with a 16
percent increase during the first half of 2010.
Arrivals were 20 percent in the Middle East, 7
percent in the America’s and 2 percent inEurope. Nonetheless, the growth in international
tourism receipts are expected to lag those of
tourist arrivals, because much of the volume

This surge in capital goods exports has been an
important contributor to the recovery in growth.
In the US for instance equipment and software
spending contributed 1.24 percent, 1.52 percent
and 1.02 percent to GDP in Q1, Q2 and Q3
respectively.
…and low-income countries benefitted fromthe rebound in commodity prices. The increasein the demand for capital goods and durable
consumer goods has also led to the recovery indemand for inputs that feed these markets
including industrial metals. Partly as a result,industrial metal dependent economies

51

Global Economic Prospects January 2011: Annex
increase in tourism reflects more intra-regional
travel over shorter periods of time. Further,significant discounting of prices has also takenplace to attract tourists. The World Tourism
Organization estimates tourist arrivals to havegrown by 4 percent in 2010.

Figure S3.3 After rebounding world trade volumes
have decelerated sharply
percent growth, 3m/3m, saar
100
80
60
40

Global imbalances have declined substantiallyand are expected to continue falling. The onsetof the global crisis accelerated the narrowing of
global imbalances that had already begun in2006. The increase in public sector andconsumer spending in China as well as theincrease in household savings rate in the U.S. in2010 supported this reduction in global
imbalances (Box S3.1). Looking forward, theextent to which imbalances narrow further will
depend importantly on oil prices; the extent towhich fiscal stimulus in the United States iswithdrawn as the recovery unfolds, and to whichinterest rates rise (prompting increased savings
behavior). For China, the issue will be theauthorities’ capacity to maintain the recent shift
toward increased domestic spending.

20
0
Japan

-20

USA
Germany

-40

China
World

-60
-80
May-08Long-term average

Oct-08Mar-09Aug-09Jan-10Jun-10Nov-10Source: World Bank.

in October, after expanding at a peak rate of
79.7 percent pace in February 2010.
Global trade growth still remains below its
pre-crisis trend. The long-term average annual
growth in global trade volumes during the precrisis period (1991-2008) was 7.0 percent. Thus
the sharp downward adjustment in global trade
growth that occurred in the third quarter points
to the fact that global trade growth, post-thebounce back phase, is well below the long-term
trend and had not yet stabilized at a new
equilibrium by September.

The bounce-back phase of the trade recovery
has ended. Many of the factors that helped drive
the trade rebound were temporary in nature (e.g.
inventory re-stocking, restarting of trade-finance,
declines in crisis-induced precautionary savings,
and the growth impact of government stimuli
packages). As these factors faded, global tradedecelerated. Thus after growing at a 21.1 percent
annualized rate in the first half, global exports
decelerated sharply, declining at an annualizedpace of 1.65% in the 3rd quarter (Figure S3.3).

Several factors suggest the pace of recovery
will pick-up… While worrisome, thedeceleration appears to reflect a temporary pause
in trade growth following some overshooting
during the bounce-back phase. The most recent
trade data for instance points to a slowdown in
the pace of deceleration. In October, the pace of
deceleration in global trade volumes had
moderated to -2.8 percent from the -4.8 percent
that occurred in September. Indeed, industrial
production after registering a similarly sharp
deceleration is now accelerating once again in
the fourth quarter.

All regions participated in the deceleration. In
Japan for instance momentum growth rates
peaked at 58.5 percent, but trade was actually
declining at 14.4 percent annualized pace during
the three months ending October 2010. The
deceleration in China was equally brutal, with
exports declining at 14.8 percent annualized pace52

Global Economic Prospects January 2011: Annex
Box S3.1: Global Imbalances continued decline in 2010.
The onset of the global crisis accelerated the narrowing of global imbalances that had already begun in 2006.
Global imbalances (measured here as the absolute value of national current account balances divided by globalGDP) peaked at 5.6 percent of global GDP in 2005, and had fallen to 3.9 percent in 2009 and an estimated 3.3 in2010.
China’s current account surplus, which stood at 10.6 percent of GDP in 2007 declined to 5.6 percent of GDP in
2010, reflecting increased imports associated with government efforts to stimulate domestic demand, and higher
commodity prices (consumer spending as a share of GDP rose from 8.7 percent in 2009 to 9.3 percent in 2010).
Further China’s export growth has been constrained by the anemic levels of consumer spending from several highincome OECD countries.
Box figure S3.1 Global trade imbalances have eased substantially
Absolute value of national current account balances,% of Global GDP

US and China Trade imbalance
millions of U.S. dollars, annualized

800
600
400
200

China Trade Balance
China Trade Balance (ex oil)
U.S. Trade Balance
U.S. Trade Balance (ex oil)

6
5

Developing countries

4

0

3

-200
-400

2

-600

High‐income countries

1-800-1,000
1990M01 1994M01 1998M01 2002M01 2006M01 2010M01

0
1995

1997

1999

2001

2003

2005

2007

2009

2011

Source: World Bank.

In the United States, large negative wealth effects associated with falling higher prices prompted a large increasein consumer savings, which contributed to a sharp decline in the current account from a high of 6.4 percent in2006Q3 to an estimated 3.2 percent in 2010. Looking forward, whatever tendencies there might be for consumer
savings to decline along with lower unemployment rates and more certain prospects, will be offset by increased
public-sector saving and higher interest rates as fiscal and monetary policy is gradually shifted to a more neutral
stance. As a result, the U.S. current account deficit is not projected to deteriorate much further, although it willremain sensitive to energy prices and interest rates.

sales growth has remained mostly positive
throughout 2010. And for large developing
countries such as China and India, November
retail sales growth was 18.0 percent (3m/m, saar)and 16.1 percent (3m/m, saar) respectively.

Moreover, demand-side indicators show
continued positive growth, and in high-income
countries there is reason to believe that therecovery is becoming more broadly based—
involving more countries and more segments ofaggregate expenditure. In particular, consumer
demand, which has lagged business demandthroughout the recovery, is showing early signsof adding vigor to the recovery. Retail sales in
the U.S grew at 10.1 per cent and 14.1 percent(3m/m, saar) in October and November, after
declines in July and August. In Europe, retail

Recent Purchases Managers Index (PMI)
surveys confirm the slowdown nut no reversal inexport orders. Overall, they point to a continued
expansion but at lower rate. In December for
instance the J.P Morgan Global Manufacturing
PMI rose to 55, above the critical 50 mark which

53

Global Economic Prospects January 2011: Annex
they accounted for 28.6 percent in 2009. This
trend has however persisted during the recovery
phase. For the first ten months of 2010, a further
2.1 percent drop in export shares to these two
economies occurred.

indicates that production will be expanding in
the coming months. The new export orders subcomponent of the index also rose in October,marking a sixteen consecutive monthly increase.
More significantly, however, was the pick-up in
the rate of growth of new export orders, which
accelerated to its fastest pace since July.
Similarly, the Baltic Exchange Dry Index, a high-frequency (daily) index of shipping costs forprimary commodities has picked up in the fourth
quarter – suggesting a revival in the demand forindustrial inputs.

At the same time, China became an increasingly
important destination for Japanese exports,
accounting for 19.2 per cent of Japanese exports
during the first ten months of 2010, comparedwith 13.1 percent in 2004. If these trends
continue, over the forecast period China could
become equally important or possibly a more
important export destination than the E.U. and
U.S. combined. Similarly, China is on route to
become the largest destination for U.S. exports,having already overtaken Mexico and closing inon Canada’s lead. In December 2004, U.S’s
share of total trade with Canada was 19.5 percent whereas China accounted for 10.1 per cent.
By September 2010 Canada’s share of US’s total
trade had fallen to 16.4 per cent and China’s
share had risen to 15.4 per cent.

In contrast to high-income countries, orders data
for Asian economies generally is declining orindicating only modest growth, suggesting thatthe soft-patch on production in that region may
be longer-lived – partly in response to policy
tightening and currency appreciation.

Outlook
Against the backdrop of these recent
developments, and reflecting strengthening
global consumer and industrial demand the
expansion is expected to return in coming
months and through the forecast horizon.
Overall, global merchandise trade is expected to
grow by 8.2 percent in 2011 and by 9.5 percent
in 2012, with goods and services trade
expanding by 8.2 and 9.0 percent in the twoyears. The contribution of the imports ofdeveloping countries to global trade is projected
to decline from its 35 percent share in 2010 toaround 29 percent in 2012 as the recovery inhigh-income countries picks up.

South-South trade is also growing. Just as
developing countries are becoming increasingly
important markets for high-income exporters, so
to are other developing countries becoming more
important destinations for the exports ofdeveloping countries. China, in particular has
become an increasingly important export market
for all developing regions. In Sub-SaharanAfrica, China’s voracious appetite forcommodities has led to a significant increase intrade with the region. However, China’s tradewith sub-Saharan Africa is not only inmerchandise trade, indeed an increasing
proportion of bilateral flows is also occurring asservices trade. The Forum on China Africa
Cooperation (FOCAC) reports that as of August
2010, Chinese projects in Africa had reached$205.2bn since 2000. Most of these projects
were infrastructure related such as theconstruction of roads (60,000km in total) andAs a consequence of the increasing
importance of developing countries in global
trade, significant changes to trading partners
could occur over the forecast horizon. In 2004
the United States and the E.U. accounted forsome 40 percent of Japan’s exports. By 2008
their share had fallen to 31.7 percent and withthe crisis hitting both the U.S and the E.U harder54

Global Economic Prospects January 2011: Annexbuilding of power plants (3.5 million kw of total
generating capacity).

developing countries from trade openness.
With global growth set to slow in 2011(see maintext), efforts to spur trade such as through theconclusion of the beleaguered Doha
Development Agenda should be encouraged.
The continued proliferation of bilateral andregional trade agreements only partly
compensates for the lack of multilateral progressand has eroded the preferential margins of many
low-income countries. A multilateral deal thattakes into account the supply-side constraints in
low-income economies, and therefore allows for
greater transition periods and better market
access opportunities for agricultural goods aswell as processed commodities would be moredevelopment friendly than the current system.
Nevertheless, some of the largest barriers to
trading developing country goods and services
are imposed by other developing countries.
Removal of these barriers could reap significant
benefits, spurring an even faster expansion ofSouth-South trade.

The growing importance of developing
countries in global trade has implications forthe structure of global trade. Because demand
patterns in developing countries are different
than in high-income countries, their growing
share in global imports is shaping the productstructure of global trade. Rapidly industrializing
developing countries demand proportionately
more industrial raw materials, energy and foodproducts, as opposed to manufactured consumer
goods and non-tradeable services. Hence withthe growing importance of developing countries
as an engine of growth, this is likely to sustain
the high increases in commodity prices that
occurred in 2010 over the forecast horizon (seecommodities annex).
Although progress has been limited,concluding the Doha process remains criticalto maximizing the potential benefit to
Box S3.2 Prospects for remittances

The global recession of 2009 took a toll on the flow of remittances to developing countries from expatriate
workers overseas. Economic activity in the high-income countries softened or declined, unemployment increased, and in several host countries, anti-immigrant sentiment showed patent signs of buildup. Newly available
data indicates that officially record remittance flows to developing countries fell to $307 billion in 2009, a 5.5
Box figure S3.2
East– and South Asia dominate remittance flows todeveloping regions in 2010
remittance inflows by recipient region, US$ bn

The recession of 2009 exacted a toll on remittance receipts
Index, 2000=1
6

21.49
35.45

5
91.16

4
36.72

3
2
58.01

1

82.58

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total inflows 2010: $326 billion
Sub-Saharan Africa
Europe & Central Asia
South Asia

Source: World Bank.

Middle East & North Africa
Latin America & the Caribbean
East Asia & the Pacific

East Asia & the Pacific

Europe & Central Asia

Latin America & the Caribbean

Middle East & North Africa

South Asia

Sub-Saharan Africa

Source: World Bank.

55

Global Economic Prospects January 2011: Annex
percent decline from the previous year. But contrasted with other forms of financial flow, the decline in remittances was quite modest (see Finance annex for more): foreign direct investment dropped 40 percent in the year,
while portfolio debt and equity flows declined by a large 46 percent. Estimates for remittance inflows for 2010 are
for a 6 percent increase to $325 billion.
In broad terms, the relative resilience of remittances during the global recession is tied to a number of factors. Importantly, despite the financial crisis and ensuing recession, the stock of migrants has continued to grow, lending
persistence to streams of remitted incomes. Existing migrants remained in host countries to a large degree, rather
many returning home, as was earlier anticipated by the World Bank and other analysts. And, South-South migration is actually larger than South-North migration, with an estimated 43 percent of migrants from developing countries in other developing countries. Given the relatively robust economic conditions among emerging markets inthe last few years, remittance flows were supported to higher levels than would otherwise be the case.
The 5.5 percent decline in remittance incomes during 2009 for the aggregate of developing countries masks highly
diverse outcomes across regions. During the year, remittances to South Asia continued to grow at a 4.5 percent
pace, through well below the 20-30 percent annual rates of the years just preceding; East Asia edged 0.3 percent
higher. But inflows dropped by a substantial 23 percent to Europe and Central Asia; by 12 percent in Latin America, and 6- and 4 percent in MENA and Sub-Saharan Africa, respectively (Box figure S3.2).
The World Bank’s Migration and Remittances Unit estimates that the USD value of remittances increased 6 percent in 2010. The benefits of the increase in remittances in 2010 to the poor in developing countries has been reduced by exchange rate developments, with the dollar depreciating against many developing country currencies.
As a result, the real local currency value of remittances is estimated to have declined a further 6.3 percent in 2010.
The outlook is for further increases in remittances of 6.3 percent and 8.1 percent in 2011 and 2012 respectively toreach $375 billion by the latter year. There are several risks to this view, including the possibility that the recovery in the high-income countries could falter, or follow a profile of below-trend growth for several years. Fiscal
retrenchment underway in Europe and elsewhere also augers poorly for more vibrant labor market conditions andwork opportunities in key migrant host countries. Finally, volatile currency and commodity prices, such as continued decline of the U.S. dollar against currencies of remittance sending and receiving countries could carry adverse
effects on flows.

56

Global Economic Prospects January 2011: Annex
Other key developments during 2010 include
acceleration of food price inflation in several
low and middle income countries where
consumers often spend more than half of theirincome on food. Food prices in China (world’s
largest producer and consumer of many
commodities) increased 7.5 percent between
August 2009 and August 2010 (by contrast, nonfood price inflation increased by a meager 0.5
percent). In response, the government lifted
quantitative restrictions on several commodities
and released publically-held reserves while it isaccelerating efforts to increase domestic
production by expanding the use of
biotechnology in maize and rice with the
expectation that it will significantly increase
crop yields. Food price inflation has been a key
concern in other countries as well. During the 12-month period ending in August 2010 (justbefore world grain prices began spiking), foodprice inflation in India, Indonesia, andBangladesh run at an annual rate of 10.4, 13.2,
and 9.6 percent, respectively, as opposed to nonfood price inflation of 3.7, -0.7, and 3.4 percent.

Prospects for global commodity
markets
The $U.S. price of commodities continued torebound in 2010 from the post-financial crisis
lows, with price changes varying from a
relatively small increase in energy to larger gains
in metals and agriculture (Figure S4.1). Oilprices have been stable on opposing forces ofsupply cuts and strong demand versus surplus
capacity and high stocks. Base metals prices
have risen 43 percent since December 2009
supported by relatively strong demand, with
continued strong (yet easing) demand in
emerging markets that was partly buttressed byrecovering demand in developed countries.
Although the downturn in industrial production
during the second half of 2010 caused demand
momentum to slow, dollar denominatedcommodity prices were given a boost in the
fourth quarter by strengthening demand in China
and expectations of tightening supplies in themedium term. Agriculture prices were up 17
percent in 2010, with some commodities risingmuch higher on extreme weather events. For
example, severe drought in Russia andsurrounding countries led to a sharp rise in wheat
prices. Corn and soybeans prices followed, inpart due to expected competition for acreage.
Heavy rains in Asia affected several tropicalcommodities, as did drought concerns in SouthAmerica. Interestingly, Africa faced the least
weather-related problems during the past year.

On exchange rates, the $U.S. appreciated almost
10 percent against the euro (from 1.46 $US/euroin December 2009 to 1.32 $US/euro in
December 2010) amid considerable volatility.
However, it appreciated much less against othermajor currencies and against the broader groupof trading partners. Lastly, there have been
concerns that the US$600 billion quantitativeeasing announced by the US in November may
induce higher commodity price volatility as
some of the “new money” may find its way tocommodity futures exchanges through hedge andinvestment fund activity (it may also increase thephysical demand for commodities). As of mid2010, $320 billion were invested in commodities(more than half in energy), representing about 1
percent of the assets of global pension andsovereign wealth funds.

Figure S4.1 Commodity prices rebound
USD prices, index Jan 2000=100
500

400

EnergyAgriculture

Metals300

200

Moving forward, energy prices are expected tostrengthen in 2011, despite slower demand
growth and large surplus capacity as OPEC now
prefers a wider price range of $70-90/bbl. Base
metals prices, on the other hand, are expected torise by 15 percent on continuing strong demand

1000
Jan-00 Apr-01

Jul-02Oct-03 Jan-05 Apr-06

Jul-07

Oct-08 Jan-10

Source: World Bank

57

Global Economic Prospects January 2011: Annex
already substantially above production costs. As
a result, there are large incentives for producers
to step up supply, while at the same time, highprices are leading to substitution with othermaterials, notably from copper to aluminum — amarket currently in surplus.

by China, falling stocks, and supply constraints.
Agricultural commodities are expected to decline
8 percent (they increased 17 percent from 2009
to 2010), assuming a return to normal crops andrebuilding of stocks. Large declines are expectedin beverages (11 percent) while grain prices will
decline 5 percent.

Crude Oil
There are long-term upside risks for somecommodities, especially those in the extractive
industries. Because of strong developing country
growth, demand for some commodities may beentering into a phase during which commodity
prices will continue to rise (or, at least, remain
elevated) as supply growth struggles to meetdemand. As discussed in World Bank (2008),
China is clearly in an extremely metals-intensive
phase of its development, and has become theworld’s largest consumer of most metals andminerals. Compared with other developing
countries at similar income levels, the metals
intensity of China’s GDP is well above average.
China’s copper and aluminum intensity was 1.8
and 4.1 kgs per $1,000 of real GDP for 2007-09,
compared with world averages of 0.4 and 0.7,
respectively. If China continues to follow thepattern experienced during the past decade, it
may put strong upward pressure on metals andmineral prices—particularly those in which
China is a net importer, and/or ceases to be a net
exporter. More importantly, such pressure may
be intensified if other developing countries, say,India, follow suit.

Despite an uptick toward the end of the year,
world oil prices were relatively stable during
2010 compared with the extreme volatility of
2008-09. Prices, which averaged $U.S. 79.04/bbl
in 2010 (up from $US 61.76/bbl in 2009), were
supported by OPEC supply cutbacks andrecovery in global demand which grew by an
estimated 2.9 percent or 2.3 mb/d in 2010
following two years of declines (Figure S4.2).
Developing Asia accounted for about half of thegrowth, similar to the gain in 2009, and China
accounted for much of that, up 10.5 percent or
0.9 mb/d. However, quarterly growth rates fellduring the course of the year. The growthincrease during 2009 was exceptional because of
one-off increases in naphtha demand due to theaddition of new petrochemical capacity—
naphtha is a key crude oil byproduct. OECD oil
demand posted a 1.1 percent increase or 0.5 mb/
d, after four years of decline, with much of thegrowth occurring in the U.S. By 2010:Q4, world
oil demand had settled into near-trend growth ofaround 2.0 percent. In the medium term, world

Such up-side risk has been described in thecontext of a super-cycle, i.e., a period during
which commodity prices can stay elevated for along time (perhaps as much as two decades) due
to strong import demand as one or more
economies go through a major industrial
transformation phase. Super-cycles of this nature
have taken place in the past rather infrequently(e.g., industrial revolution in the UK and early
1900s in the US). Several authors have argued
that some metals (especially copper and iron ore)
may be going through such a super-cycle period
because Chinese demand.
While Chinesedemand has been very strong and metals prices
are expected to remain firm, they are notexpected to continue rising because they are

Figure S4.2 Growth in world oil demand recovers,
1995-2010
Increase in oil demand, millions of barrels per day
4.0
3.0
2.0
1.0
0.0
-1.0
Other

Oth Asia

China

FSU

OECD

-2.0
-3.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: International Energy Agency.

58

Global Economic Prospects January 2011: Annex
Figure S4.3 Stable oil prices and high OECD stocks

Figure S4.4 China overtakes OECD in metal consumption

mil bbl$/bbl

Metal demand, thousand of tons

2,800

160

40,000140

WB Price

2,750

Stocks35,0002,700

120

30,0002,650

100

25,000

2,600
80
60

2,550

20,0002,500

15,00040

2,450

10,000

20

2,400

5,000

0

2,350

0

Jan-96Oct-97

Jul-99Apr-01

Jan-03Oct-04

Jul-06

Apr-08Jan-10

OECD

1990

1992

1994

China

1996

1998

Rest of world

2000

2002

2004

2006

2008

Source: World Bank and IEA.

Source: World Bureau of Metal Statistics.

oil demand is expected to experience modest
growth, owing to efficiency improvements intransport and ongoing efforts by governments
and industry to reduce carbon emissions,particularly in high-income countries.

Over the medium term, oil prices are expected tobe more volatile than during the past year, but on
average are expected to remain in the $70-80
range as OPEC continues to restrict supply. It isalso expected that OPEC will prevent prices
from going much above that range due toconcerns that new technologies and policies may
curb oil use. Growth in global oil demand is
expected to remain moderate at 1.5 percent in thenear term, with most of the growth in developing
countries. Non-OPEC oil supplies are projected
to continue rising modestly, with production
increases from Brazil, Canada, Colombia, the
FSU, and other areas. Globally there are noresource constraints, and the World Bank’s longterm forecast of $80/bbl in real terms iscommensurate with the higher end cost ofdeveloping additional oil capacity, notably fromoil sands in Canada.

Despite the recovery of oil demand—albeit offof low levels from recession—the market
remained mired in surplus production andrefining capacity. OECD oil inventories reachedrecord highs in both crude oil and products(Figure S4.3). There were also large volumes ofcrude oil and products in floating storage, though
the crude portion of this was greatly reduced in
the second half of the year. Furthermore, because
OPEC continued to restrain output to keep oil
prices within a $70-90/bbl range, its surplus
capacity remains at 6 mb/d, with 5 mb/d in theGulf, and two-thirds of total spare capacity in
Saudi Arabia. Such levels of spare capacity are
similar to those observed during the early 2000s
when the price of crude oil was ranging between$20 and $30/bbl.

MetalsChina has been the chief driver of metal demand
over the past decade (Figure S4.4). Between
2000 and 2009 Chinese consumption of the mainbase metals (aluminum, copper, lead, nickel, tin
and zinc) rose by 17 percent per annum — trends
that continued during the recovery. Chinese
apparent demand surged 20 percent in 2009 due
to restocking, and rose a further 10 percent in thefirst 10 months of 2010. Currently, China
accounts for 41 percent of global refined metal
consumption, overtaking the OECD by a margin

Non-OPEC supplies posted a second year ofstrong gains, up 0.9 and 1.1 mb/d in 2009 and2010, respectively, with the largest gains comingin the U.S., Russia, Brazil, Kazakhstan,
Colombia, China, Azerbaijan, Oman andCanada, and from biofuels. Finally, OPEC
natural gas liquids production rose 0.5 mb/d in
2010, leaving little growth in the demand for
OPEC crude oil.

59

Global Economic Prospects January 2011: Annex
Figure S4.5 China becomes the world’s largest steel
producer

Figure S4.6 Copper prices reach pre-crisis level

million tons$/ton
10,00060000 tons
1,200

Price

9,000
1,000

8,000

50
OECD

7,000

40

800

6,000
600

5,000

30

4,000

Other
20

400

3,000
China

Stocks

2,000

200

10

1,000
0

0

Jan-90 Jun-92 Nov-94 Apr-97 Sep-99 Feb-02 Jul-04 Jan-07 Jun-09

Jan-970
Jan-99

Jan-01

Jan-03Jan-05Jan-07

Jan-09Source: World Steel Association.

Source: Datastreamof 4 million tons. In contrast, OECD metals
demand plunged 21 percent in 2009, with morethan half of the volumes losses in Europe.
OECD demand rebounded by 17 percent in thefirst 10 months of 2010 as it began restocking,with Europe accounting for nearly two thirds ofthe increase.

increases to date, but also due to substantial idle
capacity in some sectors. Further large priceincreases would require idle capacity being
reabsorbed over the longer-term, but withdemand growth slowing towards trend, pressures
for real price increases should be moderate. Overthe longer term, declining ore grades,
environmental and land rehabilitation, as well aswater, energy and labor pressures may result in
upward pressure on prices. Such pressure on
prices, however, may well intensify if metal
demand by China grows at the rates that it has
been expanding in the recent past (see earlier
discussion on super-cycles).

A similar pattern has occurred with steel
production (Figure S4.5). China’s steel output
rose sharply in the second half of 2009 and firsthalf of 2010, but fell in the third quarter due toslowing demand and reduced profitability
because of oversupply. OECD steel output alsorose sharply before falling in the third quarter, inline with the slowdown in industrial production.
Metal production has increased commensurately
with demand, but supplies for a few metals havebecome tight, notably for copper and tin, andstocks have been declining in 2010 (FigureS4.6). Copper mine supply growth was flat in2010 because of declining ore grades, anddevelopment of large projects on the horizon islimited. Tin prices reached record nominal highs
in 2010 on strong demand, falling stocks, andlower production in Indonesia because of heavy
rains. All other base metals remain in surplus
and stocks are relatively high.

Figure S4.7 Grain prices rebound$US/ton
1000
800
600

Wheat

Rice

Maize

400
200
0
Jan-04 Nov-04 Sep-05

Over the next two years, prices are not expected
to rise substantially, partly given the large priceSource: World Bank.

60

Jul-06

May-07 Mar-08

Jan-09 Nov-09 Sep-10

Global Economic Prospects January 2011: Annex

Agriculture

Table S4.1 Key nominal commodity price indices(actual and forecast, 2000=100), 2005-12

Following a relatively stable first half,
agricultural prices rose sharply during the second
half of 2010 registering a 17 percent nominal
increase over 2009, 2 percent above the 2008
average. However, contrary to the 2008 pricespike which was accounted for by foodcommodities, the recent price increases weremore broadly distributed and included most
tropical commodities and raw materials which
did not increase much during 2008. For example,
between 2008 and 2010, beverages (led byarabica coffee) and raw materials (led by cotton)
increased by 40 and 45 percent, respectively,
while food prices declined 9 percent.

EnergyNon-Energy
Agriculture
Food
Beverages
Raw Materials
Metals & Minerals
Fertilizers------------------------------------ Actual -------------------------------- ---- Projection ----2005
2006
2007
2008
2009
2010
2011 2012
293
277
188
221
245
342
215
271
270
258
149
192
225
272
213
267
213
205
133
150
180
229
198
228
134
147
185
247
205
221
208
204
225
210
137
145
170
210
220
250
131
160
175
196
169
232
219
206
386
367
179
280
314
326
236
348
163
169
240
567
293
278
255
249

Source: World Bank

whether a 2007/08-type price spike is unfolding.
However, the situation today is different fromthree years ago for a number of reasons. First,
global supplies of the three key grains (wheat,maize, rice) are 18 percent higher now than in
2007/08 (Figure S4.8). Second, global
production is expected to be 1.92 billion tons in
2010/11, 10 percent higher compared to the
2004/05-2006/07 average of 1.74 billion tons.
Third, input prices, notably energy and fertilizer,
have been stable during 2010 and no major
increases are expected in the medium term.
Fourth, policy measures in the wheat market
have had less of an impact on prices than in 2008
(policy reactions were a key driver behind theearlier price spike). As compared with rice
market, the main driver in 2008, wheat andmaize markets are less concentrated in terms of
production and trade, subject to fewer policy
distortions, more broadly traded, and not as
politically sensitive. Lastly, price increases in

Most agricultural commodity price sub-indicesregistered large gains during the second half of2010. The increases were more pronounced
among grains, primarily led by wheat, following
weather problems that surfaced earlier in thesummer (Figure S4.7). Policy actions, including
Russia’s wheat embargo and later Ukraine’s
export quotas, and the USDA latest updates
indicating a tighter global market for coarse
grains due to yield declines further boosted foodprices. As a result, maize and wheat prices
increased by 94 and 63 percent from June to
December 2010 while the overall grain index
gained 53 percent compared to the 29 percent
increase in the non-energy index.
Not unexpectedly, the price increases triggered
food security concerns and discussions of

Figure S4.8 Global grain production is expected to be healthy but stocks are set to decline
million tons

million tons

2,000

450

1,900

400

1,800

350

1,700

300

1,600

250

1,500

200
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11E

2004/05

Source: US Department of Agriculture (December 10, 2010 update)61

2005/06

2006/07

2007/08

2008/09

2009/10 2010/11E

Global Economic Prospects January 2011: Annex
the price quoted in $U.S. Second, trade policies,
including non-trade barriers and taxes or
subsidies (very common in countries where key
food commodities have been designated as“sensitive” or “strategic”) often introduce large
gaps between border and domestic prices. Third,
poor infrastructure (prevalent in Sub-SaharanAfrica), large distances from ports (especially inlandlocked countries), and various customsrelated obstacles, may further amplify the gap
between international and domestic prices. For
these reasons, domestic commodity markets areoften disconnected from world markets, or, atbest, world price signals are transmitted todomestic markets with considerable lags.
Finally, the relative price of food commodities
will evolve differently in developing countries
than in the United States because the prices ofother goods and services in these countries
involve at different rates. As a result, the real
price of internationally-traded food commodities
in developing countries will rise and fall at adifferent rate than the real US dollar price.

domestic terms (after accounting for exchange
rate fluctuations and inflation) increased muchless than their $US counterparts (see next
section).
Agricultural prices are expected to decline by 8
percent in 2011, followed by a further 3.7
percent decline in 2012 (Table S4.1). Over the
longer term, trends in agricultural prices will be
shaped by two key (and opposing) forces:
Upward push by energy prices (agriculture is anenergy intensive industry) and downward
pressure due to gains in total factor productivity(TFP)—which for agriculture is much higher
than manufacture. Thus, if the flatness of energy
prices persists, TFP will be the dominant force.
Yet, there are several risks. First, weather-related
problems can always induce price variability as
they did during July-August 2010. Second, trade-related policy actions are always a concern,
although the lessons from the rice price spike
episode of 2008 could (and should) serve as areminder on their adverse impact on world prices
and trade. Third, if biofuel mandates change due
to new blending requirements, grain and oilseeddemand patterns will follow suit withproportional impact on most other crops;
however, that scenario is less likely tomaterialize in the short term as it would require
new technologies for car engines andinfrastructure of delivering ethanol over long
distances. Fourth, while energy prices—a key
input to most agricultural commodities andclosely correlated with fertilizer prices—havebeen relatively stable so far and are expected tostay relatively flat over the medium term, anenergy price spike would likely spread quickly
to agricultural markets for two reasons: thehigher cost of energy and the fact that biofuels
may set a floor for key agricultural commodities.

Table S4.2 breaks out the influence of each ofthese factors in explaining the difference
between changes in nominal $U.S. prices ofinternationally traded commodities and their real
local currency price movements between January2005 (prior to the food rice boom and August2010). It decomposes world price movements
into the following components: inflation,exchange rate, and the domestic weight
Table S4.2
At-the-border price decomposition:
January 2005 and August 2010

Price movements in domestic terms

Mediancountry fromeach income
level:

Change inborder price(real,
domestic
CPI)

High
MiddleDeveloping
Low

[A]
20%
20%
14%
21%

-------- Contribution of -------Inflation

Ex. rate

[B]
-13%
-10%
-20%
-28%

[C]
-13%
-15%
4%
12%

-------- Change in world price based on: -------World
DomesticWorld
weights (real,
weights
weights
US
CPI)(nominal)(nominal)
[D]
45%
45%
31%
37%

[E]
57%
57%
57%
57%

[F]
67%
67%
67%
67%

Source: World Bank calculations based on various country data sources.
Note: Column A is the sum of columns B, C, and D. Column E denotes the change of world food price index inreal terms (deflated by the US CPI) while column F denotes the change of world food price index in nominal
terms.

International commodity prices in $U.S. do notalways move in tandem with prices paid byconsumers or received by producers fornumerous reasons. First, exchange rate
fluctuations imply that the country is likely toface a different price at the border compared to62

Global Economic Prospects January 2011: Annex
Figure S4.9 Real at-the border prices deflated withoverall and non-food CPI

composition of food imports. During this period
the World Bank’s global food price index
increased by 67 percent in nominal terms and 57
percent in real terms (when deflated by the U.S.
CPI).

Prices, Jan 2005=100
180

Overall CPI
Non-food CPI

160

The increase of real food prices in domestic
currency terms relative to non-food prices wasmuch smaller. For example, during this period,
the median low income country’s food priceindex (Bangladesh in this case) increased by 37
percent. Considering that its exchange rate
appreciated against the $U.S. by 12 percent
while non-food price inflation stood at 28
percent, domestic food prices were only 21
percent higher in real terms. The corresponding
at-the-border real food price increase for the
median developing country was 14 percent,while that of middle and high income countries
was 20 percent.

140

120

100

80
Jan-04 Oct-04

Jul-05

Apr-06 Jan-07 Oct-07

Jul-08Apr-09 Jan-10

Source: World Bank and ILO.

(year averages). However, when adjusted by thenon-food CPI, the index increased by 25 percent,almost twice as much.

Table S4.2 uses non-food prices as a deflator andreports income-group data as the medianincrease. Alternatively, these calculations can bedone using the price of all goods and services(including food) and aggregated using GDP
weights (see discussion in the main text). Thishas the advantage of allowing more countries tobe included in the calculation (120 countries
with overall CPI, versus only 41 for which nonfood CPI can be calculated). When calculated inthis way, the increase in real-at-the borderinternationally traded food commodity prices
was 6 percent between January 2005 and August2010 (see main text). But, deflating food prices
with the overall CPI where food has a large
weight in the overall CPI (often ranging between
50 and 60 percent) may understate the extent towhich food prices have risen relative to othergoods and services.

To further analyze the degree to which domestic
commodity markets respond to world pricechanges, Table S4.3 compares world $U.S. pricechanges to changes in prices paid by consumers(expressed in local currencies) for three foodcommodities—wheat, maize, and rice—inselected developing countries. Specifically, threecomparisons are made: (i) the second half of2010 is compared to the first half (first column),
an attempt to capture whether the recent pricespike shows up in domestic markets; (ii) 2010 iscompared to 2009 (second column), to examine
whether the declines in maize and wheat prices
had a discernable impact on domestic prices; and(iii) 2010 is compared to 2006, effectively
capturing the entire food commodity boom
cycle. The latter figures are reported in bothnominal (third column) and real (domestic CPIdeflated) terms (fourth column).

Finally, for the 41 developing countries forwhich both overall and non-food CPI data exist ,we report at-the-border food price index adjusted
by both measures of inflation (Figure S4.9).
When international food prices are adjusted by
the overall CPI (same measure reported in in
main text, applied to fewer countries), thedeveloping-country real food price index
increased by 14 percent between 2005 and 2010

The figures for the short and medium term give avery mixed picture. Between the first and second
half of 2010, $U.S. wheat and maize prices
increased by 32 and 22 percent, respectively
while rice prices registered a 6 percent decline.
However, domestic retail prices of maize andwheat declined in most cases while they
increased in the case of rice. A mixed picture
emerges when comparing 2010 with 2009 as

63

Global Economic Prospects January 2011: Annex
in the short term, over the longer term there issome degree of convergence.

well, essentially indicating that world price are
may not be transmitted to domestic markets inthe short run.

Yet, a less clear picture emerges when foodprices are deflated by the domestic non-food
CPI. Countries with high non-food priceinflation did not experience large increases inreal food prices (e.g., Ethiopia). On the contrary,in countries with small non-food inflationarypressures food prices increased considerably(e.g., Pakistan).

However, a pattern emerges when domestic and$U.S. prices are compared over a longer period.
For example, from 2006 to 2010 prices for thethree commodities increased, on average, by 40
percent in $U.S. nominal terms. During thisperiod, the average nominal price increase forthese three commodities in Sub-Saharan Africa(21 countries for a total of 35 cases, not allreported here) rose by 46 percent. This implies
that while prices may follow independent paths

Table S4.3 World ($US) and domestic (local currency) price movements of key food commodities in selected countries

WHEAT
World price (US$, HRW US Gulf
Ports)
Burundi (retail, Bujumbura)
Pakistan (retail, Karachi)
Cameroon (retail, Yaundé)
Ethiopia (retail, Addis Ababa)
Afghanistan (retail, Kabul)
South Africa (wholesale, Randfontein)
MAIZE
World price (US$, fob US Gulf
ports)
Burundi (retail, Bujumbura)
Chad (retail, N’Djamena)
Tanzania (wholesale, Dar es Salaam)Philippines (retail, national average)
Malawi (retail, Lilongwe)
Ethiopia (wholesale, Addis Ababa)
RICEWorld price (US$, 5% Thai,
Bangkok)Indonesia (retail, national average)
Burundi (retail, Bujumbura)
Tanzania (wholesale, Dar es Salaam)
Bangladesh (retail, Dhaka)
Chad (retail, imported N’Djamena)
Pakistan (retail, irri type, Karachi)

Jan-Jun 2010 to
Jul-Nov 2010
percent change,
nominal2009 to 2010
percent change,
nominalNominal

Real

32%

-6%

12%

4%

0%
-1%
-7%
-4%
30%
23%

19%
1%
-3%
-5%
-20%
-3%

144%
110%
6%
89%
32%
82%

na
43%
3%
-12%
na
20%

2006 to 2010 percent
change

22%

-13%

52%

46%

-11%
6%
-32%
-16%
-16%
-10%

9%
-9%
-18%
-2%
-30%
-22%

55%
-5%
33%
36%
na
78%

na
-10%
na
21%
na
-14%

-6%

5%

57%

41%

10%
4%
-22%
18%
0%
4%

16%
-4%
-9%
30%
-3%
6%

na
58%
38%
na
16%
116%

na
na
na
na
10%
47%

Source: World Bank (world prices); country sources (wholesale or retail prices); ILO (the non-food CPI).
Notes: Real world prices have been deflated by the MUV. Real domestic prices have been deflated by the domestic non-food
CPI. na implies data is not available.

64

Global Economic Prospects January 2011: Annex
sharply in the recent period, in general crossrates with other currencies were more stable.

Recent exchange rate developments
The financial and real-side gyrations of the past
few years have also been accompanied by large
swings in exchange rates. Counter-intuitively theonset of a major financial crisis in the UnitedStates initially prompted a sharp appreciation of
the U.S. dollar, which was only subsequently
followed by a depreciation. As concerns about
the sustainability of fiscal situations in Europe
increased, the euro depreciated viz-a-viz thedollar only to regain value as markets calmed
during the summer of 2010 and then lose value
in the fall when concerns intensified once again.

Of course, very low interest rates in high-income
countries, and ensuing capital inflows todeveloping countries also help explain both the
weakness of the dollar and the euro and thestrength of developing currencies. Overall, thedollar depreciated 3.5 percent in real-effective
terms during 2010 and the euro fell about 3
percent on the same basis, with most developing
countries appreciating with respect to these tworeserve currencies. Overall, the currencies ofclose to 60 percent of developing countries
appreciated in real-effective terms since January2010 (Figure S5.3), and almost 20 percent ofthem by 5 or more percent. In contrast, mosthigh-income countries depreciated in realeffective terms – albeit by relatively modest
amounts.

In part, these fluctuations reflected an increase in
the volatility of the U.S. dollar against othercurrencies. Since 2007, the volatility of thedollar and the euro, as measured by the 12 –month standard deviation in their fluctuation of
their real-effective exchange rate, has increased
sharply to levels in the case of the United States
not seen over the past 20 years (Figure S5.1).

Generally, the appreciation of developing
countries currencies is a normal and welcome
reflection of strong productivity growth andgood growth prospects — and for most countries
this appears to have been the major factor in theappreciations observed during 2010. Other
factors that contributed were: strong capitalIndeed, cross-rates between the euro and theCanadian dollar or the euro and the British
pound (until recently) were much more stable
than the U.S. dollar euro exchange rate (FigureS5.2). Similarly, while the dollar exchange rateof many developing countries rose and fell

Figure S5.2 Cross exchange rates have been less volatile

Figure S5.1 Increased exchange rate volatility
Nominal Exchange rates indexes, January 2000=1

Standard deviation of real-effective exchange rate during the preceding 12 months
7

1.7

United States

6

1.5

5

Euro/Pound

1.3
Euro/CAD

4

1.1
3

0.9
2

0.7

1

Euro/$

Euro (DM before 2000)

0
1992M01

1995M01

1998M01

2001M01

2004M01

2007M01

0.5
1990M01

2010M01

Source: World Bank, IMF IFS.

1994M01

1998M01

Source: World Bank, IMF IFS.

65

2002M01

2006M01

2010M01

Global Economic Prospects January 2011: Annex
Figure S5.4 Countries having experienced a large appreciation

Figure S5.3 Most developing countries have appreciated# of countries
30

Kiribati
Mongolia
Venezuela
Costa Rica
Eritrea
JamaicaNamibia
TurkeyColombia
South Africa
LesothoMoldovia
BrazilThailandMadagascar
Armenia
Botswana
Liberia
Pakistan
Swaziland
Laos
Nigeria

Developing
25

High-income

20
15
10
5
0
-5

-3

-1

1

3

5

8

11

13

15

18

More

(% appreciation / depreciation)

Source: World Bank, IMF IFS.

inflows, rising commodity prices, and relatively
high inflation.

0

Among those having experienced the sharp est
appreciations (Figure S5.4), capital flows playeda major role in Turkey, Colombia, South Africa(and indirectly Lesotho and Swaziland), Brazil,
and Thailand. The (partial) recovery incommodity prices were an important factor inmany Latin American and African economies,
while rapid inflation was at root in several
others.

1020% real-effective appreciation
Oct and Jan. 2010

Source: World Bank. IMF IFS.

66

30

Global Economic Prospects January 2011: Regional Annex

Global Economic Prospects January 2011:
Navigating strong currents
Regional Annex

East Asia and the Pacificunderpinned largely by domestic demand,
especially private consumption (accounting for3.2 points of growth) and fixed investment (2.5
points), as stimulus measures continued to carry
positive effects. Reflecting strong internal
demand, imports for the group expanded at a 30
percent pace, and though exports advanced 25
percent, net trade offered a drag to GDP; ‘gross’
exports however, provided support for
production, jobs and incomes. Robust regional
import demand played a role in spurring
recovery in the high-income countries, as well as
helping to reduce overall global imbalances (seemain text).

Recent developments
The East Asia and Pacific region led the global
recovery from the deepest recession since the1930s over 2009 and 2010. The recovery was led
by robust 10 percent GDP gains in China, where
fiscal and monetary support measurescontributed almost a percentage point to growth(Figure R1.1 and Table R1.1).1 For the ASEAN
countries and smaller island economies, growth
picked up sharply from 1.5 percent in 2009 to
6.8 percent in 2010, partly reflecting strong
stimulus-related import demand from China.
Overall, GDP of the developing East Asia andPacific region increased 9.3 percent in 2010 upfrom a resilient 7.4 percent pace in 2009.2

Setting the stage. Available GDP data and highfrequency indicators suggest that growth in theregion hit a soft patch in the second half of 2010
(Figure R1.2). But outturns across countries vary
substantially, reflecting different fiscal andmonetary stances, varying exposures to external
trade and financial markets, and greater or lesser
trade linkage with China. In general, growth
was strong through the first quarter, and began
the adjustment toward more sustainable rates in

Sources of growth. For China, domestic demand
contributed some 7.8 percentage points tooverall growth of 10 percent in 2010, with net
trade contributing the remainder. With realimports expanding at a 35 percent pace, China’s
demand served as a powerful impetus for exports
from the East Asia region and beyond. GDP
growth in the rest of the developing region was

Figure R1.2 GDP growth easing quickly in second-half2010

Figure R1.1 Developing East Asia grew robustly in 2010
growth of real GDP
12
2008

10

2009

real GDP, growth q/q saar; China, year-on-year18
Q1‐2010
15

2010

8

Q2‐2010

Q3‐2010

12

6

9

4

6

2

3
0

0

‐3

‐2
East Asia &the PacificGeographic
RegionDeveloping
East Asia &the Pacific

China

‐6

East Asia &Newly
the Pacific Industrialized
excluding
Economies
China

Taiwan,China

Source: World Bank

Thailand Philippines

Source: Haver Analytics

67

China

Korea

Malaysia Indonesia

Global Economic Prospects January 2011: Regional Annex

some 34 percent above pre-crisis peak levels versus 3.5 percent-above for the rest of theregion in October. Differences in remaining
spare capacity are less stark. World Bank
estimates suggest that China’s spare
manufacturing capacity is effectively at trend
rates at present, as it is broadly for the remainderof the region. But the structure of economies indeveloping East Asia differs widely with respect
to external accounts, with many focused on
manufacturing-, others commodities, and stillother economies upon remittances and service
incomes, notably tourism receipts.

the second and third quarters.
Many countries in the region saw a surge ininternational capital inflows during the second
half of 2010, evidenced in rising equity values
and appreciating currencies, with the potential—
as increased liquidity moved through local
economies—to trigger higher inflation, or to sow
the seeds of asset bubbles.
The industrial production cycle in East Asia wasmore pronounced than in other developing
regions in the year, as the region was particularly
hard hit by the global collapse in demand forcapital-, IT- and consumer durables (e.g. autos).
However when global recovery set in, theproduction of these goods also registeredsharpest rebounds, and regional output quickly
regained previous peaks (Figure R1.3).

Developments across larger countries. China’s
growth moderated over the course of 2010 withdomestic demand (particularly consumption andinvestment) cooling gradually as stimulus faded
and the monetary stance tightened. With
domestic demand easing, import growth slowed,
while stronger export performance helped tomaintain growth at high levels and contributed to
an increase in the trade surplus. While growth

The variation in the speed of post-crisis recovery
within the region reflects underlying trend
growth rates, and China’s industrial output stood
Table R1.1 East Asia and Pacific forecast summary(annual percent change unless indicated otherwise)
95-06
b

a

2007

2008

2009

Est.
2010

Forecast
2011
2012

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

7.4
6.4
7.4
5.7
7.9
0.7
12.9
10.4
0.7
2.2
5.4
-2.1

12.3
11.4
12.2
8.9
10.7
12.4
15.4
11.3
2.8
9.1
5.0
0.4

8.5
7.6
8.4
7.4
8.6
9.1
7.1
4.6
1.6
8.1
7.8
-0.5

7.4
6.5
7.4
7.2
6.7
19.1
-10.5
-2.1
-4.2
5.8
3.5
-3.1

9.3
8.5
9.3
8.9
8.0
10.1
31.8
33.4
1.2
5.2
4.9
-2.9

8.0
7.2
8.0
7.4
8.6
9.9
11.7
11.2
1.0
4.8
4.2
-2.2

7.8
7.0
7.9
7.3
7.5
8.2
13.7
12.1
1.6
5.2
4.6
-1.6

Memo items: GDP
East Asia excluding China
China
Indonesia
Thailand

3.5
9.2
2.7
2.7

6.3
14.2
6.3
4.9

4.7
9.6
6.0
2.5

1.5
9.1
4.5
-2.3

6.8
10.0
5.9
7.5

5.2
8.7
6.2
3.2

5.8
8.4
6.5
4.2

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. Estimate.
f. Forecast.

Source: World Bank

68

Global Economic Prospects January 2011: Regional Annex

second and third quarters, as the political turmoilof April and May adversely affected tourism
arrivals and services exports. NonethelessThailand is likely to have registered 7.5 percent
growth in 2010 on the strength of its initial
rebound. And in Malaysia the recovery wassmoother, with government- household- andinvestment spending driving the rebound, butwith net trade continuing to disappoint. In
response to rising demand pressures, the central
bank raised policy interest rates 75 basis points
between March and July.

Figure R1.3 Production adjusting down post-recovery

industrial production, ch% 3m/3m saar
80
60
40
20
0
-20
-40
-60

Malaysia
China

Indonesia
Philippines

External accounts. Goods export volumes for
East Asia recovered strongly from the depths ofthe 2009 recession to double digit growth during
the first months of 2010. China’s export volumes
peaked at 80 percent growth in February 2010
(3m/3m saar). For the region excluding China,
peaks were closer to 50 percent (saar) in late2009 with stronger performance in Indonesia andMalaysia (80 percent) than in the Philippines andThailand (40 to 50 percent), driven in part byvibrant import demand in China. China’s importshare in the exports of the rest of developing
East Asia advanced from 16.2 percent at the startof 2008 to 18 percent by fall 2010.4-80
2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07

Source: World Bank

prospects are bright, further normalization of themacro stance is likely required to guard against
asset price increases, strained local government
finances and a buildup of non-performing loans
in the banking system. Authorities have started
to raise interest rates and are making
administrative changes designed to tighten
liquidity. China experienced significant upward
pressure on equity prices and the exchange ratein the fall months of 2010, the latter of which
was mitigated through market intervention,
leading to a further large build-up of reserves.

As global inventories of capital- and durable
goods were replenished and business conditions
began to “normalize”—based in part on
expectations for only moderate growth in highincome country demand—the momentum of
East Asian exports began to wane by spring2010. Downward adjustment in export growthfrom exceptionally high peaks continued more
rapidly into autumn of the year, such that by
October, China’s exports were falling at a 15.7
percent annualized pace (saar), with exports forthe region excluding China declining by 11.2
percent.

Among ASEAN economies,3 Indonesia wasleast affected by the global financial crisis andrecession, in part given earlier reforms to its
financial system as well as an export mix(commodities) less affected than manufacturesby the falloff in OECD demand. By the first halfof 2010 growth patterns had largely normalizedwith GDP advancing a strong 6.2 percent in thesecond quarter (year-on-year), largely driven byhousehold consumption, which benefited from
low inflation and better consumer confidence;and by private investment associated withimproved growth prospects. In Thailand, despite
an escalation of political crisis and the onset ofglobal recession, the manufacturing sector
helped the economy consolidate recovery.
However, following robust 15 percent growth in
the first quarter (saar), GDP declined in both theImports traced a different course over 20092010. After recovering in dramatic fashion
beginning in mid-2009 (once more reflecting
Chinese stimulus programs), East Asianmerchandise import growth slowed to near zeroby October, reflecting a global overshooting ofindustrial production (see main text). Indications
are that the global industrial and trade cycle is69

Global Economic Prospects January 2011: Regional Annex

tensions) permitted strong bond issuance; IPO
offerings from China continued on an impressive
scale and foreign direct investment (FDI)
increased by 47 percent in the year to $150
billion (Table R1.2, and Figure R1.6). The surge
is being driven by improved East Asian growthprospects, strong investor sentiment and large
differentials between East Asia and the highincome economies in both growth and interest
rates. FDI flows have been dominated by China,accounting for $110 billion of the region’s $150
billion inflow in the year (see Financial Markets
appendix for more information).

picking up momentum in the fourth quarter of2010, and East Asian import growth is expected
to pick up momentum in-line with still robust
demand growth in the region (Figure R1.4).
Overall, net exports are likely to be modestly
supportive or neutral for growth in 2010, andrecent increases in trade balances in dollar terms
should ease in coming quarters.
The surge in domestic demand underpinned bypublic sector stimulus served to reduce theregion’s current account surplus by 4 percent ofregional GDP between 2007 and 2010, with thatof China narrowing from 10.6 percent to 5.5
percent (Figure R1.5). While some of thisadjustment is likely cyclical in nature, it also
reflects potential longer-term changes, including
higher savings rates in the United States, whichhave translated into lower import levels, and in
East Asia, policy driven increases in the share ofdomestic demand in GDP.

Figure R1.5 Imbalances narrowed during 2009
recession
current account balances, billions U.S. dollars
400
200
0
‐200

Capital flows and financial market
developments. Net capital flows from private
sources flowing into the developing East Asia
region5 surged by 52 percent during 2010,
carrying the total of portfolio-equity and foreign
direct investment to $187 billion—yet still morethan 10 percent below the previous peak ($212billion) of 2007. Improved international market
conditions (despite European sovereign debt

‐400
‐600
‐800
2005

2006

2007

China

2008

Other East Asia

2009

2010

United States

Source: U.S. Department of Commerce, World Bank

Figure R1.4 East Asia's export volumes decline as bounce-back factors fade; imports recovered earlier, but have flattened to no growth
goods exports volumes, percent change

import volumes, growth, percent change

100

125

80

100

60

75

40

50

20

25

0

0

-20

‐25

-40

‐50

-60
Jan-08‐75
Jul-08

East Asia

Jan-09China

Jul-09Jan-10Jul-10Jan‐08Jul‐08
East Asia

East Asia & the Pacific excluding China

Source: World Bank70

Jan‐09China

Jul‐09Jan‐10Jul‐10

East Asia excluding China

Global Economic Prospects January 2011: Regional Annex

5.5 percent falloff in its real effective exchange
rate (Figure R1.7). In-step with equity markets
through mid-December 2010, currencies lost
about a percentage-point and a half of theappreciation witnessed up to November peaks,
as international investors moved out of local
markets selling local currencies for dollars.
Some countries had intervened heavily to resist
upward exchange rate pressures, accelerating theaccumulation of international currency reserves.
To the extent that these interventions were notfully sterilized, they could contribute to rising
inflation, which like nominal appreciation has
the effect of reducing external competitivenessand inducing real appreciation (see Main text).

In the third quarter of 2010 there was a sharp
acceleration of international capital flows, driven
by the carry trade, in which investors borrowmoney in low-interest countries and invest in
higher yielding economies. Investor’s cash
entered East Asian financial markets directly,
into equity markets or local currency bonds, theissuance of which surged over the last 12
months, or indirectly through mutual funds andother vehicles. Inflows were particularly strong
for Indonesia, Malaysia and Thailand(nevertheless, to the extent that overall foreign
liquidity is what is relevant, the large current
account surpluses in countries like China and thePhilippines are equally relevant). Indonesia’s
local stock market index increased 3-fold fromMarch 2009 to end-November 2010; Thailand’s
bourse was up 150 percent, which dwarfs thestill-impressive 75 percent increase in the MSCIWorld equity index. In the fourth quarter inflows
have eased somewhat, with the escalation ofsovereign fiscal/debt problems in the Euro Area
and a rebound in the dollar.

A large role for service exports and remittancesin East Asia. Tourism is a source of substantial
foreign currency revenue for a number ofcountries in the region, amounting to $92 billion
in 2009 (during recession) from peak receipts of$104 billion in 2008. In that year, tourism
represented 1.4 percent of regional GDP. The
United Nation’s World Tourism Organization
reports that in 2009, global international tourist
arrivals dropped 4.2 percent (the worst year for
the industry within memory).6 But for the firstsix months of 2010 arrivals advanced 7 percent(year-on-year) driven by more robust
performance in developing economies. The
rebound in arrivals occurred across all world
regions, but East Asia and the Pacific, the second

The inward flow of capital placed upward
pressure on regional currencies. Since the start of2010 through recent peaks in early November,the Thai baht jumped 13 percent against thegreenback and 10 percent in real-effective terms;
the Malaysian ringgit 10.8 percent (with adecline of 1.2 percent in real effective terms),
and the Philippines peso 7 percent, with a sharp

Figure R1.6 East Asian private inflows almost set fresh record in 2010 and strong capital inflows lofted local bourses
across the region
Equity market indexes, September 1, 2008 =100.

Net private flows, millions U.S. dollars

180

300

160

250

140

200

120

150

100

100

80

50

60

0
2005

2006

Portfolio equity

2007

2008

Net private debt flows

2009

2010e

40
Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
MSCI World$
China LCU
Hong Kong SAR, China LCU

Foreign direct investment

Source: World Bank, Thomson-Datastream

71

MSCI PAC$
Indonesia LCU
Thailand LCUGlobal Economic Prospects January 2011: Regional Annex

Worker remittances are also critical for a numberof countries in East Asia (Table R1.3, top panel),
where such income flows from the expatriate
labor force can amount to substantial shares ofGDP. Inflows continued during the worst of therecession in 2009, and are estimated to haveincreased 6.4 percent for developing East Asia in
2010. Although China leads the remittances
table in the region, such flows account for only
0.9 percent of the country’s GDP. In contrast,
remittances amount to 11 percent of GDP in the

Figure R1.7 Real effective appreciation extensive forIndonesia and Thailand
REER exchange rates, Index, January 2009 =100.0
130.0

China
ThailandIndonesia
Malaysia

Philippines

120.0

110.0

100.0

Figure R1.8 Remittances and tourism are key for anumber of East Asian economies

90.0

80.0
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Trade balance, tourism receipts and remittance inflows, US$ bn
60

Source: JP Morgan-Chase through Thomson-Datastream

2009

50

most visited region globally, led the upturn witha 14 percent jump in arrivals during the first halfof the year.

40

Estimates for full year 2010 suggest that arrivals
to East Asian destinations grew 7.6 percent to
114 million. This was driven by a pick-up inarrivals to China of near 5 percent, exceptionallyrobust gains in Indonesia (11 percent) reflecting
in part local cross-border movements, a strong
showing for Thailand (10 percent) and thePhilippines (4 percent). Receipts for the region
dropped by 11.4 percent in 2009, but are likely
to have revived over the course of 2010. East
Asia accounts for fully 50 percent of tourism
revenues for the aggregate of developing
countries (Table R1.3, bottom panel).

10

30
20

0
‐10
Malaysia

Thailand

Balance of trade

Indonesia

Tourism receipts

Philippines

Vietnam

Remittances

Source: World Bank, United Nations World Tourism Organization

Philippines, 7 percent in Vietnam and 3.5
percent for Fiji. The World Bank’s Migration
and Remittances Unit sees a pickup from 6
percent gains for all developing countries in2010 to 6.3- and 8.1 percent for 2011 and 2012
respectively to reach $375 billion by the latteryear.8Since 2000, arrivals to East Asian tourism
destinations have advanced within a range of 5to 10 percent per year. Tourism expenditures inhost countries have grown closer to 10 percent
annually. Such revenues are critical for small
Pacific islands, and for destinations such as
Malaysia (8.5 percent of GDP) and Thailand (6.5
percent) where incremental receipts fromtourism bolster current account positions whileserving to support domestic employment anddemand (Figure R1.8).7 The UNWTO anticipatesthat tourism prospects are encouraging for East
Asia, with arrivals advancing 6.5 percent per
year through 2020 (see Trade Annex).

Medium-term outlook
East Asia is well positioned to enjoy further
years of strong- albeit more moderate- growthover the period to 2012. Increasingly, domestic
demand will be the major driver for regional
gains. Due to projected weaker activity among
high-income countries, regional export volumes
are expected to expand at a 12 percent pace in
2011-12 versus the 15 percent rate recorded72

Global Economic Prospects January 2011: Regional Annex

Table R1.2 Net capital flows to East Asia and the Pacific$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+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
69.9
3.1

2004
88.1
3.4

2005
175.3
5.8

2006
298.7
8.3

2007
425.0
9.4

2008
470.1
8.5

2009
358.0
5.8

2010e
359.3
5.1

76.4
83.6
3.7
69.3
56.8
12.5
7.1
-7.2
-1.5
-0.5
-5.2
14.3
-9.8
1.8
-8.5
-3.1
24.1
-6.5
-139.8

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
22.0
-237.1

171.0
174.2
5.8
130.0
104.3
25.7
40.9
-3.2
-0.6
-1.6
-1.0
44.2
9.3
10.1
1.6
-2.3
34.8
-128.6-217.7

192.4
201.7
5.6
161.9
105.7
56.2
30.6
-9.3
-0.4
-8.5
-0.4
39.9
14.8
3.9
12.2
-1.3
25.1
-196.0-295.1

282.2
286.1
6.3
212.2
177.1
35.1
70.0
-3.8
-0.3
0.0
-3.5
73.9
18.5
0.7
18.1
-0.3
55.4
-166.3-541.0

183.2
184.3
3.3
179.3
186.6
-7.3
3.9
-1.1
1.2
0.0
-2.3
5.0
16.2
0.2
18.3
-2.3
-11.2
-220.9-432.4

190.6
186.9
3.0
132.3
102.5
29.9
58.3
3.7
2.2
0.1
1.4
54.5
-0.8
8.4
-8.7
-0.5
55.4
-13.8
-534.8

287.0
283.3
4.0
187.2
150.2
37.0
99.8
3.7
1.8
0.1
1.8
96.1
22.9
16.4
6.5
0.0
73.2
-306.8-339.5

32.3

40.0

50.3

57.4

71.1

85.5

85.7

91.2

2011f
379.1
4.7

2012f
420.5
4.7

300.9
3.8
199.4
164.4
35.0

294.2
3.3
234.2
202.2
32.0

101.5

60.0

98.0

106.0

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

industry-led, capital intensive growth is likely tokeep GDP gains near 8.5 percent over the period,
with net exports contributing smaller shares ofgrowth than in the pre-crisis years, closer to 0.5
to 1 points of growth. China will remain the
focal point of regional activity, with East Asian
exports of materials and semi-finishedmanufactures to China for final processing andexport to high-income destinations likely tointensify (Figure R1.9).

during the boom. Nevertheless, trade willcontinue to grow faster than GDP, as intraregional interconnectivity continues to expand.
Policies which foster increased productivity,
growth of domestic incomes and a wider
provision of services, can help to broaden thebase for consumer spending in many countries,
improving development prospects for the poor.
Regional per-capita GDP growth is expected tostep-up to 7 percent growth in 2011-12 from 6.3
percent during the 2000-2007 pre-crisis interval,
with the investment share of GDP moving higher
to 41.4 percent by 2012 from 35.5 percent over
2000-2007.

GDP gains for the aggregate of the ASEAN
countries are anticipated to ease from 6.8 percent
in 2010 to 5.2 percent in 2011, partly reflecting
the slowdown in quarterly growth in the second
half of 2010. GDP should then revive to a 5.8
percent pace in 2012—in-line with historic
performance. Normalization of fiscal andmonetary policy remains a key challenge for thegroup. In Malaysia for example, fiscal
consolidation is expected to contribute to aslowing from 7.4 percent growth in 2010 to 4.8

Growth in China is likely to ease from the 10
percent pace of 2010—due in part to theunwinding of fiscal stimulus, restrictions placedon over-heating sectors (e.g. housing) and ageneral tightening of monetary conditions in theface of rising inflation pressures. Nevertheless,73

Global Economic Prospects January 2011: Regional Annex

While the real economy has managed to restore
pre-crisis growth momentum, investors remain
concerned about the ability of Vietnam toachieve a soft landing. In the medium term,
improved non-oil exports should complement
domestic demand to maintain growth at 6.5 to 7
percent, close to Vietnam’s historic record, but
still below its long-term growth potential.

percent in 2011, before expanding 5.7 percent by
2012. And in the Philippines, an end to electionyear spending should see GDP growth slow into
the second half of 2010, while activity settles
into a medium term path of 5-to 5.5 percent,grounded in remittance-supported householdspending and further government support for
infrastructure development. Fiscal deficits forthe region are expected to halve from 3.1 percent
of GDP in 2009 to 1.6 percent by 2012.

On balance, GDP gains for developing East Asia
are expected to decelerate to 8 percent in 2011,
from 9.3 percent in 2010 (see Table R1.1). In
2012, growth for the overall region moves down
moderately to 7.8 percent, a stability that masks
further moderation of growth in China, and a
firming elsewhere in the region. From 2009
through 2012, the region’s current accountsurplus position is anticipated to decline byabout one-half percentage point of GDP. Still,
the surplus will expand in dollar terms, coming
to average $390 billion over 2011-12.

Following the global financial and economiccrisis, Vietnam’s economy recovered rapidly, inpart due to government’s prompt decision to
implement a large, effective stimulus package.
Growth recovered to 6.7 percent in 2010 from
5.3 percent the previous year, on buoyant private
investment and construction spending. However,the current account deficit remains high, and thecurrency—despite being devalued twice in thecourse of the year—remains under pressure.

Table R1.3 East Asia and Pacific, remittances and tourism-related revenues, 2000-2010eRemittances inflows ($mn)
East Asia Region
growth per year (%)
share of GDP (%)

China
Philippines
VietnamIndonesia
Thailand
Malaysia
Cambodia
Other East Asia
Memo items: EAP ex China
growth per year (%)
EAP share of global remittances
Tourism arrivals and revenues
East Asia Region
Arrivals - Thousands
Tourism expenditure in the country - US $ Mn
growth of arrivals per year (%)
growth of revenues p er year (%)

2000

2005

2007

2008

2009

2010e

15,80650,30026.1
1.65

71,07318.9
1.56

85,46520.2
1.49

85,6850.3
1.35

91,1606.4
1.26

24,102
13,556
4,000
5,420
1,187
1,117
200
718
26,19819.9
26.2

38,791
16,302
5,500
6,174
1,635
1,570
353
748
32,28211.0
25.5

48,524
18,642
7,200
6,794
1,898
1,329
325
753
36,941
14.4
26.3

48,72919,766
6,626
6,793
1,637
1,110
338
686
36,9560.0
27.9

51,00021,311
7,215
7,139
1,788
1,576
364
767
40,1608.7
28.061,44341,382

88,84065,9507.7
9.8

107,048
95,6539.8
7.7

107,486
104,2280.4
9.0

105,947
92,353-1.4-11.4

114,018…
7.6…

31,22910,222
9,579
5,064
2,140
1,992
466
751

46,80916,431
11,567
5,002
3,468
2,623
1,422
1,518

54,72020,973
14,464
5,506
4,244
3,092
2,015
2,034

53,04922,052
14,584
6,234
4,236
3,139
2,001
2,191

50,87523,64614,145
6,324
3,747
3,017
2,046
2,147

54,742
24,261
15,560
7,020
4,496
3,231
2,251
2,457

30,21424,06442,031
34,1086.8
7.2

52,32854,527
11.6
26.4

54,43760,0984.0
10.2

55,07250,914
1.2-15.3

59,276
…
7.6
…

0.92
5,237
6,961
…
1,190
1,697
342
121
258
10,569
19.5

Tourism arrivals

China
Malaysia
ThailandIndonesia
VietnamPhilippines
Cambodia
Other East Asia
Memo items: EAP ex China
Arrivals - Thousands
Tourism expenditure in the country - US$ M ngrowth of arrivals per year (%)
growth of revenues p er year (%)

Source: Remittances: World Bank; Tourism: United Nations World Tourism Organization and World Bank estimates

74

Global Economic Prospects January 2011: Regional Annex

Figure R1.9 Developing East Asia growth to moderate

Risks

growth of real GDP
12

2009

2010

2011

East Asia’s trade and financial linkages to theglobal economy are broad and intensifying;hence shocks emanating from financial markets,from OECD trade partners as well as oil andother commodity markets can carry adverse
effects to the region quickly. At this juncture
there are three primary risks to the baseline
projections for the region.

2012

10
8
6
4
2
0
‐2
East Asia & the Developing
East Asia & thePacific
Pacific
geographic
region

China

Newly
East Asia & theindustrialized
Pacific
economies
excluding
China



Source: World Bank

Continued reliance on export trade as asource of growth (though as noted, domestic
demand is moving quickly to the fore) leaves

Table R1.4 East Asia and Pacific country forecasts(annual percent change unless indicated otherwise)

Cambodiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Chinab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Fijib
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Indones iab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Lao PDRb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Malays iab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Mongoliab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Papua New Guineab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Philippinesb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Thailandb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Vanuatub
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Vietnamb
GDP at market prices (2005 US$)
Current account bal/GDP (%)

Forecas t
2011
2012

2007

2008

2009

Es t.
2010

8.3
-4.4

10.2
-5.8

6.7
-10.2

-2.0
-7.9

4.9
-8.6

6.0
-11.0

6.5
-11.2

9.2
2.6

14.2
10.6

9.6
9.7

9.1
6.0

10.0
5.5

8.7
5.3

8.4
5.7

2.3
-3.3

-0.9
-14.4

0.2
-12.8

-3.0
-10.1

0.1
-4.7

0.9
-2.9

1.0
-1.4

2.7
1.5

6.3
2.4

6.0
0.0

4.5
2.0

5.9
2.6

6.2
-0.1

6.5
2.3

6.2
-7.7

7.6
3.3

7.3
2.1

6.4
-0.3

7.7
-0.9

7.5
0.0

7.5
-0.1

4.8
6.5

6.5
16.0

4.7
17.2

-1.7
16.8

7.4
14.7

4.8
17.8

5.7
13.3

5.2
-3.4

10.2
6.7

8.9
-14.0

-1.6
-9.8

8.5
-13.9

7.0
-22.9

6.0
-18.0

0.7
3.3

7.2
0.9

6.7
9.1

5.5
9.1

7.5
-16.1

5.5
-18.5

5.0
-16.1

4.2
-1.4

7.0
4.9

3.5
2.2

1.1
5.5

6.8
5.3

5.0
4.5

5.4
3.5

2.7
1.9

4.9
6.3

2.5
0.8

-2.3
8.3

7.5
6.0

3.2
4.3

4.2
4.9

2.3
-8.9

6.7
-9.9

6.3
-8.2

3.6
-4.6

4.5
-3.9

5.5
-4.2

5.5
-3.6

7.2
-2.5

8.5
-20.1

6.2
-12.3

5.3
-8.7

6.7
-15.5

6.5
-12.5

7.0
-11.6

95-06

a

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.
American Samoa; Kiribati; Korea, Democratic People's Republic; Mars hall Is lands ; Micrones ia, Federate States ;Mongolia: Myanmar; N. Mariana Is lands ; Palau; Solomon Is lands ; Timor-Les te; and Tonga are not forecas t owing todata limitations .
a. Growth rates over intervals are compound average; growth contributions , ratios and the GDP deflator are averages .
b. GDP meas ured in cons tant 2005 U.S. dollars .
c. Es timate.
d. Forecas t.

Source: World Bank

75

Global Economic Prospects January 2011: Regional Annex

China and other manufactures exporters at
risk, as key export markets adjust to aenvironment of more moderate growth. High-double-digit export volume performance isunlikely to characterize the coming two
years.


SAR, China, Singapore, and Taiwan, China)
the shift was greater, rising from 22.5
percent to 25 percent.
5. Countries covered in the summary of
aggregate East Asian capital flows include:
Cambodia, China, Fiji, Indonesia, Lao PDR,
Malaysia, Mongolia, Burma (Myanmar),Papua New Guinea, Philippines, Samoa,
Thailand, Tonga, Vanuatu and Vietnam. Of
course, part of these flows are intra-regional.

A challenge for all policymakers is toachieve a balance in stance required to (i)begin the fundamental shift of easing
stimulus efforts while planning for further
medium term budgetary consolidation; at thesame time (ii) financial markets (and insome cases earlier domestic overheating) are
generating contingencies for potential shortterm asset-price bubbles, emerging inflationpressures, exchange rate appreciation—andin the medium term a loss of export
competitiveness.

6. ‘World Tourism Barometer’, Update, August
2010. United Nations World Tourism
Organization, Madrid. 2010.

Food price increases underway have—as ofDecember 2010—not exceeded their realvalues during the food/fuel crisis of 2008.
Still, as international investors continue toexplore new avenues for higher returns,
commodities may become an attractive
alternative to financial instruments andstaple foods could be bid up further. Termsof trade would be adversely affected for anumber of countries in the region (see Maintext). The pickup of inflation in China is tiedin large part to higher food prices; and for anumber of countries import bills would
escalate substantially.

Notes:
1. See “China Quarterly Update”. November,2010. Beijing Office. World Bank.
2. See “Robust Recovery, Rising Risks”. East
Asia and Pacific Economic Update, 2010,
Volume 2. October, 2010. World Bank. East
Asia and Pacific Region.
3. See East Asia and Pacific Economic
Outlook, October 2010, for a complete
coverage of all EAP country developments
and prospects.
4. For the high-income NIEs (Hong Kong

76

7.

Though Malaysia has attracted more tourists
than has Thailand, structurally this is a very
different story. Half of all arrivals in
Malaysia are from Singapore alone (70% ifadding Thailand and Indonesia). According
to Malaysian authorities, many Singaporeansvisit Malaysia on a daily basis to buy lessexpensive basic items. Though this boosts
retail sales, the multiplier effects of tourism
are smaller for Malaysia than mightotherwise be the case.

8.

Migrant remittances are defined as the sumof workers’ remittances, compensation of
employees, and migrants’ transfers.
Workers’ remittances, as defined by theInternational Monetary Fund (IMF) in the
Balance of Payments Manual, 6th edition(IMF 2010a), are current private transfersfrom migrant workers who are considered
residents of the host country to recipients inthe workers’ country of origin.4 If the
migrants live in the host country for one year
or longer, they are considered residents,
regardless of their immigration status. If the
migrants have lived in the host country forless than one year, their entire income in thehost country should be classified ascompensation of employees.

Global Economic Prospects January 2011: Regional Annex

Europe and Central Asia
domestic demand. In Bulgaria, Lithuania andRomania, for instance—which had posted sharp
contractions in 2009—GDP growth waslackluster, and indeed contracted in Romania,
and significantly lagged the regional averagerebound. Where credit booms had been relatively
more subdued ahead of the crisis, and where thetransmission of the crisis was driven morestrongly by swings in trade growth andcommodity prices (which rebounded quickly)—such as in Armenia, Azerbaijan, Belarus,
Georgia, Russia, Turkey, Turkmenistan,
Uzbekistan—growth outturns in 2010 werestronger and exceeded the regional average.

GDP growth in developing Europe and Central
Asia1 rebounded to an estimated 4.7 percent in2010, following the 6.6 percent decline in 2009.
The recovery has been slow owing to continued
large-scale restructuring, reflecting the severityof impact of the crisis through multiple channelsof transmission to the region—including thecollapse in capital inflows, sharp contraction inexternal demand, plunge in commodity prices
and large fall-off in remittances inflows. Coming
out of the crisis, high levels of householdindebtedness and widespread unemployment
held back consumer demand, while bankingsector consolidation and elevated bad-loans
constrained new lending. Countries with fixedexchange-rate regimes faced more limited policy
options, often implying fiscal spending cuts tobring about adjustment in domestic demand. In
contrast, a revival in external demand andfirming international commodity prices—
especially for hydrocarbons and metals—
underpinned the recovery in regional growth in2010. While also recovering, net international
capital flows to Europe and Central Asia were
tepid in 2010 (see main text), and in particularbank-lending remains severely limited compared
to pre-crisis flows, accentuating rather thanoffsetting contractionary forces emanating fromthe domestic banking sector. Looking forward,
growth in the region is expected to accelerate
only slowly. Persistent and increasingly
structural unemployment, significant personal
debt burdens, and financial-sector restructuring
are expected to keep growth modest, with GDP
projected to expand only 4.0 percent in 2011 and
4.2 percent in 2012. (Table R2.1).

Recent developments
Much of the impetus for recovery in Europe andCentral Asia in 2010 was external in nature:strengthening demand in export markets, higher
metals and energy prices, a revival in
remittances inflows, and in some cases large
inflows of crisis-related official aid. Nearly all of
the economies in the region posted positive
growth in 2010. The regional aggregate isdominated by Russia and Turkey, which together
comprise nearly 75 percent of regional GDP, andwhich posted strong outturns of 3.8 percent and8.1 percent, respectively. Russia’s real-side
recovery was supported by fiscal stimulus
equivalent to 5.3 percent of GDP and strong oil
and metals prices, which generated strong
spillovers for other countries in the region in theform of import demand (up an estimated 7
percent) and remittances, which after falling 18
percent in 2009 picked up 11 percent in dollar
terms during 2010. Turkey’s recovery was morevibrant—a reflection of strengthening domestic
demand, supported by rising foreign capital
inflows, and an accommodative monetary andfiscal policy. GDP outturns were strongest in
Turkmenistan, Uzbekistan and Belarus withgrowth of 11.7 percent, 8 percent and 7.0
percent, respectively, due to the rebound innatural gas prices and minerals prices. In
contrast, Kyrgyz Republic saw GDP decline,
given political and civil dislocation. Sharp fiscal

Significant variation in the extent of recovery at
the individual country level broadly reflects
initial conditions at the onset of the crisis andmain channels of transmission. Countries that
had relied heavily on international inflows tofinance large current account deficits in the precrisis boom years, typically reported weakerrebounds in 2010, given ongoing large private
sector debt deleveraging, continued banking
sector consolidation and severely crimped

77

Global Economic Prospects January 2011: Regional Annex

borrowers. Ongoing recapitalization andprovisioning of high non-performing loan ratios
along with more restrictive lending standards areconstraining bank-lending by lenders. Nonperforming loans account for a median of 11
percent of all loans in the region, the highest
among developing regions , with the ratio
reaching as high as 42 percent, 27 percent, and20 percent in the cases of Ukraine, Kazakhstan
and Lithuania, respectively, in early-2010(Figure R2.1).2 Consequently, credit growth
remained stagnant in most economies across theregion in 2010. Credit expansion is somewhat
stronger in Russia, but below the pre-crisis pace,consolidation and household balance sheet
restructuring was reflected in a second year of
GDP decline in Romania, and near zero growth
in Bulgaria and Lithuania. In part this reflected
the constraints of fixed exchange-rate regimes,
and policy-makers were limited to fiscal policylevers to implement adjustment throughdomestic demand.
Regional domestic demand remains subdued,
given significant debt-overhang from pre-crisis
borrowing, stagnant or falling householdincomes, and tepid job-growth—which also
underlie weak private-sector credit demand by
Table R2.1 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)

95-06
b

a

2007

2008

2009

Est.
2010

Forecast2011 2012

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

4.0
4.1
4.0
5.0
1.8
4.4
7.5
7.9
0.3
2.0
19.7
-5.1

7.4
7.4
7.7
10.7
4.4
15.4
7.3
19.6
-3.7
-0.5
11.8
3.0

3.9
4.0
4.3
6.7
3.2
6.4
3.0
8.6
-2.0
0.5
12.0
1.6

-6.6
-6.5
-6.7
-6.3
2.5
-18.5
-6.8
-24.0
6.5
0.7
2.5
-5.5

4.7
4.7
4.4
4.4
1.7
6.9
7.9
12.3
-1.0
0.8
6.4
-4.3

4.0
4.0
4.0
4.4
2.3
6.4
5.8
8.4
-0.7
-0.3
6.2
-3.1

4.2
4.2
4.5
4.6
2.7
7.9
7.0
8.0
-0.2
-1.4
5.3
-2.4

Memo items: GDPe
Transition countriesfCentral and Eastern EuropegCommonwealth of Independent States
RussiaTurkeyRomania

3.9
2.9
4.0
3.8
4.3
2.2

5.2
6.7
8.8
8.5
4.7
6.0

2.1
6.2
5.1
5.2
0.7
7.1

-5.4
-7.3
-7.3
-7.9
-4.7
-7.1

5.7
-0.9
4.1
3.8
8.1
-1.9

3.6
2.1
4.3
4.2
4.1
1.5

4.2
3.9
4.2
4.0
4.3
4.4

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: Albania, Bulgaria, Lithuania, Macedoneia, FYR, Romania, Turkey.
f. Central and Eastern Europe: Albania, Bulgaria, Lithuania, Macedonia, FYR, Romania.
g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic,
Moldovia, Russian Federation, Ukraine, Uzbekistan.
Source: World Bank

78

Global Economic Prospects January 2011: Regional Annex

in part reflecting continued capital outflows.
Turkey too is an exception, where credit growthhas been buoyed by the strong recovery andcapital inflows.

Figure R2.2 Europe and Central Asia's merchandise
goods exports remain in duldrums in late-2010
3m/3m, %-change, seasonally adjusted annualized rates, long-term
average=1991-2010
100

Figure R2.1 Bank NPLs remain elevated in Europe andCentral Asia

80
60
40

Median %-share of non-performing loans (NPLs) to total

20

12

0

10

-20
-40

8

-60
-80
2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07

6
4
2
0

Developing excl. Europe and Central Asia

Europe and Central Asia

High Income Countries

World long-term average

Source: Thomson Datastream and World Bank
2005

2006

2007

High Income with rising NPLs
Developing Asia
Other HICs

2008

2009

2010

continued contracting in 2010, albeit slightly by
0.3 percent after the sharp 8.2 percent downturnin 2009.

Europe and Central Asia
Other Developing

Source: Source: IMF Global Financial Stability Report andWorld Bank
Note: 2010*=most recent 2010-observation; 62 country sample

Remittances are also up a modest 3.7 percent in
US dollar terms following the sharp 23 percent
decline in 2009. Higher oil prices andstrengthened activity in Russia were main factors
supporting increased flows into neighboring
Commonwealth of Independent States, for which
Russia represents a key migrant destination
country. Tajikistan continued to record thehighest share among developing countries, with
official inflows for 2010 estimated at 35 percent
of GDP, followed within Europe and Central
Asia region by Moldova (fourth among LMICs),
where official flows are estimated to havereached 23 percent in 2010. Notably, corrected
for inflation and shifts in exchange rates,
remittances inflows actually contracted in
Romania, Russia, Turkey and Ukraine. (FigureR2.3).

Unemployment rates in Europe and Central
Asian remain significantly elevated, having risen
for example, as of September 2010 from end2009 in Bulgaria and Lithuania to 10 percent(from 8.6 percent) and to 18.4 percent (from 16
percent), respectively. While still elevated,
unemployment rates appear to have peaked andare falling in Russia and Turkey.
The rebound in Europe and Central Asia was led
by a surge in merchandise export volumes(notably of commodities) starting mid-2009,
while import growth (reflecting lackluster
domestic demand) remained weak. Export
growth decelerated sharply starting in early2010, ahead of the more generalized global
slowdown that began mid-year, turning strongly
negative in the third quarter before beginning to
expand once again in the fourth quarter (FigureR2.2). Services trade has posted a much moremodest recovery, albeit from a less severe
contraction in 2009. Tourism remained a drag onservices receipts, with arrivals estimated to have

Despite the strong rebound in exports, subdued
recovery in domestic demand and imports andresumption of the US-dollar value of remittances
inflows, the regional current account surplus
shrank as a share of GDP in 2010. This largely
reflected a sharp increase in Turkish imports,
which contributed to a near-tripling of its current
account deficit from 2.3 to 5.9 percent of GDP.

79

Global Economic Prospects January 2011: Regional Annex

Most other regional economies that posted
deficits in 2009 recorded shrinking deficits in2010 (Albania, Bosnia and Herzegovina,
Bulgaria, Georgia, FYR Macedonia, andMontenegro) or increased surpluses (Azerbaijan,
Russia and Uzbekistan).

contributed to an appreciation of its currency.
Overall, net private capital inflows to Europe
and Central Asia nearly doubled in 2010–
reaching $111 billion or about 3.6 percent ofGDP, but remain only about a quarter of theirpeak level of $414 billion or 15.5 percent of
GDP in 2007. (Figure R2.4) The uptick was led
by a firming in international bond issuance,
which was concentrated in Montenegro,
Romania, Russia and Turkey. In contrast,
foreign direct investment to the region declined,reflecting continued adjustment in both source
and recipient economies. While net bank-lending
to the region firmed slightly, it remained sharply
compressed compared with pre-crisis levels—
equivalent to less than one-tenth of the 2007 and2008 levels—reflecting ongoing banking sector
consolidation and loan provisioning in both
source and recipient countries.

The pickup in Turkish imports is a partialreflection of the sharp increase in foreign capital
inflows, which helped boost credit growth andFigure R2.3 Remittances inflows declined most in
Europe and Central Asia, tepid recovery tied to slow
E.U. job-growth
Official remittances inflows, annual percent change
15
10

2009

2010

5
0
-5

Extensive spare capacity throughout the region
has kept core inflation in check, but the severe
drought and extensive wild fires (notably in
Russia and Kazakhstan) provoked a sharp rise infood prices and a temporary uptick in median
inflation in the region, which rose from 2.3
percent in 2009 to 6.7 percent in 2010.
Administrative price hikes in Romania andUkraine have also played a role, while capacity
constraint and capital inflows have contributed
to an acceleration of Turkish prices. (FigureR2.5).

-10
-15
-20
-25
Europe andLatin East Asia and Middle East Sub-Saharan South Asia
Central Asia America and Pacificand North
AfricaCaribbean
AfricaSource: Source: World Bank, Migration and Development
Brief, no. 13, 2010

Figure R2.4 Net private capital inflows to Europe andCentral Asia projected to have firmed in 2010

$ billion

Figure R2.5 Inflation is quiescent in most regions; temporary upswing in ECA tied to drought

% GDP
18
16
14
12
10
8
6
4
2
0

450
400
350
300
250
200
150
100
50
0
2002

2004

2006

2008

median CPI, seasonally adjusted, annual percent change
16
14
12
10
8
6
4
2
0
-2
2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07

2010e

East Asia & PacificHigh Income Countries
Middle East & N. Africa
Sub-Saharan Africa

Net private inflows (left axis)
Net private inflows (right axis)

Europe & Central Asia
Latin America & Caribbean
South Asia

Source: Thomson Datastream and World Bank

Source: World Bank

80

Global Economic Prospects January 2011: Regional Annex

more sustainable rates, as the pace of capacity
expansion slows. In Russia, growth is projected
to firm to 4.2 percent in 2011 from 3.8 percent in2010, reflecting strengthening domestic demand,higher oil prices and supportive base effects.
However, in 2012 Russian GDP growth isprojected to moderate to 4.0 percent andconverge toward potential, as underlying
structural factors are expected to increasingly
constrain activity. In Kazakhstan the recovery is
expected to slow over the forecast horizon, given
ongoing banking sector problems that are
expected to impinge on credit growth.

OutlookGDP growth in Europe and Central Asia is
projected to slow to 4.0 percent in 2011 from 4.7
percent in 2010, before firming to 4.2 percent in2012. Growth rates will remain well-below theboom-period average of 7.4 percent recorded
during 2003-07, and will not be strong enough tomake a significant impact on regional
unemployment. Both investment and consumer
demand will continue to be held back by highunemployment, and household and bankingsector restructuring, even as domestic demand
growth plays an increasing role in the recovery.
The deceleration in 2011 mainly reflects weaker
exports due to slower growth in export markets(notably with high-income Europe), while
expected improvement in domestic conditions
underpin the modest acceleration in 2012.
Reflecting strengthening domestic demand,
imports are expected to grow more quickly thanexports and the regional current account is
projected to incrementally shift into deficit of 1.4
percent of GDP in 2012 from a slight surplus of
0.8 percent in 2010 and slight deficit of 0.3
percent in 2011.

Economic activity within the Commonwealth of
Independent States will also be supported by therecovery in Russia, a major export market andimportant migrant destination country within the
sub-region. Armenia, Moldova and Tajikistan, inparticular, are expected to benefit, among others.
Just over 45 percent of Commonwealth of
Independent States
remittances inflows
originate from Russia, and 50 percent from the
EU-15. The recovery in remittances inflows to
the region in aggregate is expected toprogressively firm by 6.5 percent and 10.4
percent in 2011 and 2012, respectively (in USdollar value-terms). While this would result inremittances inflows reaching a projected $43bn
in 2012, the level would remain 6 percent below
the record high posted in 2008 (Figure R2.6).3

Projected growth paths vary significantly at the
sub-regional level. For example, Turkey is
projected to post a deceleration in GDP growth
to 4.1 percent in 2011 from an estimated 8.1
percent in 2010, due to falling export
competitiveness and weaker base effects.
Growth in the Central European economies at
2.1 percent and 3.9 percent in 2011 and 2012,
respectively, will continue to be held back by
restructuring. In contrast, the Commonwealth of
Independent States are projected to post
somewhat stronger real GDP growth of 4.3
percent and 4.2 percent in 2011 and 2012,
respectively. (Table R2.2).

Figure R2.6
Central Asia

Remittances inflows to Europe and% of 2009 GDP
Tajikistan
Moldova
Kyrgyz Republic
Bosnia and Herzegovina
SerbiaAlbania
Armenia
Georgia
Macedonia, FYR
Romania
Bulgaria
Azerbaijan
Lithuania
UkraineBelarus
Russian Federation
TurkeyKazakhstan

The
more
commodity-dependent
Commonwealth of Independent States
economies, such as Russia, Ukraine andUzbekistan, should continue to benefit fromelevated key export prices for hydrocarbons andmetals. And, in the case of Turkmenistan, addedexport capacity will also be a factor. In contrast,
in Azerbaijan growth is projected to slow to

0%

10%

20%

30%

40%

Source: World Bank, Migration and Development Brief,
no. 13, 201081

Global Economic Prospects January 2011: Regional Annex

hurdles, only gradual progress in reducing large
fiscal deficits is expected. Russia is expected tocontinue unwinding the large stimulus measures
introduced during the crisis, but significant
tightening is unlikely until after the presidential
elections in the spring of 2012. In Armenia,

Better economic performance should see fiscal
balances improve. Further fiscal consolidation inCentral and Eastern Europe, partly under theaegis of IMF programs, should help set the stage
for more balanced and sustainable growth in the
future. However, given existing significant
Table R2.2 Europe and Central Asia country forecasts(annual percent change unless indicated otherwise)

2007

2008

2009

Es t.
2010

Forecast
2011
2012

5.4
-5.5

6.0
-10.6

7.5
-15.4

2.5
-15.6

3.0
-12.2

3.7
-10.9

4.2
-9.9

8.6
-11.7

13.7
-6.4

6.8
-11.6

-14.4
-15.7

4.0
-12.7

4.6
-11.6

4.9
-10.5

10.2
-16.6

25.0
27.3

10.8
35.6

9.3
23.7

3.7
27.2

3.5
24.4

3.9
24.0

6.7
-3.2

8.6
-6.8

10.2
-8.7

0.2
-13.0

7.0
-14.0

6.0
-14.2

5.5
-13.3

2.8
-3.4

6.4
-27.2

6.2
-21.9

-4.9
-9.7

0.0
-2.4

2.5
-3.1

2.7
-3.4

6.6
-9.8

12.3
-20.9

2.3
-25.3

-3.9
-12.3

5.5
-12.1

4.0
-12.0

4.7
-11.1

6.4
-2.3

8.9
-7.9

3.3
4.7

1.2
-3.7

5.5
3.8

4.5
4.4

5.1
4.0

6.3
-8.3

6.9
-15.2

2.9
-17.0

4.3
-19.7

5.7
-18.2

5.2
-17.0

4.7
-10.2

8.5
-6.9

8.4
-14.6

2.3
-6.6

-3.5
-5.4

7.0
-9.4

4.5
-9.1

6.1
-7.8

9.8
-14.5

2.8
-11.8

-15.0
4.4

0.4
2.6

3.3
1.3

3.1
1.2

2.3
-7.9

3.1
-16.5

7.8
-17.3

-6.5
-9.9

2.6
-10.0

3.0
-10.3

3.6
-10.6

2.2
-6.0

5.9
-7.6

4.8
-12.8

-0.7
-7.0

1.2
-4.4

3.0
-5.3

4.5
-5.1

2.2
-5.8

6.0
-13.6

7.1
-11.9

-7.1
-4.5

-1.9
-6.3

1.5
-6.4

4.4
-6.5

3.8
7.6

8.5
6.0

5.2
6.2

-7.9
4.0

3.8
5.1

4.2
3.3

4.0
1.1

4.6
-4.5

7.8
-8.6

7.9
-7.7

3.4
-4.9

5.5
-3.5

5.0
-5.4

5.0
-5.4

4.3
-1.5

4.7
-5.9

0.7
-5.7

-4.7
-2.3

8.1
-5.9

4.1
-5.8

4.3
-5.6

2.7
2.7

7.9
-3.7

2.1
-7.1

-15.1
-1.5

4.3
-2.2

4.0
-3.1

4.5
-3.4

4.6
3.3

9.5
7.3

9.0
8.7

8.1
2.7

8.0
4.3

7.3
8.3

8.3
9.6

95-06
Albaniab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Armeniab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Azerbaijanb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Belarusb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Bulgariab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Georgiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Kazakhstanb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Kosovob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Kyrgyz Republicb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Lithuaniab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Moldovab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Macedonia, FYRb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Romaniab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Russian Federationb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Tajikistanb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Turkeyb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Ukraineb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Uzbekistanb
GDP at market prices (2005 US$)
Current account bal/GDP (%)

a

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, Serbia, 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 cons tant 2005 U.S. dollars.
E i

Source: World Bank.

82

Global Economic Prospects January 2011: Regional Annex

Georgia, Kyrgyz Republic, Moldova, Tajikistan
and Ukraine improved conditions are expected tosee policy shift toward a more neutral stance
beginning in 2010.

percent and 16 percent in 2010. Similarly, FDI is
projected to firm over the forecast horizon,
partly because of an expected pick up in
privatization, reaching 3.3 percent of regional
GDP in 2012. (Table R2.3).

Financing external imbalances will be facilitatedby continued improvement in international
financial market conditions and risinginternational flows to the region, which will also
support stronger investment growth. Althoughfinancial conditions are much tighter than during
the pre-crisis boom, international borrowing
costs have fallen sharply and consolidation
efforts are beginning to bear fruit. Several
countries in the region have seen their credit
ratings upgraded (Azerbaijan, Georgia, Moldova,
Montenegro, Turkey, and Ukraine -- although
Montenegro also received one downgrade).

Risks
Banking system balance sheets remain impaired
in a number of Europe and Central Asia
countries, and significantly lower growth
outturns could further undermine positions. In anumber of countries, decisive actions—including
improved provisioning and supervision
standards—are required to help restore normal
credit expansion.
Growth in energy exporters remains very reliant
on hydrocarbon exports and volatileinternational oil prices. Significantly lower-thanprojected commodity prices could lead to weaker
growth outcomes for the mineral-export-led andReflecting these improving conditions, net
private inflows into the region (excluding
official inflows) are projected to expand by 30
Table R2.3 Net capital flows to Europe and Central Asia
$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+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
20.3
2.0

2004
36.7
2.7

2005
48.5
2.9

2006
37.6
1.8

2007
-13.6
-0.5

2008
8.1
0.2

2009
14.6
0.6

2010e
33.6
1.1

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
-170.7-226.1

262.1
251.0
7.5
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
-328.0
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
-78.4
-26.0

134.7
111.0
3.6
86.0
79.0
7.0
48.7
23.7
2.2
10.5
11.0
25.0
24.0
13.5
10.5
0.0
1.0
-121.2
-47.2

11.6

16.0

23.3

28.4

39.3

45.8

35.4

37.0

2011f
21.2
0.6

2012f
12.2
0.3

144.2
4.3
112.2
103.2
9.0

167.8
4.4
135.3
124.3
11.0

32.0

32.5

39.0

43.0

Source: World Bank
Note: Countries covered are Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Georgia, Kazakhstan,
Kosovo, Kyrgyz Republic, Lithuania, Macedonia FYR, Moldova, Montenegro, Romania, Russian Federation, Seychelles, Tajikistan, Turkey, Turkmenistan, Ukraine and Uzbekistane = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries

83Global Economic Prospects January 2011: Regional Annexinterlinked CIS economies. And, while the buildup of oil revenue savings-funds prior to the onsetof the crisis—albeit significantly drained in theinterim (Azerbaijan, Russia, Kazakhstan)—havecreated some cushioning for downturns,
diversification to other sources of growth would
further underpin sustainable long-term growth.
Continued improvement in the investment
climate (for example in public administrationand judicial reforms) would facilitate private
sector development.
Given the extent to which the region, particularly
the CEE economies, has become tightly
integrated with high-income Europe (trade,finance and labor), a significantly lower-thanprojected growth-outturn in the Euro Area
represents a downside risk. Further, a number ofthe Europe and Central Asian economies (e.g.,
Bulgaria, Romania) have some exposure to thebanking systems of high-income Euro Area
countries with elevated sovereign debt (e.g.,
Greece), where recovery is particularly fragile.
While spill-over of heightened risk-aversion
from the Euro Area countries has been limited sofar, Europe and Central Asia’s bond markets
remain vulnerable to downswings in investor
sentiment. As sustainability of public debt andconcerns about the health of banking systems
will remain a key concern over the forecasthorizon, countries with large external financing
needs face the risk that international financial
markets might require greater fiscal
consolidation to maintain confidence.

Notes:
1. For the purposes of this report thedeveloping Europe and Central Asia
comprises only low- and middle-income
countries
2. IMF Global Financial Stability Report,
October 2010.
3. Ratha, Dilip et al, “Migration andDevelopment Brief (number 13)”, November
8, 2010, The World Bank.

84

Global Economic Prospects January 2011: Regional Annex

Latin America and the Caribbean
balance sheet, and trade diversification towards
Emerging Asia, and improved systems offinancial regulation. All helped to bolster theregion’s resilience. The rebound was also
supported by strong cyclical factors such as therebound in external demand (particularly from
China), renewed capital inflows, strong
commodity prices, the turn in the inventory cycle
and a significant boost to domestic demand frommonetary and fiscal stimulus.

Recent developments
The Latin America and Caribbean (LAC) region
has emerged from the global crisis faster than
expected. After contracting by 2.2 percent in2009, GDP is estimated to have expanded by 5.7
percent in 2010, similar to the average growthrecorded during the 2004 – 2007 boom years.
Growth is forecast to slow to around 4.0 percent
in the remainder of the forecast period, largely
because of a weaker external environment as
growth in advanced economies and China
moderates. Nonetheless, the recovery compares
well to the region’s own past and the recovery inother emerging regions.

Financial conditions have also improved
noticeably. After a brief pause during the global
crisis, the LAC region experienced a strong
recovery in capital inflows as the very loose
monetary policy and the associated negative realinterest rates that currently prevail in highincome countries have boosted yield-searching
bond and equity capital inflows to the region.
Based on the gains already made, net private
inflows are expected to reach over $203 billion
in 2010 – less than 7 percent shy of the 2007
peak, and almost 38 percent above 2009 (Figure
R3.1 and Table R3.1).

That strong aggregate performance masks
significant differences within the region,
reflecting differences in the terms-of-tradeeffects, capital flows and policies stances acrosscountries and sub-region. Central America(particularly Mexico with its strong links to theUS) was most affected by the crisis, with GDP
declining by 5.9 percent in 2009. Although therebound to an estimated 5 percent growth during
2010 in Central America was also the strongest,
there is still considerable slack in the sub-region,
with countries still having considerable catch-up
to do before regaining pre-crisis trends. In the
Caribbean countries, the impact of the crisis was
smaller, while the rebound has been more muted,
in part because remittances and tourism fromhigh-income countries, an important source of
foreign exchange and incomes are expected toremain weak. Overall, GDP for these countries is
expected to grow by between 2½ and 4 percent
over the forecast period, much less than thealmost 7 percent rate recorded during the years
2005-2007.

The strong inflows have been a mixed blessing.
On the positive side, it provided cheap financing,
thereby boosting domestic demand. But
increasingly, these flows are raising concerns
Figure R3.1 Financial flows to Latin America andCaribbean recovered sharply in 2010
US$ bn300

Workers' remittances
Net debt flows

250

Net portfolio equity inflows
200

Net FDI inflows

150

100

The region’s newfound resilience reflects themuch healthier macroeconomic position fromwhich it entered the crisis. Noticeable
improvements have been made in terms of thequality and credibility of monetary policy, better
fiscal and debt management, an improved

50

0

-50
2002

2003

2004

Source: World Bank.

85

2005

2006

2007

2008

2009

2010

Global Economic Prospects January 2011: Regional Annex

Table R3.1 Net capital flows to Latin America and the Caribbean$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+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
8.8
0.5

2004
21.2
1.0

2005
33.9
1.3

2006
44.3
1.4

2007
10.5
0.3

2008
-34.5
-0.8

2009
-20.4
-0.5

2010e
-52.8
-1.2

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
-35.4
-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
-53.0
-25.4

85.2
116.6
4.5
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
-84.8
-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
-55.1
-55.5

217.5
218.5
6.1
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
-90.2
-137.8

177.2
170.7
4.1
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
-92.5
-50.1

166.7
147.5
3.8
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
-94.3
-52.0

223.8
203.4
4.5
153.3
99.3
54.0
70.5
20.4
6.2
0.2
14.0
50.1
40.9
33.5
7.4
0.0
9.2
-108.3
-62.7

36.7

43.3

50.1

59.2

63.1

64.6

56.9

58.0

2011f
-68.2
-1.4

2012f
-84.9
-1.6

212.9
4.4
160.9
109.9
51.0

212.7
4.1
170.5
127.5
43.0

52.0

42.2

62.0

69.0

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

production activity there growing relatively
quickly, reflecting a bounce back after the 28
percent decline (3m/3m saar) recorded following
the earthquake earlier in the year. Althoughforward looking indicators in the region point tocontinued growth, growth rates are expected tobe more modest than earlier this year, as capacity
utilization stabilizes throughout the region andoutput gaps approach zero. With private

about domestic overheating, external
competitiveness and increased sterilization costs.
Although the recovery in domestic financial
conditions is not complete (domestic credit
growth remains moderate), very large external
capital inflows have induced booms in manyequity- and bond markets, raising fears about
possible asset price bubbles. Moreover, capitalinflow induced exchange-rate appreciations in
the region are having growing impacts oncompetiveness and growth and are of increasing
concern to regional policy makers.

Figure R3.2 Sharp recovery in industrial production
growth is slowing
percent, 3m/3m saar

The strong recovery in GDP during 2010 reflects
a rapid bounce back in industrial activity during
the early part of the year, followed by a sharpslowing mid-year. This is a pattern repeated in
virtually every region of the world (seediscussion in main text). Regional industrial
production reached peak growth rates in excess
of 11 percent (annualized) during the final
months of 2009, but was actually declining
during the third quarter (Figure R3.2). Chile
proved an exception to this trend, with industrial

30
20
10
0

Brazil-10

Mexico-20

Argentina
-30

LAC
-40
-50
2008M01

2008M05

2008M09

Source: World Bank

86

2009M01

2009M05

2009M09

2010M01

2010M05

Global Economic Prospects January 2011: Regional Annex

consumption, investment and export growth
rates forecast to moderate substantially over theforecast, industrial production growth will also
slow to more sustainable growth rates of aroundhalf those registered in the first half of 2010.

Figure R3.4 GDP growth rebound also benefitting fromstrong recovery in the terms of trade% change, year-over-year

76

8
LAC GDPLAC Terms of Trade

Deeper trade linkages to Emerging Asia, andChina in particular, have contributed to theregion’s quick recovery through exports andrising commodity prices. Export volumes havefully recovered from the crisis, but as is the casewith other high frequency indicators worldwide,
export growth (temporary) slowed sharply mid
year (Figure R3.3).
Strong demand forcommodities – especially from China – also
benefited the region, boosting its terms of trade,raising incomes and contributing to stronger
domestic demand (Figure R3.4).

4

4

3

2

2
1

0

0

-2

-1
-4

-2

-6

-3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: World Bank

the swing accounted for by Brazil) –nevertheless a marked swing from the 1 percent
of GDP average surpluses recorded during the
2004-07 commodity boom.

Regional imports were boosted by the reboundin investment spending (investment goods in the
LAC region tend to have a high import content)(Figure R3.5). This, plus the real-effective
appreciation of many of the currencies in theregion meant that merchandise import volumes
grew by an estimated 21.4 percent in the 12months ending October 2010, versus 8.3 percent
for exports. Had it not been for stronger
commodity prices (notably metals prices seeannex on commodities), the region’s current
account deficit would have deteriorated muchmore. As it is, it went from -0.5 percent of GDP
in 2009 to about -1.2 this year (with about half

Tourism, an important source of foreign
currency in many countries, especially in Central
America and the Caribbean, also recovered in2010. Tourism arrivals rose an estimated 3.3
percent in 2010, underpinned by a 3 and 3.2
percent growth recovery in Brazil and Mexico
respectively and a sharp 8 percent increase in thenumber of visitors to Argentina. High-income
islands in the Caribbean experienced adisappointing year, with only small increase inarrivals—in part due to inclement weather

Figure R3.3 Export volumes have recovered to pre-crisis levels, but growth is slowing rapidly
Level of exports, index August 2008=100

Export growth, 3m/3m saar

120

50
40

100

30
80

20
10

60

0
40

-10

LAC exports (volumes)
20

LAC export (values)

6

5

-20
-30

0

-40

2002M01 2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01

2002M01 2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01

Source: World Bank.

87

Global Economic Prospects January 2011: Regional Annex

As indicated earlier, strong capital inflows have
put upward pressure on the real exchange rates
of some countries in the region (Figure R3.6).
This has been particularly evident in Brazil,
where the real effective exchange rate has
increased by 13.2 percent during 2010, and by
41.5 percent since the 2008 lows. But even incountries such as Colombia, Chile and Mexico,
real effective exchange rates have appreciated by
29.9, 14.9 and 18.5 percent respectively since
their lows in late-2008/early 2009.

Figure R3.5 Investment spending has been a major
driver of imports
percent

25
20
15
10
5
0
-5

The brisk rebound in economic activity in theregion during 2010, combined with the(continued) surge in capital inflows has raised
concerns about overheating and the inflation
outlook. In Brazil, for instance, the surging
capital inflows and appreciation of the Real has
coincided with rising inflation (Figure R3.7).
Elsewhere in the region, where surging capital
inflows has played less of a role, risingcommodity prices have raised inflation
somewhat, as food prices have a high weighting
in the region’s price basket. With a more rapid
than expected recovery pushing up wage
demands, a number of central banks in theregion have started to tighten interest rates.
Brazil, where first quarter growth came in at 9
percent, first raised its benchmark policy rate in
April - Peru and Chile followed later. Although
inflationary pressures have been strongest inArgentina, a desire to sustain the consumption
boom suggests that policy may not be tightened

LAC Fixed investment-10

LAC Imports-15

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: World Bank

during peak season.
Remittances, also an important source of foreign
currency for countries in the region, rebounded
by a modest 2 percent in 2010, after falling an
estimated 12 percent in 2009 – the second largest
regional decline after Europe and Central Asia,
where remittances fell 23 percent. Persistent
unemployment in the United States and theconcentration of joblessness in the construction
sector where many regional remitters are or used
to be employed underpin this weak performance,
which is projected to remain relatively modest in2011 and 2012.

Figure R3.7 Appreciating real is placing upward pressure on inflation

Figure R3.6 Upward pressure on real exchange rates
Index, 2005 =100
180

160

BrazilChile

Columbia

MexicoBrazilian real (2005 = 100)

140

120

100

Percent

170.0

7.0

160.0

6.5

150.0

6.0

140.0

5.5

130.0

5.0
4.5

120.0
110.0

80

100.0

Real effective exchange rate (lagged 8months)Inflation (y-o-y)

60

90.0

2008M01 2008M05 2008M09 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09

2007M01 2007M09 2008M05 2009M01 2009M09 2010M05

Source: World Bank.
Source: World Bank

88

4.0
3.5
3.0

Global Economic Prospects January 2011: Regional Annex

contribution to growth will wane as policy
stimuli are being withdrawn. Stronger demand isalso fuelling a cyclical rebound in fixed
investment and imports.

unless there is a dramatic reversal in capital
flows. Mexico has also not yet tightened rates,reflecting its relative weak recovery.

Medium-term outlook
As policy makers in the region begin tightening
monetary policy and interest rates rise, many
currencies will continue to experienceappreciation pressures, which will adversely
affect external competitiveness. Furthermore
higher capital inflows in response to increased
interest rate differentials could lead to excess
credit expansion, complicating the task ofpolicymakers in combating inflationarypressures, which are already rising in some
economies.

Aggressive policy stimulus and Chinese demandhas enabled the region’s commodity exporters(Brazil, Chile and Peru together account for 70
percent of the region’s exports to China) to leadthe recovery, growing by an estimated 7.6, 5.5
and 8.0 percent respectively in 2010. The region
as a whole is estimated to have expanded by 5.7
percent in 2010, and is forecast to grow byaround 4 percent per annum over the 2011-2012
period (Table R3.2). Private consumption is
forecast to rebound by 5.0 percent after
contracting by 1.2 percent during 2009,
supported by the lagged effects of expansionary
macroeconomic policies, while later in theforecast period, the government spending

Beyond 2010 growth in the region will likely
slow as policy stimulus and the inventory cycle’s
contribution to growth wanes. Also, slower
growth in the US in the second half of 2010 and

Table R3.2 Latin America and the Caribbean forecast summary(annual percent change unless indicated otherwise)
95-06
b

a

2007

2008

2009

Est.
2010

Forecast
2011
2012

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

2.9
1.4
2.9
3.4
2.2
3.5
6.0
6.2
0.1
-1.7
6.6
-3.6

5.6
4.2
5.8
7.1
5.0
12.3
5.6
13.1
-1.8
0.3
5.8
-1.2

4.0
2.7
4.3
5.1
2.4
8.7
1.1
8.3
-1.9
-0.8
7.2
-0.9

-2.2
-3.4
-1.8
-0.7
4.0
-9.3
-10.3
-15.0
1.6
-0.5
4.1
-4.0

5.7
4.4
5.7
5.0
6.4
13.9
14.3
21.0
-1.8
-1.2
6.5
-2.6

4.0
2.7
4.0
3.1
4.3
6.4
5.8
6.7
-0.4
-1.4
5.6
-2.2

4.0
2.7
4.1
3.5
4.4
7.6
6.4
7.6
-0.5
-1.7
5.5
-2.1

Memo items: GDP
LAC excluding ArgentinaeCentral AmericafCaribbeanBrazilMexicoArgentina

3.0
3.6
4.2
2.4
3.6
2.3

5.3
3.7
6.0
6.1
3.3
8.7

3.8
1.8
3.3
5.1
1.5
6.8

-2.4
-5.9
0.6
-0.2
-6.5
0.9

5.5
5.0
2.5
7.6
5.2
8.0

4.0
3.6
3.7
4.4
3.6
4.7

4.0
3.8
3.8
4.3
3.8
4.5

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 andTobago, St. Vincent and the Grenadines.

Source: World Bank

89

Global Economic Prospects January 2011: Regional Annex

lingering high unemployment will undermine
growth in Mexico, Central America and the
Caribbean, through trade, investment,
remittances and tourism linkages.

Figure R3.8 Mexican growth closely link to US developments
Percent growth

Brazil has resumed its pre-crisis growth
dynamic. GDP is expected to have increased byaround 7.6 percent in 2010, on account of strong
commodity demand as well as the lagged effects
of expansionary demand management policies.
Going forward, activity will continue to benefit
from an expanding labor force, real wage growthand credit expansion, facilitated by a strong
financial sector, a diversified economy andhighly diverse trade partners. Over the medium
term growth is forecast to slow to, albeit still
strong, 4.4 and 4.3 percent pace in 2011 and2012, respectively. However, renewed global
capital market volatility is expected to affect theReal, and Brazil’s external competitiveness.
Somewhat weaker growth in major trading
partners during 2011-12 pose additional
downside risks for Brazil’s economic outlook.
Brazilian policymakers should ensure thatgrowth remains within levels that are sustainable
over the long term. Brazil’s ability to use
monetary policy for this task is limited by the
likelihood that higher interest rates will attract
further capital inflows, while the long-term
consequences of further appreciation for firms’
export and import-competing points to apotential drawback of flexible exchange rates. In
this context, a further fiscal policy tightening
may be required.

6

8

5

6

4

4

3
2

2

1

0

0

-2

-1

-4

-2
-3

USA

Mexico-6-8-41990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: World Bank

percent growth on average over 2004-2006.
Trade (both exports and imports), which
recovered rapidly during 2010 from very
depressed 2009-bases, is expected to slow once
more as global (particularly US) growth slows
and the base effects dissipate. Overall GDP
growth is forecast at 5.2, 3.6 and 3.8 over the2010 – 2012 period.
GDP growth in Argentina is projected to haveincreased by a robust 8 percent in 2010, but
expected to decelerate to 4.7 and 4.5 percent in2011 and 2012 respectively. During 2010,
Argentina and other commodity exporters in theregion have benefitted from terms of trade gains,stronger external demand, in particular from
Asia, while strong Brazilian demand has
supported a sharp recovery in Argentina’s
industrial sector (Figure R3.9). Although thecurrent lax monetary and fiscal policies are notsustainable over the long term, there are signs
that economic policies may move towards amore moderate and “market friendly” approach.
Two important steps here were the newnegotiations with the Paris Club to restructure
the official debt which has remained in default
since 2001 and the agreement with the IMF for atechnical mission to Argentina to help design a
new nationwide CPI index. Also, thegovernment seems keen to establish a social pactwith unions and employers to anchor inflation
expectations. However, no radical changes in thepolicy stance prior to the 2011 presidential

Mexico was one of the few countries in region to
not have fully recovered from the crisis in 2010,
and with US output gaps only slowly unwinding
over the forecast period, Mexican growth isprojected to remain relatively weak and below
potential (Figure R3.8). Mexican domestic
demand is not expected to be sufficiently strong
to drive internal dynamism, reflecting local
structural weaknesses. Although a recovery inreal wages and a rapid expansion in the working
age population will support demand, the impact
will be muted by weak employment prospects inboth Mexico and the United States. Remittances
are estimated to have declined by 8.7 percent in2010 - well off the pre-crisis pace of 17.5

90

Global Economic Prospects January 2011: Regional Annex

12 remains extremely dissatisfactory as
government policy is creating severe economic
distortions and the sustainability ofmacroeconomic policy remains under pressure.
Notwithstanding the steep currency devaluationin early 2010 and various other measures
implemented to avoid further depreciation, theexchange rate remains severely overvalued,
while access to foreign currency remains
difficult. Despite devaluation and higher oil
prices which have boosted the government’s
revenues, current levels of spending are notsustainable and will only aggravate economic
dislocations, hence failing to produce asustainable recovery.

Figure R3.9 Argentinean exports benefitting from Brazilian demand
Percent growth

25

12
10

20

8
15

6
4

10

2

5

0

0

-2
-4
-6

Brazilean demand
Argentinean exports-5-101990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

In Peru, real GDP growth is forecast to average
6.2 percent over 2010-12. Growth has beenbroad based, with household consumption andinvestment recoding strong growth in 2010 – a
trend which is expected to continue over theforecast period.

Source: World Bank, Datastream.

elections are expected.
Chile’s well deserved status as the most stable
and resilient economy in Latin America, owing
to many years of sound and consistent economic
management, will remain intact as GDP is
forecast to grow by an average of 5.4 percent
over 2010-12. This projected growth is evenslightly faster than during the 2004 – 2007 boom
periods, with forecast growth benefitting fromthe massive reconstruction activity following theearthquake. Around one-half of total exports areaccounted for by copper mining, which was
unaffected by the earthquake. Althoughcontinued export diversification and relatively
strong demand from Asia will underpin export
growth, import spending will rise asreconstruction gets under way, resulting in asomewhat weaker current-account balance overthe forecast period.

The prospects for the Caribbean economies
have been hindered by high unemployment andweak private consumption in the US and otherhigh-income countries that affect the demand for
tourism services and remittances inflows.
Although the Dominican Republic-Central
American Free-Trade Agreement (DR-CAFTA)
has boosted growth over the 2004-2008 period, it
has also increased the region’s reliance on the
US economy. With US growth projected to slow,
the region’s fragile recovery remains vulnerable
to adverse trade, investment and remittance flow
developments. Haiti’s economy is projected torecover over the forecast horizon, after
contracting an estimated dramatic 8.5 percent in2010 due to the earthquake, boosted byreconstruction efforts financed mostly by aid
flows.

Although GDP growth in Colombia is forecast
to rebound from the 2009 slump and average 4.2
percent over 2010-12, the growth will be moresubdued than the average 6.2 percent during the
2004-2007 boom years. Growth will besupported by high levels of investment andstrong private demand, but the collapsing tradewith Venezuela will prevent faster growth rates.

Central American economies (excluding
Mexico) were one of the hardest-hit sub regionsin 2009 due to the sub region’s close economic
ties to the U.S. The recovery has also beenhampered by limited fiscal space to implement
counter-cyclical policies, while prospects for
remittances – the greatest source of foreignexchange and large contributor to income andGiven the recovery in commodity prices andactivity in the region, the growth outlook for
Venezuela (-2.3, 0.9 and 1.7 percent) over 2010-91

Global Economic Prospects January 2011: Regional Annex

regions, with their dependence on tourism andremittance flows from the US, remain
particularly vulnerable to weaker than projected
US economic conditions.

private consumption – continues to be hinderedby still weak job prospects for many Central
Americans working in the crisis affected US andSpanish (housing) markets. In countries such as
Honduras, El Salvador, Guatemala andNicaragua, where remittances are equivalent to
10-20 percent of GDP, and consumption heavily
relies on remittances inflows, the recovery will
be weaker. But in Costa Rica, where thecontribution of remittances is relatively small,
growth is forecast to have been stronger, at 3.6
percent in 2010. The region’s growth prospects
also continue to suffer from crime, corruption,
weak institutions and a lack of competitiveness,
stemming from infrastructure deficiencies. In
Panama however, a number of mega-projects
should support growth which is forecast to
average 5.6 percent over 2010 - 2012.

The tightening stance of monetary policy in theregion, even as interest rates in high-income
countries remains very low has led to a surge ofcapital flows into several countries in the region(see discussion in main text). Attractive interest
rate spreads, the region’s positive growth
outlook, strong commodity prices and the low
opportunity cost of borrowing in high-income
countries have all contributed to the increase inflows. While for many countries the inflows
have been positive and helped support
productive investments, in others, notably Brazil
they have contributed to a consumer credit
boom, rapidly rising imports and asset prices.

Risks
At this stage, monetary policy appears
overburdened. Despite efforts to control money
expansion with higher interest rates andadministrative controls (including taxes on shortterm capital inflows), many currencies in theregion have appreciated sharply, hurting
domestic competitiveness in both exporting andimport-competing sectors. In this context, further
tightening of fiscal policy may be required bothto keep demand under control, but also to restore
the fiscal space that the effective countercyclical policies of the past few years havedepleted. This is all the more important, given
the potential need to react should today’s rapid
inflows reverse rapidly as exchange rates deviate
ever more from underlying fundamental levels.

Although LAC’s improved resilience has passed
the test of the global crisis, there is no room forcomplacency as the continued robustness ofcountries in the region is not a foregone
conclusion. Paramount among the risks facing
the region is dealing with the surging capital
inflows and the destabilizing impact that thismight have on exchange rates, external
competitiveness and domestic asset prices.
Already, delays in withdrawing domestic
stimulus fast enough could be supporting
unsustainable growth, and may be contributing
to overheating of some economies. For theregion’s commodity exporting countries, further
accommodative monetary policies (quantitativeeasing) in high-income countries may translate
into even larger capital inflows and further
commodity price and terms of trade gains adding
to the pace of the recovery (and overheating).

The possibility of intensified and prolonged
sovereign debt stresses in a number of highincome (European) countries, which subsided
during the summer, has increased once again. As
discussed in the main text, Latin America retains
close financial and trade ties with both Spain andPortugal, and as such could be exposed tosignificant repercussions should conditions in
those countries deteriorate sharply. So far, theserisks have not materialized and indeed banks inthese countries have expanded business in theregion attracted by its strong growth prospects,
However, should they be forced to restructure

Robust commodity prices have boosted export
revenues and domestic income, which alongwith easy financing conditions has supported
domestic demand. Should global growth slow
more abruptly than projected in the baseline,
these gains would be quickly unwounded.
Countries such as Mexico, with its deep real andfinancial links to the US economy, and thecommodity importing Central and Caribbean

92

Global Economic Prospects January 2011: Regional Annex

and or deleverage, they could call on the assetsof regional subsidiaries —extending a European
tightening of credit to Latin America. In a lesssevere scenario Latin America could benefit if it
is seen as a more secure location for investing.

good shape, some countries in the region remain
vulnerable to a sharp increase in their debt stock,reflecting weak revenue bases, and/or limited
financing options. Some of the smaller countries
in the region (Jamaica, the Dominican Republic)
have already agreed on lending arrangementswith the IMF. In Argentina, the financing of therapid expenditure growth is placing the longer-

Even though the region’s public finances haveemerged from the global downturn in relatively
Table R3.3 Latin America and the Caribbean country forecasts(annual percent change unless indicated otherwise)

Argentinab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Antigua and Barbudab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Belizeb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Boliviab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Brazilb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Chileb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Colombiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Costa Ricab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Dominicab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Dominican Republicb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Ecuadorb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
El Salvadorb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Guatemalab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Guyanab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Hondurasb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Haitib
GDP at market prices (2005 US$)
Current account bal/GDP (%)

Forecast
2011
2012

2007

2008

2009

Est.
2010

2.3
-0.2

8.7
2.8

6.8
2.1

0.9
2.8

8.0
1.8

4.7
1.3

4.5
1.2

4.3
-10.5

9.1
-32.9

0.2
-29.4

-8.5
-23.1

0.0
-21.9

2.5
-19.2

3.0
-17.3

5.7
-12.1

1.2
-4.1

3.8
-9.7

0.0
-7.0

1.5
-7.2

2.1
-7.8

2.4
-7.6

3.8
-3.0

0.0
12.1

6.1
12.0

3.4
4.7

4.1
8.0

4.0
7.7

4.2
7.1

2.4
-2.0

6.1
0.1

5.1
-1.7

-0.2
-1.5

7.6
-2.7

4.4
-3.0

4.3
-3.2

4.2
-1.5

4.6
4.5

3.7
-1.5

-1.5
2.6

5.5
0.6

5.8
0.3

5.0
-0.3

2.4
-2.2

6.9
-2.9

2.7
-2.8

0.8
-2.2

4.3
-2.7

4.4
-1.9

4.0
-2.2

4.5
-4.0

7.8
-6.3

2.6
-9.3

-1.5
-1.8

3.6
-3.2

3.4
-2.8

3.8
-3.3

1.4
-18.7

4.9
-25.2

3.5
-36.4

-0.8
-32.6

1.2
-30.4

2.0
-25.8

2.8
-22.8

5.2
-0.8

8.5
-5.2

5.3
-9.9

3.5
-4.6

4.4
-5.9

4.2
-5.4

4.3
-5.2

3.2
-1.4

4.0
3.5

7.2
2.0

0.4
-0.5

2.3
-0.8

2.3
-1.5

2.0
-1.4

2.7
-2.5

4.6
-5.8

2.4
-7.2

-3.5
-1.8

1.3
-3.1

2.5
-3.3

2.8
-3.4

3.5
-4.9

6.3
-5.4

3.3
-4.7

0.6
-0.7

2.2
-2.5

2.5
-2.6

2.8
-3.1

1.7
-9.4

5.4
-10.4

3.0
-16.5

2.5
-11.2

2.8
-9.0

3.2
-10.9

3.8
-12.8

3.8
-6.6

6.3
-9.0

4.0
-12.9

-1.9
-3.1

2.4
-4.7

3.1
-2.9

3.3
-4.1

1.0
-24.1

3.3
-8.0

0.8
-11.9

2.9
-9.7

-8.5
-13.6

7.6
-9.6

7.6
-10.4

95-06

a

93

Global Economic Prospects January 2011: Regional Annex

Table R3.3 (continuation)

Jamaicab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Mexicob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Nicaraguab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Panamab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Perub
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Paraguayb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
St. Luciab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
St. Vincent and the Grenadinesb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Trinidad and Tobagob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Uruguayb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Venezuela, RBb
GDP at market prices (2005 US$)
Current account bal/GDP (%)

Forecast
2011
2012

2007

2008

2009

Est.
2010

0.8
-5.5

1.4
-15.8

-0.5
-19.6

-3.0
-9.3

0.6
-7.9

2.2
-6.6

2.5
-5.9

3.6
-1.9

3.3
-0.8

1.5
-1.5

-6.5
-0.7

5.2
-1.0

3.6
-1.2

3.8
-1.3

4.1
-20.1

3.2
-17.7

7.5
-25.8

-5.6
-12.9

3.0
-13.8

3.0
-12.7

3.3
-12.6

4.5
-5.3

12.1
-7.1

10.7
-11.5

2.4
0.0

5.7
-6.1

5.4
-5.5

5.8
-5.5

3.3
-3.3

8.9
1.3

9.8
-3.7

0.9
0.2

8.0
-1.7

5.5
-1.3

5.2
-1.6

1.2
-1.5

6.8
1.5

5.8
-2.5

-3.8
0.3

8.5
-1.8

4.0
-1.8

4.2
-0.9

2.4
-13.2

2.2
-36.0

0.8
-35.2

-3.8
-19.8

1.2
-16.8

2.7
-13.8

2.8
-12.0

4.3
-18.2

8.4
-34.5

1.1
-39.2

-2.8
-34.0

-1.0
-34.6

3.1
-31.0

3.9
-28.4

6.5
3.9

4.6
25.5

2.3
32.9

-3.0
21.8

2.2
25.7

2.8
26.0

2.8
27.1

1.5
-0.9

7.5
-0.9

8.5
-4.8

2.9
0.7

7.9
-0.6

4.6
-0.7

4.2
-0.6

1.6
7.5

8.2
8.0

4.8
12.0

-3.3
2.6

-2.3
5.9

0.9
5.2

1.7
4.7

95-06

a

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 intime.
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.

Source: World Bank

dislocations, and therefore not support asustainable recovery.

term health and sustainability of public finances
at risk and exposing the economy to a rapid
acceleration of inflation. In Venezuela,
government policy is creating severe economic
distortions and the sustainability ofmacroeconomic policy remains under pressure.
Although the recent steep currency devaluation(along with the introduction of a secondary rate
for non-essential imports) should temporary
boost the government’s fiscal position and help
to finance (largely inefficient) government
spending, current levels of spending are notsustainable and will only aggravate economic

Inflexible labor markets, high non-wage costs,
scarce skilled labor and limited infrastructure
remain serious challenges that need to beaddressed if the region is to achieve the higher
longer term growth to which it aspires andrequired to make more progress against poverty.

94

Global Economic Prospects January 2011: Regional Annex

Middle East and North Africa
Developing oil exporters and the GCC benefited
from a substantial 28 percent gain in dollardenominated oil prices in the year to $79/bbl
from $61/bbl in 2009. And for the high-income
countries, a gradual process of financial
consolidation is underway in the wake ofDubai’s crisis of 2008-09. The GCC emerged to
growth of 3.5 percent from a decline of 0.2
percent in 2009. A broader measure of GDP
performance for the geographic region(including the high-income countries) moved up
to 3.4 percent in the year from 1.9 percent at thedepth of global recession (Table R4.1).

Recent developments
The developing countries of the Middle East andNorth Africa region were less affected than otherdeveloping regions by the global recession, inpart because of the region’s limited financial
integration, but also due to its export mix, whichis concentrated in products (oil, materials andlight manufactures) that were not as sharply
affected by the crisis as capital goods- and, inturn, as the economies which produce them.1
Reflecting a muted downturn, the region’s
recovery in 2010 was also more subdued than forother developing regions.

Sources of growth. Several factors in 2010
helped to shift the principal source of growth forthe diversified economies further toward
domestic demand (particularly private andgovernment consumption), as the contribution to
growth from net trade waned. Stimulus packages
were slow to unwind in 2010 and therefore
continued to support household spending, public-sector infrastructure projects, and, throughspillover effects, private investment in the year.3
Moreover, worker remittances to developing
Middle East and North Africa picked up by 5.3
percent in 2010 to $35.5 billion, much stronger
than earlier expected, augmenting householdincomes and offering support for consumption

The upturn in 2010 reflected both an improved
external environment and the ongoing effect ofearlier stimulus measures. Higher oil prices
tended to benefit oil exporters, while the growth
rebound in the Euro Area and high-income Gulf
Cooperation Council (GCC) helped boost
remittances and exports in the region,
particularly among the diversified economies.
Growth edged higher in 2010. With the reboundin world trade and production, upward pressureon oil prices and recovery of the Euro Area togrowth in 2010, GDP gains for developing
Middle East and North Africa picked up
modestly from 3.1 percent in 2009 to 3.3 percent
in 2010.2 The diversified economies of theregion, those with close ties to the GCC andthose with tighter linkages to Europe,
experienced a pick-up in exports that supported
an upturn in growth for most countries. But
overall, the GDP of these countries grew
somewhat less quickly than in 2009 (4.7 versus
4.8 percent) mainly because agricultural
production growth in the Maghreb was weaker
than in 2009. This overall stability masks much
improved bounce backs in Egypt, Jordan andTunisia. Oil exporters saw moderate gains
ranging between 1.5 to 2.5 percent in 2010,
dampened to a degree by self-imposed limits onhydrocarbons output in support of OPEC pricetargets (Figure R4.1).

Figure R4.1 Developing Middle East and North Africa
region less adversely affected by crisis and recession
than many others% growth of real GDP
7
2008
6
2009
5
2010
4
3
2
1
0
-1
Middle East &Developing Oil Exporters Diversified
Gulf
Middle East &Cooperation North Africa
Geographic
North Africa
Council
RegionCountries

Source: World Bank.

95

Global Economic Prospects January 2011: Regional Annex

growth of 4.6 percent in the year. Private
consumption accounted for 3.4 points of 4.7
percent GDP growth in 2010, up from 3.1 points
in the year preceding.

Turnaround in the external environment. Amongthe more favorable factors supporting growth in2010 were the increase in oil price; recovery in
the Euro Area; a modest increase in capital flows
to the region and stronger recovery in tourism
and remittances. On the downside, the U.S.
dollar price of internationally-traded food prices
jumped, notably for wheat-, maize and othergrains. As the developing region most dependenton imported food, these increases are particularly
worrisome, especially for those countries where
currencies are fixed to the dollar. Financial
conditions among the GCC improved fairly
slowly across the year, limiting faster growth inremittances and other flows to the developing
countries of the region.

For the developing oil exporters, the shift insources of growth during 2010 was similar to thediversified economies, but amplified by weakoverall export volumes (0.7 percent growth).
This contrasts with large-scale public-sector
infrastructure and consumption support
programs that lifted construction, engineeringand domestic production activities, in turnsupporting household spending and overall nonoil activity. Indeed, imports surged by 14 percent
for the group, leading net exports to subtract 2.3
points from GDP growth.4 The exception to thisrule is Yemen, where the coming online of LNG
exports in 2010 expanded the hydrocarbons
sector by almost 50 percent and underpinned
GDP growth of 8 percent in the year.

Oil prices firmed by $17 per barrel on averageduring 2010, on the back of stronger demand in
emerging markets, expectations of improved
future global demand, and continued supply
restraint on the part of OPEC. The increase

Table R4.1 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
95-06
4.4
2.7
4.4
4.1
3.3
6.6
4.9
5.7
-0.2
2.9
5.2
-1.5

2007
5.9
4.1
6.2
7.0
2.0
11.6
5.6
12.3
-1.9
10.6
7.3
0.0

2008
4.2
2.4
4.1
5.3
8.4
9.7
-0.8
12.0
-4.4
6.5
14.7
-0.3

2009
3.1
1.4
3.1
4.8
19.1
5.0
-14.1
-3.1
-3.9
-1.2
2.0
-4.2

Est.
2010
3.3
1.6
3.3
4.3
7.1
5.0
3.8
12.6
-3.3
0.3
8.6
-4.4

4.0

4.6

4.7

1.9

3.4

4.1

4.4

4.3

5.9

6.6

4.8

4.7

5.2

5.6

4.4

5.9

2.6

2.2

2.4

3.6

3.6

3.6
4.4
4.8
4.0

3.0
7.1
7.8
3.0

5.3
7.2
2.3
2.4

-0.2
4.7
1.4
2.4

3.5
5.1
1.5
2.4

4.3
5.5
3.0
4.1

4.2
6.0
3.0
4.1

a

b

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

Forecast
2011
2012
4.3
4.4
2.6
2.8
4.2
4.4
4.7
5.0
6.8
6.3
4.8
5.1
5.3
6.3
6.8
7.9
-1.0
-1.2
1.0
0.0
5.3
5.0
-3.4
-2.4

Memo items: GDP
MENA Geographic RegioneResource poor- Labor abundant
Resource rich- Labor abundant
Selected GCC Countries
Egypt
Iran
Algeriaf

7

6

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. Geographic region includes high-income countries: Bahrain, Kuwait, Oman and Saudi Arabia.
f. Selected GCC Countries: Bahrain, Kuwait, Oman and Saudi Arabia.

Source: World Bank

96

Global Economic Prospects January 2011: Regional Annex

growth, as most countries have focused attention
on raising domestic demand. In Algeria, an
expansionary fiscal policy will keep the budget
position in deficit for some time (9.5 percent of
GDP in 2010), as the second phase of the Public
Infrastructure Program comes online. GDP islikely to repeat the moderate 2.4 percent gain of2009 with technical production difficulties
continuing in the oil sector. GDP growth placed
at 1.5 percent in Iran for 2010 is likely to remainon the weaker side moving forward, in part
because of increased economic isolation. In
Syria, a net oil importer since 2008, growth
picked-up from 4 percent to 5 percent in 2010
due to improved agricultural output in the wakeof drought. Fiscal stimulus remains in thepipeline—as rising public investment, public
sector wages and transfers are compensating forhigher fuel prices. And in Yemen, the longawaited Liquefied National Gas Production
Facility began operation in 2010, now producing
at 90 percent capacity. Despite currently
depressed international gas prices, the project is
expected to yield $20-to $30 billion over its 20year lifetime, offering needed revenues for the
low-income economy.

occurred despite more-than sufficient global
crude oil and product stocks, and is driven inpart by the weaker dollar and a “search for yield”
on the part of international investors, treating oil(see discussion in main text) as an “asset class”
of interest (Figure R4.2). The oil price rise
directly benefits regional oil exporters; andindirectly- (in theory) regional oil importers, inthe form of improved remittance flows into thediversified economies. But benefits must be
weighed against associated adverse shifts interms of trade.
Overall the region’s oil revenues increased 28
percent from $450 billion in 2009 to $575 billion
in 2010. The increase helped push the current
account- and fiscal positions of most exporters
back into positive territory – though 2010 fell
well short of 2008 peaks. The divergent results
are tied to the degree of restraint placed on crude
oil production and/or difficulties for several
exporters in maintaining current output levels
against physical-, technology or resource
limitations. Saudi Arabia bore the brunt of
production cutbacks during 2009-10; currently
35 percent of Saudi oil capacity is idle (FigureR4.3). Oman has been able to boost crude oil
output using enhanced recovery techniques, andis not bounded by OPEC quotas. During the year
oil production increased by between 1.5 and 2.5
percent across the GCC and developing oil
exporters.

The upturn in GCC oil revenues in 2010 has
helped spur demand. In Saudi Arabia,
government and quasi-government investment
spending supported growth of 3.7 percent up
from 0.2 percent in the year preceding. Kuwait isprojected to register positive growth in 2010 (1.9

For the latter group, the upturn in oil revenues
will provide only partial support for GDP

Figure R4.3 Oil output, largely curtailed in 2009 begins
to increase in 2010

Figure R4.2 Daily oil price in dollars & euros

industrial production, ch%, (2010 is available year-to-date)$/bbl, €/bbl
WB average

90

9
$/bbl

80

6

70

3

60

0

50

-3

euros/bbl

-6

40

-9

30
20
Jan-09

2008

2009

2010e

-12
Iran
Apr-09Jul-09Oct-09Jan-10

Apr-10Jul-10

Oct-10Source: World Bank

Source: World Bank

97

Oman

Saudi Arabia

AlgeriaGlobal Economic Prospects January 2011: Regional Annex

higher in 2010, up 6.7 percent over the year
through September on an upturn in domestic andforeign demand for manufactures. Consumption
is underpinned by rising incomes, and policy
measures are geared to promote competitivenessand improve the business climate for Tunisianfirms. Key public investments are making
substantial contributions to economic activity.
Growth is expected to reach 3.8 percent in 2010,
contrasted with the 3.1 percent advance of 2009.
And in Jordan and Lebanon, recovery appears to
be fairly well on-track. For the former, with tightlinks to the GCC, growth in these economics is
improving—but as remittances, other income
flows and FDI will likely take time to recover,growth may remain below potential for a time.

percent) after a 4 percent decline in 2009, thesharpest downturn among the GCC. And in the
United Arab Emirates (UAE), the Dubai crisis
dominated the policy agenda. Following a 7
percent GDP advance in 2008, GDP dropped 2.5
percent in 2009 and is expected to pick-up 2.4
percent in 2010.
The moderate easing of growth for thediversified economies of the region was in partdue to slow growth among their major trading
partners— the European Union members and
GCC member states. But a number of one-off, or
special factors restrained growth from what
could have been stronger outturns. In Egypt, forexample, GDP improved from the 4.7 percent
gain of 2009—strong for a period of global
recession—to 5.1 percent in 2010; but thiscontrasts with rates near 7 percent in theimmediate pre-crisis period. Industrial
production recovered sharply, growing at anannualized pace of 8.5% between January andAugust 2010. However, industrial production
has since decelerated in line with the slow downin global growth in the third and fourth quarterof 2010 (Figure R4.4).5 Morocco’s GDP growthis likely to register 3.5 in 2010, a falloff from the
4.9 percent advance of 2009, as the agricultural
sector is showing lower output levels following
record production in 2009. There have also been
adverse terms of trade developments related to
the rising cost of oil and wheat imports.

Economic revival in the Euro Zone. Following arecord 4.1 percent decline in Euro Area real
GDP in 2009, activity is likely to recoup to a 1.7
percent pace in 2010 (see main text), led bystrong growth in Germany, and in broader terms,
by good export performance—and increasingly
in improved domestic demand. Though not astellar recovery, and one hindered bycontinuation of substantial sovereign fiscal anddebt difficulties among smaller Area members,
import demand accelerated over the course of2010, offering export opportunities for thediversified economies of Middle East and North
Africa—notably, Morocco, Tunisia and Egypt.
The rebound of activity in the Euro Area, andrecovery in Morocco’s exports of specialized
products including phosphate acid and fertilizers,
up 80 percent in October (y/y), and fish exports(7 percent) has underpinned overall exports from
the Maghreb. The Euro Area accounts for
between 60-70 percent of goods exports,
remittance receipts and tourist arrivals for thesecountries, with the United States also accounting
for a substantial share. In Morocco for example,
dollar exports increased 23 percent in October2010 on a year-on-year basis. Similarly Tunisiantotal exports were up 17.2 percent as of June,with shipments to Germany gaining momentum(Figure R4.5).

In Tunisia, industrial production is moving
Figure R4.4 For diversified group varied production
outturns for 2010industrial production, ch%, (2010 is available year-to-date)
10
5
0
-5
-10

2008

2009

2010e

-15
Egypt

JordanMoroccoTunisia

Remittances and tourism. There was a surprisingpick-up in worker remittances and tourist

Source: World Bank

98

Global Economic Prospects January 2011: Regional Annex

Figure R4.5 Morocco sees export recovery notably to the United States while Tunisia’s export rebound appears to belosing steam
MoroccoTunisia
Imports by countries, ch% 3mma

Imports by countries, ch% 3mma

80

80

60

60

40

40

20

20

0

0

-20

-20

-40

-40

-60

-60

World

France

Italy

GermanyWorld

United States

France

Italy

Germany

Source: IMF, Direction of Trade Statistics, and Haver Analytics

arrivals to the Middle East rising 20 percent, andup 6 percent for North Africa in the first half of2010 (Table R4.2 bottom panel).6

arrivals in 2010 that provided additional support
for growth—particularly for household
consumption. The upturn in tourism is offering
potential for job creation, incentives forinfrastructure improvement and new
development. These improved flows have been
particularly evident in Egypt in 2010, but mostcountries of the developing region participated in
the upturn. After remittances growth in theregion peaked at 13.2 percent in 2007
(equivalent to $32.1 billion) receipts fell by 6.3
percent during the 2009 recession. Declines werelargest for Morocco (9 percent), Egypt (9percent) and Jordan (5 percent)—a substantial
proportion of Jordanian GDP (Table R4.2, top
panel).

Egypt offers a prime example of the importanceof ancillary external revenues (including FDI) asa financial offset to deficits in the balance oftrade, and a support for growth in domestic
demand and economic activity across sectors of
the economy (Figure R4.6). Trade deficits
averaging $20 billion per year are usually fully
offset by the aggregate of remittances, tourism,
and Suez Canal dues; and FDI, through thefinancial account, offers further financing
Figure R4.6 Egypt’s ancillary revenues more than offset
average trade deficits

World Bank estimates for 2010 suggest that the
dollar value of remittances to the region
increased 5.3 percent to $35.5 billion, on
recovery in Europe and to a lesser degree, theGCC economies. Largest gains were recorded by
Egypt (25 percent), Lebanon (8.2 percent) andJordan (5.3 percent). Tourism is another key
element in the forces propelling growth in the
Middle East and North Africa, representing on
average $32 billion or 3.5 percent of thedeveloping region’s GDP over the past three
years. After falling 4 percent globally in 2009,
the United Nation’s World Tourism
Organization estimates that arrivals will increaseby as much as 13 percent for the region—with

billions U.S. dollars
40

30

20

10

0
2005

2006

2007

2008

2009

Worker remittances

Tourism revenues

Suez Canal receipts

Foreign Direct Investment

Source: World Bank, Government of Egypt, UNCTAD

99

2010e

Global Economic Prospects January 2011: Regional Annex

Table R4.2 Middle East and North Africa, remittances and tourism-related revenues, 2000-2010eRemittances inflows ($mn)
MENA Region
growth per year (%)
share of GDP (%)

Egypt
LebanonMoroccoJordanTunisia
Yemen
West Bank and Gaza
Other Middle East and North Africa
Memo items: MNA ex Egypt
growth per year (%)
M NA share of global remittances (%)
Tourism arrivals and revenues
MENA Region
Arrivals - Thousands
Tourism expenditure in the country - US $ Mn
growth of arrivals per year (%)
growth of revenues per year (%)
revenue share of GDP (%)

2000

2005

2007

2008

2009

2010e

15,32325,078
10.4
4.5

32,14513.2
4.3

35,93711.8
3.7

33,660-6.3
3.5

35,455
5.3
3.5

4,330
4,924
4,590
2,500
1,393
1,283
705
5,353
20,748
11.1
13.1

6,321
5,769
6,730
3,433
1,716
1,332
1,085
5,759
25,824
11.6
11.5

8,560
7,181
6,895
3,794
1,977
1,411
1,220
4,899
27,377
6.0
11.1

7,806
7,558
6,271
3,597
1,966
1,378
1,261
3,823
25,854
-5.6
11.0

9,753
8,177
6,447
3,789
1,960
1,471
1,307
2,551
25,702-0.6
10.9

38,30830,8859.7
7.9
4.1

42,98234,015
12.2
10.1
3.5

44,03433,886
2.4
-0.4
3.5

49,777
…
13.0
…

3.2

31,831
21,102
8.5
12.1
3.8

5,116
4,278
2,100
5,058
1,580
742
2,281

8,650
5,843
3,571
6,378
2,987
1,140
3,262

9,788
7,408
4,158
6,762
3,431
1,017
5,744

12,294
7,879
5,430
7,049
3,729
1,333
5,268

12,293
8,341
6,092
6,901
3,789
1,851
4,767

13,758
9,375
7,615
6,970
4,547
2,221
5,291

16,0397,241

23,181
13,896
7.6
13.9

28,52020,55810.9
21.6

30,68821,911
7.6
6.6

31,741
22,401
3.4
2.2

36,019
…
13.5
…

4.2
3,067
1,582
2,161
1,845
796
1,228
1,010
3,634
12,25616.1

21,155
11,898

Tourism arrivals

Egypt
Morocco
Syria
Tunisia
JordanLebanon
Other Middle East and North Africa
Memo items: MNA ex Egypt
Arrivals - Thousands
Tourism expenditure in the country - US$ M ngrowth of arrivals per year (%)
growth of revenues per year (%)

Source: Remittances: World Bank, Tourism: United Nations World Tourism Organization & World Bank estimatesrecovery and financial improvement are
emerging. Increasingly, flows may begin to takeplace across developing countries of the region,
as trade and production agreements among
Middle East and North Africa countries-, andbetween Middle East and North Africa and theEuropean Union begin to gather momentum.
Even at reduced levels, FDI continues todominate overall financial flows to the region.

support for possible overruns in trade.
Foreign direct investment. If 2010 outturns for
remittances and tourism arrivals are “upsidesurprises”, then the near-12 percent decline in
FDI inflows to the developing countries ofMiddle East and North Africa has to beconsidered a “downside” development. FDI
established average growth of 32 percent
between 2000 and 2005 and reached $35.3
billion, or 3.7 percent of GDP in 2008. Egypt,
Lebanon, Iran and Jordan are key recipients(Table R4.3, top panel). The Dubai financial
crisis served to disrupt these flows. Outbound
FDI from the GCC halved from 2007 levels by2009 (Table R4.3, bottom panel). Developments
among GCC economies suggest that thelikelihood of a quick return to the halcyon daysof 2007-08 is small, though signs of economic

Net capital flows to Middle East and North
Africa. Private capital flows to the developing
Middle East and North Africa region increased
modestly (by 1.2 percent, or $320 million) to$25.8 billion during 2010; this in contrast withthe sharp pick-up in flows into East- and South
Asia (Table R4.4).7 Moderate gains in portfolio
equity and medium-term debt flows were almost
wholly offset by the decline in FDI noted for the100

Global Economic Prospects January 2011: Regional Annex

Table R4.3 Middle East and North Africa, foreign direct investment flows, 2000 to 2010e
2000

2005

2007

2008

2009

2010e

5,628

22,52332.0
3.5

32,64620.4
4.3

35,2488.0
3.7

32,170-8.7
3.3

28,350
-11.9
2.8

5,376
2,624
3,136
1,774
1,081
723
1,620
6,189
17,147
31.3
13.1

11,578
3,376
1,670
1,950
1,665
1,532
2,825
8,050
21,068
10.8
11.5

9,495
4,333
1,615
1,965
2,656
2,638
2,466
10,08025,753
22.2
11.1

6,712
4,804
3,016
2,382
2,390
1,688
1,332
9,846
25,458
-1.1
11.0

6,500
4,650
2,900
2,500
2,000
1,700
1,500
6,600
21,850-14.2
10.9

18,888

10,690-10.8

44,247103.4

34,342-22.4

20,382-40.6…
…

KuwaitSaudi Arabia
Qatar
United Arab Emirates
Other GCC

-303
1,550
17,210
423
8

5,142
78
352
3,750
1,368

10,156
12,7305,160
14,568
1,633

8,858
1,450
6,029
15,800
2,205

8,737
6,526
3,772
2,732
-1,385…
…
…
…
…

Memo items: GCC ex Kuwait
FDI outflows ($mn)
growth per year (%)

19,191

5,548
-22.0

34,091147.9

25,484-25.2

11,645-54.3…
…

Foreign Direct Investment inflows ($mn)
Middle East and North Africa Region
growth per year (%)
share of GDP (%)

Egypt
LebanonIran
JordanAlgeria
Tunisia
MoroccoOther Middle East and North Africa
Memo items: Middle East and North Africa ex Egypt
growth per year (%)
M iddle East & North Africa share of developing country FDI (%)
Foreign Direct Investment outflows ($mn)
Gulf Cooperation Council (GCC)
growth per year (%)
share of GDP (%)

1.4
1,235
964
194
815
438
752
221
1,009
4,393
16.1

Source: Foreign Direct Investment: World Bank, and United Nations, UNCTAD
Note: FDI inflows include those to Iran and Lebanon, not included in developing totals elsewhere.

Figure R4.7 Bourses in Egypt and UAE performing
well in 2010

year. Equity flows increased for a second year insuccession favoring the bourses of Egypt andthe UAE. For the UAE market, improvements
were centered in fall 2010 as the Dubai World
restructuring was settled and banking results
improved (Figure R4.7). Medium and long-term
private debt flows increased by $6.7 billion, withissuance of $2.3 billion in international bonds
and the undertaking of syndicated bankborrowing of some $2.7 billion. Net flows fromofficial creditors increased by $620 million to$2.9 billion in the year. But the decline in FDI
by 15 percent to $20.8 billion dominates theflow of capital to the region.8 Looking forward,
the World Bank anticipates a resumption of
growth in FDI over the period through 2012,
with a continued—albeit more moderate—
pickup in portfolio equity and private debt.

MSCI benchmark indices in LCU, index Jan 2009=100.
200
180
160
140
120
100
80
60
40
20

Egypt

0
Jan-09 Apr-09

MoroccoJul-09JordanOct-09 Jan-10 Apr-10

UAE

Jul-10

Oct-10Source: Morgan Stanley, World Bank data.

more detail) remain in excess supply in
production and refining, with non-OPEC
producers having met almost all increased
demand in both 2009 and 2010 (production was

Medium-term outlook
Global oil markets (see Commodity annex for101

Global Economic Prospects January 2011: Regional Annex

Table R4.4 Net capital flows to Middle East and North Africa$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+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
22.2
5.2

2004
37.9
7.8

2005
59.8
10.8

2006
69.1
10.9

2007
81.4
10.7

2008
63.0
6.6

2009
-8.9
-0.9

2010e
19.6
1.8

13.5
15.6
3.7
10.2
10.0
0.2
3.4
-2.1
-0.3
-0.6
-1.2
5.4
0.9
0.7
-0.2
0.4
4.6
-12.5
-23.2

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
-36.2
-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
-40.2
-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
-45.7
-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
-62.8
-48.0

21.1
22.9
2.4
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
-40.7
-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
5.3
-24.2

28.7
25.8
2.4
22.2
20.8
1.4
6.5
2.9
1.8
-0.1
1.2
3.6
5.0
2.3
2.7
0.0
-1.4
-37.0
-11.3

19.9

22.6

23.6

25.1

32.0

36.0

34.0

35.0

2011f
5.1
0.4

2012f
-1.0
-0.1

32.4
2.8
25.4
23.3
2.1

33.1
2.6
30.1
27.8
2.3

7.0

3.0

37.0

40.0

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

countries are unlikely to benefit from asubstantial exogenous boost over the forecast
period. Developing oil exporter growth isexpected to inch-up to 3.6 percent in 2011-12, on
continued strength in domestic demand. Net
exports should continue to exert drag, given
hefty imports related to infrastructure projects(Figure R4.8). The current account surplus ofdeveloping exporters is projected to ease fromabout 5 percent of GDP in 2010-11 toward 3.5
percent in 2012, as large-scale spending andimports offset oil revenue gains. For the highincome GCC economies recovery will depend on
oil markets, but also on international financial
and growth developments, given the increasingly
diversified nature of economies such as theUAE, Bahrain, and Kuwait. GDP gains for thegroup are expected to register 4.3-and 4.2
percent in 2011 and 2012, on stronger
government-investment and household spending.

up 0.9mb/d each year) leaving little room for
OPEC members to increase output. Growth inglobal oil demand is expected to remain
moderate at 1.5 percent per year in the near term,with non-OPEC oil supplies projected tocontinue increasing at about the same pace,
implying about 0.5mb/d increase for OPEC.
Despite recent upticks in oil price, world prices
are projected to remain between $70-90/bbl inthe medium term, with OPEC producers
stepping up sales from their ample spare capacity
to meet any additional demand not supplied by
non-OPEC producers. OPEC is not expected toallow prices to rise beyond this point for fear of
inducing additional non OPEC supply or demand
substitution. Globally there are no medium-to
longer run supply constraints (2020); and a longterm upper-range of $80/bbl is consistent withthe end-cost of developing additional oil
capacity, notably from oil sands in Canada.

Given a pickup in growth among the GCC and aleveling-out of economic activity in key export

As a result, incomes among oil exporting102

Global Economic Prospects January 2011: Regional Annex

disruptions related to fiscal difficulties
would put Maghreb exports at risk. And in
the United States, quantitative easing
monetary policies are raising uncertainties inexchange and commodity markets.

Figure R4.8 Growth in developing Middle East &North Africa region to reach 4.5% by 2012
% growth of real GDP

2009

2010

2011

2012

6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0



Middle East
Gulf
Developing Oil Exporters Diversified
Cooperation & North
Middle East
AfricaCouncil& NorthCountries Geographic
AfricaRegionSource: World Bank

markets by 2012 (in the Euro Area near 2
percent; the United States closer to 3 percent),
prospects for the diversified economies are fairly
buoyant. GDP growth for these countries isanticipated to accelerate to a 5.6 percent pace by
2012. Growth approaches 6 percent in Egypt, 5
percent in Morocco and Tunisia, and averages
5.5 percent in Jordan and Lebanon by 2012. Thisis grounded in a firming of goods exports;
stronger remittance and tourism receipts; returnof stronger FDI inflows, and domestic policies
oriented toward further opening of trade anddomestic service sectors. For the geographicalregion, projections point to growth picking up to
4.3 percent during 2011-12, fostered in part by ahealthier financial and economic environment
among the GCC economies.

The ratcheting up of food prices is of
exceptional concern for the broader Middle
East and North Africa region. Prices for all
non-energy commodities have escalated oflate, with fundamental pressures on cereals
prices due to the loss of Russian andUkrainian exports to the world market(Figure R4.9). Food imports account for avery large proportion of Middle East andNorth Africa imports, notably in the
Maghreb and Egypt. Such imports range
from 17 percent of the import bill in Algeria
to 7 percent in Tunisia; cereals account for
7.5 percent of Algeria’s bill to 4 percent in
Tunisia (Figure R4.10). The region iseffectively still in “recovery mode” from thefood crisis of 2008.

Figure R4.9 Metals, raw materials and agricultural
prices surge—on the weak dollar and other factors(Indices, Jan 1 2010 = 100)
200
175
150

CopperCorn
RubberWheat
Cotton
Tin

125

Risks

100

Though risks to the baseline forecast may beviewed as many, two appear to stand out:75
Jan-10 Feb-10 Mar-10 Apr-10May-10 Jun-10 Jul-10 Aug-10Sep-10Nov-10



Risks for recovery in the OECD countries,
notably for the Euro Area, have heightenedwith the onset of sovereign financial
difficulties. But risks to European growth
linked to coming imposition of austerity
measures to rein-in fiscal deficits are also ofsome concern. For the diversified exportersof the Maghreb, in particular, with tighttrade links to the southern tier of the EuroArea (Italy, France and Spain), further

Source: Commodity exchanges through Thomson-Reuters/
Datastream

Notes:
1. See “Sustaining the Recovery in Times ofUncertainty”, A Regional Economic
Outlook. Middle East and North Africa

103

Global Economic Prospects January 2011: Regional Annex

Region. The World Bank, October 2010.

Figure R4.10 Food and cereals are a large proportionof the import bill in the Maghreb and Egypt

2. The low-and middle income countries of theregion included in this report are Algeria,
The Arab Republic of Egypt, The Islamic
Republic of Iran, Jordan, Lebanon, Morocco,
Syria Arab Republic, Tunisia and Yemen.
Data is insufficient for the inclusion of
Djibouti, Iraq and the West Bank and Gaza.
The high-income economies included here
are Bahrain, Kuwait, Oman and Saudi
Arabia. Data is insufficient for the inclusionof Libya, 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

share of total goods imports, average 2006-09, percent
18
15

Food

Cereals

129630Algeria

Egypt

MoroccoTunisia

Source: U.N. Comtrade Database

Table R4.5 Middle East and North Africa country forecasts(annual percent change unless indicated otherwise)
2007

2008

2009

Est.
2010

4.0
8.2

3.0
22.5

2.4
20.2

2.4
0.0

2.4
4.6

4.1
6.2

4.1
3.4

4.4
0.4

7.1
0.3

7.2
-0.7

4.7
-1.7

5.1
-4.1

5.5
-3.2

6.0
-2.7

4.8
7.2

7.8
20.1

2.3
13.2

1.4
3.4

1.5
6.1

3.0
6.7

3.0
4.4

4.8
-0.2

8.5
-16.2

7.6
-8.7

2.3
-4.3

4.0
-4.6

5.0
-5.4

5.5
-4.5

2.6
-19.6

7.6
-6.4

9.3
-13.7

9.0
-21.9

8.0
-23.6

7.0
-22.6

6.0
-21.7

4.4
0.7

2.7
-0.3

5.6
-6.4

4.9
-5.1

3.5
-3.2

4.4
-2.9

5.1
-1.4

3.2
2.9

4.2
1.1

5.2
-3.6

4.0
-4.5

5.0
-3.9

5.5
-3.4

5.6
-3.2

5.0
-3.0

6.3
-2.6

4.6
-3.7

3.1
-2.8

3.8
-4.8

4.8
-4.1

5.0
-3.0

4.9
3.1

3.3
-7.0

3.6
-4.6

3.9
-9.7

8.0
-0.6

4.1
1.7

4.2
-0.7

95-06
Algeriab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Egypt, Arab Rep.
b
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Iran, Islamic Rep.
b
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Jordanb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Lebanonb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Moroccob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Syrian Arab Republicb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Tunisiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Yemen, Rep.
b
GDP at market prices (2005 US$)
Current account bal/GDP (%)

a

Forecast
2011
2012

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 momentin 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.

Source: World Bank

104

Global Economic Prospects January 2011: Regional Annex

the Arab Republic of Egypt, the Islamic
Republic of Iran, Jordan, Lebanon, theSyrian Arab Republic, Tunisia and theRepublic of Yemen. Table R4.4.

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).

8. Table R4.3 earlier includes FDI inflows for
the Islamic Republic of Iran and for
Lebanon, which are not part of the overall
capital flows Table R4.4.

3. For example, in Tunisia, government foodand fuel subsidies (part of mitigation efforts
from the global food price crisis of 2008
which hit the Middle East and North Africa
region hard-the largest food importing
region in the world) helped to support
household consumption to stronger gains.
Public infrastructure projects continue, andthe 2010 budget carries a cushion of 1.5
percent of GDP for potential fiscal support
measures should the external environment(notably growth in Europe) take a turn to thedownside.
4. For example, in Algeria, non-oil growthadvanced 9.3 percent in 2009, supported by
the on-going Public Investment Program(PIP), yielding the first fiscal deficit in morethan a decade. Algeria is continuing withexpansionary fiscal policies, with the second
phase of PIP slated at $285 billion over 2010
to 2014, focusing on improved access toand the quality of basic services; upgrading
housing, transport and utilities.
5. Industrial production (IP) figures herein are
sourced from the World Bank- Development
Prospects Group high-frequency database.
For IP, manufacturing, mining and utilities
share in GDP (factor cost) is used toestablish a real dollar value (in 2005 prices)
for production. This is moved forward using
available industrial production indicatorsfrom Thomson-Datastream, Haver
Analytics, the International Monetary Fundand other electronic sources. The original
series are often sourced from countryspecific statistical agencies or central banks.
6. “World Tourism Barometer”, Interim
Update, August 2010. United Nations World
Tourism Organization.
7. Capital flows to the developing MENA
region include net flows to: Algeria, Djibuti,

105

Global Economic Prospects January 2011: Regional Annex

South Asia
incomplete and real interest rates remain
negative. Moreover, despite some modest
progress toward fiscal consolidation in 2010,
South Asia has the largest fiscal deficit amongdeveloping countries with the region-wide
deficit estimated at 8.2 percent in 2010. At thecountry-level, fiscal deficits as a share of GDP
range significantly. For instance, Bangladesh’s
overall general government deficit is moremanageable at an estimated 2.5 percent
compared with the Maldives’ deficit of 22.4
percent, and those in India (9.6 percent), Sri
Lanka (8 percent), Pakistan (6.3 percent), andBhutan (6.1 percent). (Figure R5.1)

Recent developments
South Asia’s real GDP growth accelerated to an
estimated 8.7 percent in FY2010-11 from 7.0
percent in FY2009-10, buoyed by very strong
growth in India, which represents 80 percent ofregional GDP. Excluding India, regional GDP
growth (on a fiscal year basis) firmed, but to amore modest 5.1 percent from 4.3 percent theyear before. On a calendar year basis, GDP for
the region as a whole is estimated to have
expanded 8.4 percent in 2010 after 5.3 percent in2009, and to 4.8 percent in 2010 from 3.8
percent in 2009 if India is excluded.

Figure R5.1 General government deficit in South Asia ishighest among developing regions

These strong growth rates mainly reflect robust
domestic demand, supported by macroeconomic
policy stimulus measures, and a revival ininvestor and consumer sentiment. Improved
external demand and stronger private capital
inflows have also played a role. At the country
level, local factors—such as a good harvest andstrong donor funding in Afghanistan; a favorable
monsoon in India; recovery of tourism in theMaldives; rising capital expenditures forongoing development of hydropower capacity in
Bhutan; and the peace dividend in Sri Lanka—
have also supported the rebound. In Pakistan,
however, a standstill on policy implementation,
severe disruption tied to massive flooding andcontinued security problems have constrained
economic activity. Political stalemate has
contributed to lackluster growth in Nepal. And,
although growth was fairly strong in
Bangladesh, continued power-supply bottlenecks
have held back the expansion that could havebeen even stronger. (Table R5.1)

Percent share of GDP
2
0
-2
-4
-6
-8

2007

2009

2012p

-10
South Asia

High-Income
countries

Middle Eastand North
AfricaEast Asia and Latin America Sub-SaharanPacific
and Caribbean
AfricaSource:World Bank Databases and DEC Prospects Groupprojections

The region’s high fiscal deficits reflect a numberof longstanding structural factors, withsignificant pressures emanating from both therevenue and expenditure sides. In particular, tax
mobilization in the region is low. South Asia’s
general government tax revenues averaged 14.3
percent as a share of GDP in 2009—comparedwith Europe and Central Asia (21.4%), SubSaharan Africa (16.5%) and Latin America andCaribbean (16.4%)—and represented less than
12 percent of GDP in Pakistan (10.4 percent),

Macroeconomic policy in South Asia is
accommodative, given the strength of regional
economic activity and relative to other regions(where growth has generally not gained as strongof a footing). While policy interest-rates havebeen raised (beginning in mid-March 2010 inIndia, and, more recently, in Bangladesh andPakistan), monetary policy normalization is106

Global Economic Prospects January 2011: Regional Annex

This reflects elevated interest payments as ashare of total outlays in Bangladesh (17.3
percent, as of 2009) India (17.7 percent),
Pakistan (25.5 percent), and Sri Lanka (25.8
percent). In comparison, government interest
payments in Afghanistan and Nepal are moremanageable at 4 percent or lower (as a share ofgeneral government outlays).(Figure R5.2)

Nepal (11.8 percent) and Afghanistan (7.2
percent). India’s tax base is broader at 16.5
percent. On the expenditure side, the region
carries a particularly heavy burden in the form ofhigh interest payments. Relative to total
expenditures, interest payments averaged 18.2
percent in 2009, by far the highest share amongdeveloping regions and at least twice the as high,with the exception of Latin America and the
Caribbean (11%) (general government accounts).

Other factors have contributed to the region’s

Table R5.1 South Asia forecast summary(annual percent change unless indicated otherwise)

2007

2008

2009

Est.
2010

Forecast
2011
2012

6.0
6.1
4.1
6.0
4.8
5.2
7.8
11.9
9.8
-0.2
-0.7
6.1
-7.4

8.9
9.2
7.3
8.9
8.7
7.3
14.6
5.4
8.8
-1.0
-1.2
7.7
-4.2

4.8
6.1
3.4
4.8
5.6
18.1
4.1
16.0
19.0
-1.5
-3.3
8.8
-7.2

7.0
5.3
5.6
7.0
5.1
6.1
5.7
-6.1
-7.4
0.7
-1.7
6.5
-8.8

8.7
8.3
7.3
8.7
7.5
9.1
10.3
7.4
6.2
-0.1
-3.4
11.5
-8.3

7.7
7.8
6.3
7.7
5.2
8.4
13.2
8.8
9.4
-0.5
-2.9
8.7
-7.5

8.1
7.9
6.7
8.1
5.7
7.0
13.3
10.3
10.3
-0.5
-2.9
6.9
-6.9

4.5
6.4
4.1
5.3

5.9
9.6
9.2
5.7
6.4

3.7
5.1
6.7
1.6
6.2

4.3
7.7
7.7
3.6
5.7

5.1
9.5
8.7
4.4
5.8

4.3
8.4
9.0
2.6
6.1

5.0
8.7
8.5
3.8
6.3

95-06
b,f

GDP at market prices (2005 US$)c
GDP in Calendar year basis
GDP per capita (units in US$)d
PPP GDPPrivate consumption
Public consumption
Fixed investmente
Exports, GNFSe
Imports, GNFS
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP at market prices
South Asia excluding India
India
at factor cost
Pakistan
Bangladeshafa. 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 anapproximation 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 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 toreporting practices, Bangladesh, Nepal, and Pakistan report FY2007/08 data in CY2008, while India reports
FY2007/08 in CY2007.
Source: World Bank.

107

Global Economic Prospects January 2011: Regional Annex

liberalization of fuel-price subsidies in India.
More recently, inflationary pressures have been
partly offset by falling local food prices, due toimproved harvests following a good 2010

Figure R5.2 Interest payments weigh on South Asia's
fiscal coffers and constrain policy options

percent share of fiscal expenditures, 200920

Figure R5.3 Inflation in South Asia has not eased asmuch as in other regions

18
16
14

median CPI, seasonally adjusted, annual percent change

12
10

16

8

14

6

12

4

10

2

8
6

0
South Asia

Latin Am. &Caribbean

Sub-SaharanAfricaEast Asia &Pacific4

Europe & Middle East &Central Asia North Africa

20

Sources: World Bank and International Monetary Fund,2010-2
2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07

East Asia & PacificHigh Income Countries
Middle East & N. Africa
Sub-Saharan Africa

large deficits, including in the case of India, forexample, elevated countercyclical spending thathas yet to be fully unwound. Recent efforts atbudget consolidation have been missed inPakistan, because of revenue shortfalls, overrun
on power sector subsidies and elevated security
expenditures, as well as flood-related
expenditures; and in the Maldives and Nepal,
due to political stalemates that have undermined
progress on budget agreements.

Europe & Central Asia
Latin America & Caribbean
South Asia

Source: Thomson Datastream and World Bank

monsoon, particularly in Afghanistan and India.
(Figure R5.3)
The significant inflation differential between
many South Asian countries and their trade
partners has contributed to a real appreciation of
their currencies in 2010. Notably, much of theappreciation during the year represents a reversalof depreciation in the aftermath of the global
financial crisis. And, since January 2007
regional currencies have remained broadly
stable, trading within a plus/minus 10 percent
band—with the exceptions of Afghanistan andPakistan. Over the same period, Afghanistan’scurrency has appreciated by 17 percent,supported by massive foreign aid inflows. In
contrast, Pakistan’s currency real effective
exchange rate depreciated by 34 percent since
January 2007, partly tied to large and persistent
structural macroeconomic imbalances. (Figure
R5.4)

South Asia posted the highest median inflation
rate among developing regions in the secondhalf of 2010. Inflationary pressures were up
across most economies in the region in 2010,
with the exceptions of Afghanistan and theMaldives, where they remained more stable. Inpart rising inflationary pressures stem fromrecent firming in international fuel and foodprices. However, domestic drivers also
contributed to higher prices, including elevatedcapacity utilization rates, accommodative macropolicy stances and increased inflationary
expectations following several years of rising
inflation. The rise in headline prices in
Bangladesh, Bhutan and Nepal also partly
reflects spillover from India, a key trade partner,
through higher imported prices. Temporary priceshocks have also been a factor, such as the
disruption of flooding in Pakistan and some

The pace of growth in merchandise exports andimports moderated sharply in mid-2010
following several months of double-digit growth108

Global Economic Prospects January 2011: Regional Annex

Figure R5.4 Real effective exchange rates in South Asia
generally remain within plus/minus 10 percent band since2007

Figure R5.5 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

Indices, (August 2008=100)
140

80

130

120

Bangladesh

BhutanIndia

Maldives

Nepal

Pakistan

60
40
20

Sri Lanka

0

110
-20

100

-40
-60

90

-80
2007M0180
2007M1

2007M7

2008M1

2008M7

2009M1

2009M7

2010M1

2007M07

2008M01

2008M07

2009M01

2009M07

Developing excl. South Asia
High Income Countries

2010M7

2010M01

2010M07

South Asia
World long-term average

Source: International Monetary Fund and World BankSouth Asia's merchandise goods volume imports loose
steam from mid-2010(3m/3m, seasonally adjusted, annualized rates).
This basic pattern was observed across theworld, and coincided with the recovery of precrisis trade levels (see main text), and partly
reflects an overshooting of activity levels and acoming-to-an-end of the global inventory
restocking phase of the global recovery.
However, in South Asia, the slowdown in tradeactivity also stems from country-specific factors.
For example, merchandise export volumes havebeen adversely impacted by power outages in
Bangladesh that disrupted ready-made garment
production, which represents over 75 percent ofmerchandise exports. In Pakistan, floods led toan estimated 20 percent reduction in cotton
harvest and sharp fall-off in cotton exports andtextiles (with the latter representing two-thirds oftotal merchandise exports). The pace of growthof regional merchandise import volumes has
slowed markedly compared with other regions,and could reflect a recent moderation in the paceof growth of remittances inflows—a key driverof regional private consumption. (Figure R5.5)

3m/3m, %-change, seasonally adjusted annualized rates,
long-term average=1991-2010
140
120
100
80
60
40
20
0
-20
-40
-60
-80
2007M01

2007M07

2008M01

2008M07

Developing excl. South Asia
High Income Countries

2009M01

2009M07

2010M01

2010M07

South Asia
World long-term average

Source: Thomson Datastream and World Bank

inflows to South Asia increased by an estimated10.3 percent (in US-dollar value terms) in 2010,
more than double the 4.5 percent growth rate in2009—but well below the 19 percent averageannual rate recorded between 1999 and 2009.
However, because local currencies appreciatedagainst the US-dollar, remittances inflows in real
local currency-terms are estimated to havecontracted in India (down 8.6 percent),
Bangladesh (3.4 percent), Nepal (3.1 percent),
Sri Lanka (1.7 percent) and Pakistan (1.4
percent). This compares with vibrant growth inRemittances are a main source of foreignexchange for the region, and are an importantdriver of regional domestic demand. Official
remittances inflows represent a significant shareof GDP in Nepal (23 percent), Bangladesh (12percent), Sri Lanka (9 percent), Pakistan (5.1
percent) and India (4 percent).1 Remittances109

Global Economic Prospects January 2011: Regional Annex

deterioration in merchandise trade balances.
Partly as a result, India’s current account deficitrose to a projected 3.7 percent of GDP in 2010,
up from 2.0 percent in 2009. Current accountdeficits also rose significantly in Sri Lanka and
Nepal. Strengthened remittances inflows (in USdollar terms) have contained pressures on
external balances and significantly offset
sizeable trade deficits. Similarly, services
receipts helped offset large trade deficits, given a
rebound in tourism activity. In particular, theMaldives, Nepal and Sri Lanka witnessed a
sharp upswing in tourist arrivals in 2010 of atleast 12 percent over 2009. In the Maldives, thetotal number of arrivals for the first sevenmonths of 2010 increased to a record of nearly
440,000—with arrivals up 29 percent over July2009 in part due to a strengthening in arrivals
from fast-growing emerging economies (withChina surpassing the U.K. as the largest numberof tourists). Bhutan and India also saw a pick-up
in tourism activity, with arrivals for bothcountries projected to have risen by 6 percent in2010. In India, the pace of growth of ICTexports (internet, communication andtechnology) has decelerated markedly comparedwith vibrant growth rates posted in the past. Thisis largely attributed to a tepid recovery inexternal demand in the key export markets of theUnited States, United Kingdom and Europe,
which comprise about 85 percent of Indian
software and services exports.

real local currency-terms in the past, which overthe previous five years (2004-2009) expanded byan average 17.6 percent (median growth rate
across the five countries).
While remittances inflows in US-dollar terms
rose for the regional aggregate in 2010, thegrowth trend varied at the country level,reflecting divergent economic trends in migrantdestination countries and shifts in net
emigration. In Bangladesh for example, net
emigration slowed markedly in 2010, while itsurged to the highest level on record in Nepal(reaching 300,000). The annual growth rate ofremittances inflows slowed markedly in 2010 in
Bangladesh, as the pace of expansion stalled atclose to zero growth from June 2010 and shifted
into contraction in November (4.6 percent overNovember 2009). As the stock of Bangladeshi
migrants abroad continued to rise (albeit at a
slower pace than in the past), the pronounced
moderation in inflows (and recent decline in
November) could reflect a variety of factors,
including a fall in employment, decline inwages, or a decline in the propensity to remit.
(Figure R5.6).
The regional current account deficit deteriorated
in 2010, reflecting the relative strength ofdomestic demand, as growth of imports of goods
outpaced that of exports and led to a sharp
Figure R5.6 Remittances inflows post tepid growth insome South Asian countries in 2010
3-month moving averages, annual percent growth80

Bangladesh

70

Pakistan

60

Nepal

50
40
30
20
10
0
-10
May-08

Oct-08Mar-09Aug-09Jan-10Jun-10Nov-10Source: Country central banks and World Bank

110

Net private capital inflows (excluding official
inflows) to South Asia strengthened by an
estimated 18.4 percent in 2010 to $81 billion
from 2009, and held fairly steady as a share of
GDP at 4.0 percent in 2010 versus 4.3 percent in2009. India and Sri Lanka account for the bulkof private capital inflows. While private capital
inflows have nearly halved from the pre-crisis
boom share of GDP of 7.8 percent recorded in
2007, at 4.0 percent it is roughly double the 2.0
percent share recorded during the period from2000 through 2005. The recovery of inflows in2010 over 2009 reflects a firming in portfolio
equity and short-term debt flows, which
increased to 2.1 percent as a share of GDP in2010 from 1.2 percent in 2009. Compared withother developing regions, where portfolio

Global Economic Prospects January 2011: Regional Annex

inflows averaged 0.8 percent of GDP in 2010,
portfolio inflows are relatively high in South
Asia—and largely reflect record high foreign
portfolio inflows into India during 2010. In
contrast, net foreign direct investment inflows inSouth Asia continued to decline in level terms(and as a share of GDP) in 2010, albeit the paceof decline decelerated markedly compared withthe sharp fall-off in 2009. Compared with otherdeveloping regions, where FDI inflows averaged
2.2 percent of GDP in 2010, FDI inflows are

Asia. (Figure R5.7).

Medium-term outlook
South Asia is projected to continue to post robust
growth of 7.7 percent and 8.1 percent over theforecast horizon in FY2011/12 and FY2012-13,
respectively—albeit a deceleration from the 8.7
percent growth recorded in FY2010/11. The
projected slowdown in growth partly reflects
expected further tightening of fiscal andmonetary policies, which are aimed at reducing
inflationary pressures, bringing fiscal deficits
down to sustainable levels, creating fiscal space,and avoiding the buildup of large external
imbalances. India is targeting progressive
reductions in the central government’s fiscal
deficit to 3.0 percent of GDP by end-FY2013-14
from 6.7 percent in FY2009-10, which will besupported by proceeds from divestment andreforms to fuel-subsidy programs. The Maldivesand Sri Lanka are also pursuing fiscal deficitreduction programs as part of their IMF stand-by
agreements.

Figure R5.7 Net private capital inflows to South Asia
remains stable as a share of GDP at 4% in 2010
$ bn

% of GDP

120

8
7

100

6
80

5

60

4
3

40

2
20

1
0

0
2002

2003

2004

2005

2006

Net private inflows

2007

2008

2009

2010e

Net private inflowsRHS

In combination with additional normalization ofmonetary policy in FY2011/12, fiscal
consolidation is expected to lead to an easing ofregional inflationary pressures over the forecast
period. The median GDP deflator is projected to
decline to 6.9 percent by the end of the forecasthorizon from 11.5 percent in FY2010/2011.
(Table R5.2).

Pace of decline in FDI inflows slows% change

$ bn
60

250

50

200
150

40

100

Tighter macroeconomic policy conditions should
be reflected in a deceleration in public sector
consumption, which is expected to grow 7.0
percent in FY2012-13, down from 9.1 percent
growth in FY2010-11. Given the expected lessaccommodative macro-policy environment andprojected deceleration in the pace of growth ofremittances inflows, private consumption growthis also projected to decelerate from 7.5 percent in2010 to 5.7 percent over the same period.
Regional fixed investment, however, is projected
to strengthen over the forecast period to an
average of 13.3 percent from 10.3 percent in2010-11, supported by an expected continued

30

50
20

0

10

-50
-100

0
2003

2004

2005

2006

South Asia (left axis)

2007

2008

2009

2010

India (right axis)

Pakistan (right axis)

Source: World Bank

modestly lower at 1.4 percent of GDP in South111

Global Economic Prospects January 2011: Regional Annex

consolidation (through, for example, cuts ingovernment outlays and improved tax collection)and deceleration in the growth rate ofremittances inflows—should be reflected in a
deceleration of import growth. Nevertheless, thepace of growth of imports is expected tocontinue to outpace that of exports on averageover the forecast period, and net exports areprojected to continue to subtract from growth,albeit modestly.

firming of net private capital inflows to theregion, buoyed by strong growth fundamentals,
particularly in India, as well as continued strong
investment growth tied to ongoing post-war
reconstruction in Sri Lanka. Reconstruction
activity should also support investment in floodravaged Pakistan.
A moderation in domestic demand growth—reflecting the impacts of projected fiscal
Table R5.2 South Asia country forecasts(annual percent change unless indicated otherwise)

Forecast
2011
2012

2007

2008

2009

Est.
2010

5.4
-0.7

6.5
1.2

6.3
1.4

6.0
3.5

5.8
2.4

5.9
1.6

6.2
0.7

6.5
-0.5

9.9
9.5
-0.7

6.4
7.3
-2.5

5.7
6.8
-2.0

9.2
8.8
-3.7

8.5
8.9
-3.1

8.7
8.5
-3.0

4.0
-3.5

3.5
-1.7

4.3
4.2

5.0
-2.1

4.0
-3.0

3.5
-2.9

3.8
-2.5

4.2
-1.1

5.9
-5.8

3.6
-9.6

2.6
-2.2

2.8
-3.1

3.5
-3.4

3.2
-3.9

4.5
-3.2

6.8
-4.6

6.0
-9.8

3.5
-0.7

7.1
-3.6

6.8
-3.3

6.0
-3.7

5.3
-0.9

6.4
1.4

6.2
0.9

5.7
2.7

5.8
3.7

6.1
2.0

6.3
1.2

6.4
-0.5

9.6
9.2
-1.3

5.1
6.7
-2.4

7.7
7.7
-2.9

9.5
8.7
-3.6

8.4
9.0
-3.1

8.7
8.5
-3.0

4.1
1.4

3.3
-0.1

5.3
2.9

4.7
4.3

3.3
-2.6

3.7
-3.0

4.0
-2.7

4.1
-1.7

5.7
-4.8

1.6
-8.5

3.6
-5.7

4.4
-2.0

2.6
-3.3

3.8
-3.6

95-06

a

b

Calendar year basis
Bangladeshc
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Indiac
GDP at market prices (2005 US$)
Memo: Real GDP at factor cost
Current account bal/GDP (%)
Nepalc
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Pakistanc
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Sri Lankac
GDP at market prices (2005 US$)
Current account bal/GDP (%)
b

Fiscal year basis
Bangladesh
Real GDP at market prices
Current account bal/GDP (%)
India
Real GDP at market prices
Memo: Real GDP at factor cost
Current account bal/GDP (%)
Nepal
Real GDP at market prices
Current account bal/GDP (%)
Pakistan
Real GDP at market prices
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 in other Bank
documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment intime.
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 toreporting practices, Bangladesh, Nepal and Pakistan report FY2007/08 data in CY2008, while India reports
FY2007/08 in CY2007. 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.

Source: World Bank

112

Global Economic Prospects January 2011: Regional Annex

has risen more or less steadily since 2000,
contributing to rising inflation expectations, andbecause the process of deficit reduction poses
real political challenges. Sharply higher than-The growth rate of the dollar value ofremittances inflows is projected to halve over theforecast horizon, from an estimated 10.3 percent
rate of expansion in 2010 to 5.1 percent in2011—reflecting a lagged impact of the crisis, as
migrant deployments from the region haveslowed sharply and demand for migrants fromoil-rich Arabian Gulf countries (a key migrantdestination countries for South Asia) is expected
to plateau with the completion of several large
construction projects.2 In 2012, a projected
strengthening in high-income country growth isexpected to support a modest acceleration to 6.3
percent growth in remittances inflows to South
Asia in FY2012-13—well below the 19 percent
average annual rate recorded between 1999 and2009.

Figure R5.8 Inflationary pressures have trended upward in the last decade
CPI, median, seasonally adjusted, annual percent
change, South Asia
16
14
12
10
8
6
4
2

Foreign private capital inflows (excluding
official inflows) to South Asia are projected toshow strong growth over the forecast period andreach $102 billion by 2012. In 2011 and 2012,
net private inflows are projected to expand by 13
percent and 11 percent, respectively, largely due
to rising net FDI inflows, led by inflows to India.
As a share of GDP, net FDI inflows are expected
represent 2.1 percent of GDP, firming from anestimated 1.4 percent in 2010. In contrast, net
portfolio equity inflows to the region are
projected to diminish to $37 billion by 2012
from an estimated $43 billion in 2010, andcorrespondingly decline as a share of GDP from
2.1 percent to 1.4 percent over the same period,
largely led by a projected gradual moderation of
portfolio inflows to India (the largest recipient in
the region) following record inflows in 2010.
This also reflects a projected unwinding of theextraordinary monetary stimulus in high-income
countries that is expected to induce an easing of
portfolio inflows to developing countries (Table
R5.3).

0
2000M01 2001M08 2003M03 2004M10 2006M05 2007M12 2009M07

Source: Thomson Datastream and World Bank

projected international commodity prices would
create additional pressures and challenges(Figure R5.8).
On the fiscal expenditure side, risks are tied to
sharply higher-than-projected internationalcommodity prices—particularly forhydrocarbons and grains—given large regional
fiscal subsidies for food, fuel and fertilizers.
Higher oil prices, in particular, would also leadto deterioration of current account positions forthe energy-importing region. Further, presenting
risks to fiscal consolidation efforts, a longstanding challenge for the region is raising fiscal
revenue mobilization. Improving tax
administration and enforcement would help
diminish pressures on fiscal coffers.
The challenges that high-income European
countries with large deficits and large debt-toGDP ratios are encountering are an important
reminder of the importance of maintaining fiscal
sustainability. In South Asia, the policy
measures that have been proposed will, if met,
will help to achieve needed macroeconomic
policy tightening. The task is, however,complicated by the desire to maintain the pace ofRisks
A major domestic challenge facing policy
makers in the region is bringing inflation backdown to the low levels observed in the pre-boom
period, when regional inflation averaged 3.3
percent from 2000 to 2003 (median CPI). This
challenge is complicated by the fact that inflation

113

Global Economic Prospects January 2011: Regional Annex

Table R5.3 Net capital flows to South Asia
$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+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
-20.6
-1.4

2008
-55.1
-3.8

2009
-45.2
-2.9

2010e
-46.9
-2.3

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
6.4
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
-18.1
-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
6.7
-103.8

61.4
52.8
3.6
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
-32.6
26.3

77.7
68.2
4.3
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
6.2
-38.6

92.4
80.7
4.0
71.3
28.3
43.0
21.1
11.7
3.9
3.8
4.0
9.4
3.2
-2.6
5.8
0.0
6.2
-37.2
-8.3

30.4

28.7

33.9

42.5

54.0

71.6

74.9

83.0

2011f
-44.5
-1.9

2012f
-51.6
-2.0

91.5
3.9
83.5
44.5
39.0

101.9
3.9
93.3
56.3
37.0

8.0

8.6

87.0

92.0

Source: World Bank
Note: Countries covered are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lankae = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries

in the world of remittances inflows measured asa share of GDP, (fifth), and both India and
Bangladesh are among the top ten recipient
countries in the world measured in U.S. dollar
level-terms (estimated at $55 billion in 2010 for
India, placing it as top recipient, and $11 billion
for Bangladesh). Ratha, Dilip et al, “Migration
and Development Brief (number 13)”,
November 8, 2010, The World Bank.

growth-enhancing infrastructure investments,
necessarily forcing a greater share of needed
consolidation on other areas of government
spending and points to risks of fiscal slippage.
The policy challenge is to find politically
acceptable areas for deficit cutting, while
preserving growth enhancing investments—
needed to address structural supply-side
constraints and improve medium to long-term
growth prospects and poverty reduction. Asidefrom supporting growth outturns, investment inphysical and human capital—for which
performance indicators generally lag in South
Asia compared with most other developing
regions—would also support international
competitiveness.

2
Ratha, Dilip et al, “Migration andDevelopment Brief (number 13)”, November 8,
2010, The World Bank.

Notes:
1 Remittances are particularly important toSouth Asia among developing regions, as forexample, Nepal is among the top ten recipients114

Global Economic Prospects January 2011: Regional Annex

Sub-Saharan Africa
Export volumes rebounded most strongly formetal and mineral exporters (up 34.7 percent,18.2 percent for oil exporters and only 5.8
percent for agricultural commodity exporters.
Partly as a result, growth in 2010 was strongest
among mineral and metals exporters (6.5
percent), somewhat less strong among oil
exporters (5.9 percent), and a weaker but
nevertheless robust 5.7 percent among
agricultural exporters (Figure R6.2).

Recent developments
GDP in Sub-Saharan Africa is estimated to have
expanded by 4.7 percent in 2010, up from 1.7
percent in 2009. Excluding the region’s largest
economy, South Africa, growth in the region isestimated at 5.8 percent in 2010, up from 3.8
percent in 2009 (Figure R6.1).
While a resilient demand environment supported
growth during 2009, the recovery in 2010 wasbolstered by the external sector, through stronger
export volumes, rising commodity prices, higher
foreign direct investment and a recovery intourism.

Notwithstanding the rebounding in volumes thevalue of regional exports remains 26 percent
below its August 2008 levels, because as they
are yet to regain the extraordinary high levels of
2008. However, this mainly reflects weaker oil
prices, as metals and mineral prices haverecovered much of the declines endured during
the crisis. As a result, while oil exporters
revenues are off 40 percent, agricultural
exporters were at their August 2008 level, andmetal and mineral exporters were 4.8 percent
above that benchmark.

After falling sharply, regional export volumes
rebounded during the second half of 2009 andinto the first half of 2010, peaking in March2010 at 13.6 percent above pre-crisis volumes.
In line with the global slowing in trade, exports
declined toward the middle of the year and as ofJuly 2010, export volumes were only 2.2 percent
above their pre-crisis levels. Excluding South
Africa, whose exports were affected by the randappreciation and labor strikes, export volumes in
the rest of the region were 10 percent above precrisis levels in July.

Foreign earnings were also boosted by South
Africa’s hosting of the FIFA World Cup. Partly
as a result, Sub-Saharan Africa, the only region
to have experienced an increase in tourist
arrivals in 2009, sustained that growth trajectory

Figure R6.1 Growth among metal and mineral exporters in Sub-Saharan Africa ahead of oil and agriculture
exporters

Figure R6.2 Sub-Saharan metal and mineral exporters
experience sharpest rebound

Percent growth GDP
Index (August 2008=1)
9
1.3

8

All SSASSA Oil

SSA Min. & Metals

Agric

1.2

7
1.1

6
1.0

5
0.9

4
0.8

3

All Sub-Saharan Africa
0.7

Sub-Saharan Africa excl South Africa
2

Sub-Saharan Africa Oil exporters

0.6

Sub-Saharan Africa Min.&Metals exporters

1

Sub-Saharan Africa Agric Exporters

0.5

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0.4
Jan-08Source: World Bank.

Apr-08

Jul-08

Oct-08Source: World Bank.

115

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

Apr-10Jul-10Global Economic Prospects January 2011: Regional Annex

and energy prices in recent years most of theseflows went to the extractive industries sector.
Beneficiaries of these flows cover a diverse
range of countries including middle income(Congo, Ghana), low income (Mozambique,Zambia, Niger), post-conflict (Liberia, Sierra
Leone) as well conflict countries (Guinea).

with a 16 percent increase in international
arrivals during the first half of 2010 (UN World
Tourism Organization, 2010). Tourism revenues
were also up in major tourist destinations in theregion (Cape Verde, Kenya Mauritius,
Seychelles, and Tanzania).
Foreign direct investment is the most importantsource of private capital flows to sub-SaharanAfrica. After declining by 12.3 percent in 2009,
FDI recovered by 6 percent to $32bn in 2010
(Table R6.1). Indeed, foreign direct investment
to the region has risen in six of the past eight
years, reflecting increased investment interest in
the region (UNCTAD estimates that the rate of
return of FDI in Africa is the highest globally).

However, although most of the dollar value of
FDI goes to the extractive sector, themanufacturing sector accounted for 41 per centof the total number of greenfield investment
projects during 2003–2009, including, forexample, metals (9 per cent of the total),transport equipment (7 per cent) and food andbeverage (6 per cent) (UNCTAD, 2009). Besides
manufacturing the services sector is also anotherlarge recipient, particularly telecommunications,transportation and banking services. In June
2010, for instance, Bharti Airtel, an Indiancompany, completed the acquisition of Zain’s
mobile operations in Africa for $10.7bn, one of
the largest acquisitions in 2010. Even thoughdeveloped countries are the main source of

The bulk of this investment (40 percent) went to
the three largest economies: South Africa,
Angola and Nigeria. Nonetheless, over 50
percent of FDI goes to the smaller countries in
the region, in marked contrast with portfolio
flows, 90 percent of which go to the region’slargest economies. Supported by the rise in metal
Table R6.1 Net capital flows to Sub-Saharan Africa$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+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
-7.1
-1.6

2004
2.3
0.4

2005
20.3
3.2

2006
16.0
2.2

2007
-5.9
-0.7

2008
-17.0
-1.7

2009
-18.5
-2.0

2010e
-14.7
-1.4

14.6
13.2
3.0
14.0
13.3
0.7
0.6
1.4
2.2
0.0
-0.8
-0.8
0.9
0.4
1.2
-0.7
-1.7
-4.1
-3.5

24.0
21.7
4.0
17.7
11.0
6.7
6.4
2.3
2.5
-0.1
0.0
4.0
2.7
0.6
2.4
-0.3
1.4
-4.6
-21.7

33.0
33.9
5.3
26.1
18.0
8.1
6.9
-0.9
2.4
-0.4
-2.9
7.9
4.8
1.3
3.8
-0.3
3.0
-33.5
-19.9

42.4
44.4
6.0
37.0
20.2
16.8
5.4
-1.9
2.2
-0.1
-4.1
7.4
-2.0
0.3
-1.7
-0.7
9.4
-26.0
-32.5

53.2
50.7
5.9
38.7
28.5
10.1
14.6
2.5
2.4
0.1
0.0
12.1
8.0
6.7
2.1
-0.8
4.0
-20.4
-27.0

38.9
34.3
3.5
28.9
34.5
-5.6
10.0
4.6
1.9
0.7
2.0
5.5
0.8
-0.7
1.7
-0.1
4.6
-11.1
-10.9

45.3
35.8
3.9
40.2
30.3
10.0
5.1
9.5
3.1
2.2
4.1
-4.4
5.6
1.9
2.9
0.8
-10.0
-28.7
1.9

59.3
49.3
4.6
43.0
32.0
11.0
16.3
10.0
3.4
1.8
4.8
6.3
8.1
3.4
4.7
0.0
-1.8
-38.5
-6.1

6.0

8.0

9.4

12.7

18.6

21.3

20.8

21.0

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

116

2011f
-20.1
-1.7

2012f
-29.2
-2.3

56.8
4.9
49.8
40.8
9.0

64.8
5.2
60.8
51.8
9.0

7.0

4.0

22.0

24.0

Global Economic Prospects January 2011: Regional Annex

foreign direct investment to the region,
developing countries (including from elsewhere
within Africa) are increasing their share offoreign direct investment within Africa. These
investments are providing critically needed
capital, upgrading technologies, creating jobs
and contributing to Sub-Saharan Africa’s growth(Figure R6.3).

Figure R6.4 EMBI stripped spreads fall to pre-crisis
levels despite persistence of euro area sovereign debt
crisisBasis points
700
600
500
400

Figure R6.3 Foreign direct investment flows are positively correlated with total factor productivity growthin sub Saharan Africa

300
200

4

100
0

TFP Growth (2010)02

Nov-09Jan-10 Mar-10

May-10

Gabon

Ghana

Jul-10

Sep-10 Nov-10

South Africa-2

Source: JPMorgan-4

have benefitted from access to loans from Asian
countries. Though overall totals are notavailable, some notable deals include: a
September 2010 framework agreement between
the Government of Ghana and the Chinese
Development Bank and Chinese Exim Bank
amounting to over $13bn; a loan between the
Democratic Republic of Congo of up to $6bn
with China in 2010 (Table R6.2). The majorityof these loans were towards the financing of
infrastructure-related projects such as roads,
railways, power plants and economic zones. The
Forum on Chinese and Africa Co-operation
reports that since 2000 Chinese companies havebuilt 60,000km of road and 3.5 million kw ingenerating capacity of power plants in SubSaharan Africa.

05
FDI/GDP Ratio (2010)
TFP

10

Fitted values

Source: World Bank.

In 2010, South Africa was the only Sub-SaharanAfrican country to issue new foreign
denominated bonds ($4.7bn) in international
capital markets, though a number of countries,
including Nigeria, are preparing to issue
international bonds and many recently issued
bonds (e.g. those of Ghana and Gabon)continued to be actively traded in secondary
markets.
So far, the euro area sovereign debt crisis has
had little effect on the yields of Sub-SaharanAfrica sovereign debt bonds. Though initiallyrising in May, in the wake of the bail out to
Greece, the decline in spreads for bonds issued
by Sub-Saharan African countries continued
their retreat even amidst the rescue package for
Ireland in November (Figure R6.4).

By the end of October portfolio flows to South
Africa, the most liquid market in the region, hadmore than doubled to $6bn. They have supported
a recovery in share prices and with it
underpinned household consumption due to theincreased wealth effect. The inflows have also
accounted for the appreciation of the rand (8percent against the dollar between January andDecember 2010, and 30% real effective
appreciation since January 2009).
The
appreciation, while moderating domestic price

Economic ties between Sub-Sahara Africa andAsia have been strengthening in recent years,
and as a result, a number of African countries

117

Global Economic Prospects January 2011: Regional Annex

Table R6.2 Selected Asia-Africa infrastructurerelated financing agreements signed in 2010

Country oforiginBeneficiary country

China
Korea
China
China
China

Ghana
Ghana
Democratic Republic of Congo
Cameroon
Nigeria

Figure R6.5 Strong domestic demand helps drive
growth in Sub-Saharan Africa

Value($ bn)

Contribution to growth, %
10

13.4
1.5
6.0
0.7
0.9

8
6
4
2

Source: National Sources and Thomson Reuters

increases has also reduced the competitivenessof South Africa’s exports, in particular the
manufacturing sector.

0‐2
Dom. Demand

Net Exports

GDP growth‐4

Thanks to the ongoing recovery in the U.S and inEurope, remittance flows to Sub-Saharan Africa,
which remained nearly flat during the crisis,
registered a modest 1 percent gain in 2010 toreach $21 billion. Remittance flows areimportant in supporting household consumption
in a number of Sub-Saharan African countries,
accounting for up to 22 percent of GDP in
Lesotho and about 10 percent in Cape Verde,
Senegal and Togo.

2008

2009

2010

Source: World Bank.

Nigeria and Tanzania) went ahead with
infrastructure programs despite the crisis in part
because of multilateral and bilateral budgetary
support and in part because good
macroeconomic management and earlier debt
relief meant that they had the fiscal space topursue these plans despite the global recession.
Indeed, though shut out from international
capital markets, during the recession, many sub
Saharan African governments were able toborrow from their domestic securities market tofinance their fiscal plans.

Improving domestic conditions also supported
the rebound.
Despite improved external conditions, strong
domestic demand – partly reflecting improved
incomes due to higher commodity prices –meant that imports increased faster than exports
and the contribution of net exports to GDP
growth was negative in most Sub-Saharancountries (Figure R6.5), subtracting some 0.8
percent from aggregate 2010 GDP growth.
However, the rebound is not a simple
commodity story. Between 2000 and 2008 lessthan one third of Sub-Saharan African GDP
growth was due to natural resources, with thebulk reflecting the rapid expansion of wholesale
and retail trade, transportation,
telecommunications, and manufacturing.

As a result fiscal deficits in the region surged to
5.5 percent of GDP in 2009 from a surplus of 1
percent in 2008. Since then, the ongoingrecovery is helping to bring down fiscal deficits.
In 2010 fiscal deficits are estimated to havedeclined to 4.3 percent of GDP, with the decline
being most marked among oil exporting
countries (a fall from 6.8 percent in 2009 to 3.0
percent in 2010).
Favorable weather conditions in Eastern andSouthern Africa supported bumper harvest in a
number of countries in the region, thereby
providing support to household incomes as the
agricultural sector remains the largest employer
in most countries. For a number of countries in
the region (e.g. Malawi and Zambia) thePart of the recent resilience reflects theimplementation of countercyclical domestic
demand policies in a number of countries. Many
countries with adequate fiscal space (e.g. Kenya,

118

Global Economic Prospects January 2011: Regional Annex

extension in farmer coverage of government
input support programs contributed to favorable
maize harvests. In West Africa, floods destroyed
agricultural output in Benin, Togo and parts ofNigeria. On the other hand, a severe drought
across the Sahel left many households in Niger
insecure as crop yields failed.

lost compared to 526,000 in 2009.
Nigeria’s economy has continued on its robust
growth path. This strong performance continued
into 2010, with the first and second quarters
registering 7.4 percent and 7.7 percent
annualized growth. Growth in 2010 is expected
at 7.6%. Though the rebound in the global
economy helped, domestic developments weremajor factors. The relative peace in the Niger
Delta region has boosted crude oil and natural
gas production, while the non-oil sector has
continued to grow strongly (contributing 70
percent of growth in 2009 for example). The
agriculture sector benefited from favorable
weather, and the increasing commercialization of
the sector. And robust activity in services
particularly, telecommunications and public andprivate construction activity supported growth.
The contribution from the banking sector was
more subdued, due to restructuring following theclean-up in 2009.

While these forces were at play throughout theregion, low-income countries were more
successful in translating them into growth.
These countries averaged 5.6 percent in 2010,
versus 4.7 percent for middle-income countries(6.0 percent excluding South Africa).
With over 40 countries in the region it is achallenge to categorize growth performances
within income groupings, regional blocks, andresource content of exports since performances
remain heterogeneous even across each of thesesub groupings. The following section will focus
on recent growth performances among thelargest and the fastest growing economies in theregion.

Angola’s GDP is estimated to have increased 3.0
percent in 2010, up from the 0.7 percent growthrecorded in 2009. With oil accounting for over
50 percent of the Angolan economy, increased
incomes from the stronger oil prices has
underpinned the acceleration. However, large
government payment arrears to the private sector
had strong negative spillover effects in the nonoil economy, limiting economic growth in 2010.
According to the government, from May toAugust 2010 it paid $1.3 billion out of an
estimated $6.8 billion in accumulated arrears.
Despite the tight fiscal and monetary policies
inflation picked up speed in 2010 to 14.5% from
13.7% in 2009.

In South Africa, the largest economy in theregion, output in first, second and third quarters
expanded at seasonally adjusted annualized rates
of 1.7 percent and 3.1 percent and 2.6 percent
respectively. Growth for 2010 is forecast at 2.7
percent, supported by a firming in domestic
demand, reflected in the pick-up in wholesale
and retail trade, and the recovery in house prices.
Household consumption has benefitted fromincreases in real wages and lower interest rates
and the wealth effects of higher equity prices.
Households increased their borrowing by 4.6
percent (y/y) in July while the corporate sector
increased borrowing by 6 percent (y/y). Thoughprivate sector investment was sluggish,
investment by the public sector was strong.
Indeed, construction services were some 10
percent higher than the pre-crisis level. South
Africa also received a fillip from hosting theWorld Cup. GDP growth in South Africa would
have been even higher were it not for a numberof industrial strikes. In Q2 for instance, theindustrial strike contributed to the 20.8 percent
fall in mining output. Overall by October 2010,
some 1.25 million work days had already been

The Kenyan economy returned to higher
growth, thanks to a rebound in the agriculturaland industrial sectors. The Kenyan economy isestimated to have grown 5.0 percent in 2010.
The rebound in the agriculture sector has been
supported by favorable weather conditions andan increase in the area under irrigation.
Agriculture exports, particularly tea (up 50
percent in volume terms), has supported the
upturn – although horticultural exports were
hampered by the weak recovery in Europe and119Global Economic Prospects January 2011: Regional Annex

Figure R6.6 Fast growing Sub-Saharan Economies in2010

the Iceland volcanic ash crisis in April 2010 –which cut into time-sensitive deliveries. Counter
cyclical fiscal policy helped firm domestic
demand in 2010, with government investingheavily in domestic infrastructure. The passingof the new constitution and the strengthening ofregional integration efforts in East Africa hascreated new opportunities for businesses in
Kenya. Remittance flows rose to $1.8bn in 2010.
This amount was higher than each of the
traditional foreign exchange earners: tourism, tea
and horticulture. Kenya continues to benefit
from the productivity gains that growth in its
dynamic information and communications
technology sector brings to its economy (e.g.
banking, trade and health services etc). The ICT
sector alone is estimated to have accounted for
13 percent of growth in Kenya’s economy overthe past decade.

Real GDP growth ( %)
12

10

8

6

4

2

0
Congo

Boosted by increased oil production andrecovery in international oil prices, GDP growthfor 2010 in the Republic of Congo is estimatedat 10.3 percent, making it the fastest growing
economy in sub-Saharan Africa in 2010 (FigureR6.6). Oil production increased to an average of
340,000 barrels per day (bpd) up from 274,000
in 2009. Indeed, Congo was one of the few
economies that recorded robust growth (7.5
percent) in 2009, thanks to the coming on streamof recent oil discoveries. Congo reached theheavily indebted poor countries (HIPC)
completion point in January and received debt
relief from multilateral creditors. In November
the Paris club creditor nations also cancelled
more than half of Congo’s debt ($7.35bn). As aresult, the country’s debt-servicing bill is
expected to decline by $1.9bn annually. In spiteof its high growth rates, Congo’s non-oil sector
economy remains severely constrained by poor
infrastructure and a weak business environment.
The debt relief should provide some fiscal space
to increase growth-enhancing spending,particularly in the transport, power, and keysocial sectors. However, this fiscal space needs
to be used with caution and with proper planningto ensure public investments are productive.
Unlike other fast growing Sub-Saharan African
economies, where growth has been supported by
the minerals sector, Ethiopia’s robust growth

Ethiopia

Mozambique

Nigeria

Tanzania

Malawi

ZambiaSource: World Bank.

performance over the past couple of years,
including a 9 percent increase in GDP during
2010, has been driven by the agricultural sector.
The sector has benefitted from continuing
government investment in roads, power projects
and marketing networks, which has helped bringmore small-holder farmers into the market.
Generous incentives have also supported large
scale commercial agriculture ventures, including
in agro-processing. The peaceful elections
conducted in May supported the return ofinvestors. In 2010, exports rebounded on modest
increases in international commodity prices andthe depreciation of the Birr. Further, for the first
10 months of 2010, remittances were up 9
percent, yoy. In recent years, the government has
been enacting policies to support remittanceinflows, including allowing Ethiopian’s in thediaspora to open foreign currency accounts inlocal banks.
Thanks to the recovery in exports, increased
inflows of foreign direct investment andcontinuing donor support Mozambique‘seconomy is estimated to have grown 7.8 percent
in 2010. Export proceeds for the first six monthsof 2010 were up by 11 percent compared withthe same period in 2009. This was mostly due to120

Global Economic Prospects January 2011: Regional Annex

an increase in world market prices for aluminum,
which accounts for 56 percent of Mozambique’sexports. Other exports to register significant
increases were natural gas, ilmenite andelectricity exports to South Africa. Foreigninterest in Mozambique continues to grow. The
state-run investment promotion agency approved$601.2m worth of projects in the first half of2010 (up 400 percent from the low-base in2009). However, high-inflation has cut into
private consumption spending, as has currency
depreciation viz-a-viz the rand (South Africa
being a major source of imports (particularly
food imports). In September the government
reversed an earlier decision to increase the priceof bread, other basic goods and utilities due toriots.

pledges reached a record $2.4bn in the first halfof 2010, with the bulk of this from China andgoing into the manufacturing, mining and energy
sectors. The services sector was buoyed by sharp
increases in public infrastructure spending, andthe launch of third-generation services helped
boost activity in the telecoms sector.

Botswana was one of the middle income
countries in sub Saharan Africa that was
severely hit by the crisis in 2009, due to the fallin diamond prices, its principal exports. The
recovery in diamond prices has spurred a strong
rebound in mining activity, which accounts forsome 36% of GDP. Growth in 2010 is estimatedat 7.8% in 2010. Contributions from the nonmining sector also supported growth in 2010. By
the third quarter of 2010, contributions from theagriculture sector and tourism-related services
were 0.7 and 1.2 percentage points respectively.

Tanzania is expected to record a solid 7.0
percent growth in 2010, thanks to favorable
developments in the services and minerals
sector. With the recovery in the global economy,
merchandise trade and tourism rebounded.
Supported by developments in the gold sector,
by August 2010, merchandise exports had
reached $3.4bn up from the $2.5bn recorded in
the same period in 2009. With the completion of
the Buzwagi Gold Mine in June 2009, export
volumes in gold increased to 37.4 tons byAugust 2010. With gold prices soaring in 2010,
this contributed to the 33.9 percent (y/y) increasein exports values by August 2010. Travel
receipts from tourism also increased to $1,3bn
by August 2010 compared to $1.2bn for same
period in 2009. Further, given Tanzania’s
position as a transit country, the recovery in
trade led to increased activity in thetransportation sector.

In spite of the slowdown in tobacco production,
the main foreign exchange earner, the Malawian
economy is estimated to have grown by 6.8
percent in 2010 on account of bumper maize
harvests, aid inflows and rising uranium exports.
Subsidies on fertilizers and hybrid seeds tofarmers supported the boost in maize harvests.
Prudent macroeconomic policies have also kept
a lid on inflation, despite depreciation pressures.

A rebound in copper prices, bumper harvests,
inflows of foreign direct investment and astrengthening services sector contributed to therobust 6.4 percent growth in Zambia for 2010.
With the dollar price of copper rising 54 percent
during the period January-November 2010
versus the same period in 2009, copper output
increased to 720,000 metric tons the highest
level recorded since the 1970’s. Overall exports
values increased by 28 percent for the first halfof 2010. Further, thanks to a government
fertilizer and seed subsidy program andfavorable weather, maize harvest increased 42.1
percent in the 2009/10 season. The favorable
supply-side conditions contributed to amoderation of inflation in 2010, falling from anaverage annual rate of 14.2 percent for the firstnine months in 2009 to 8.9 percent for the same
period in 2010. Foreign direct investment

Medium-term outlook
Sub-Saharan Africa is projected to grow at 5.3
percent and 5.5 percent in 2011 and 2012
respectively. Excluding South Africa, growth isprojected at 6.4 percent and 6.2 percent for 2011
and 2012 respectively, making sit one of thefastest growing developing regions (Figures
R6.3 and R6.4). Growth is expected to be driven
by continued recovery in the global economy.
Developments in domestic demand will continue

121

Global Economic Prospects January 2011: Regional Annex

to growth in 2010, its contribution can be
expected to decline next year. Over the longer
term, the sector should continue to benefit fromthe stepping up in government input support
programs and the commercial activity.

to play a dominant role in supporting the growth
process particularly through productivity
spillovers from ongoing investments intelecommunications, banking, energy andtransportation services. These projects are being
financed through foreign and domestic sources.
Over the forecast horizon an increasing numberof Sub-Saharan African countries are likely toraise finance in international capital markets.
Countries that have indicated an interest in doing
so over the forecast horizon include Nigeria,
Angola, Kenya, Senegal, Tanzania, and Zambia.

The dollar value of remittances into Africa are
expected to grow by 4.5 percent and 6.7 percent
in 2011 and 2012 supporting the strengtheningof household consumption.
Individual growth performances will vary acrosscountries. Among the larger economies, South
Africa should benefit from an improving global
economy, ongoing public investment andfirming up in consumer demand. South Africa’s
economy is projected to expand by 3.5 percent

Short-term prospects in the agriculture sector,
which is the region’s largest employer, continues
to hinge on weather conditions. For thosecountries, where agriculture provided a big fillip
Table R6.3 Sub-Saharan Africa forecast summary(annual percent change unless indicated otherwise)
95-06
b

a

2007

2008

2009

Est.
2010

Forecast
2011
2012

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

4.0
1.4
4.2
2.0
5.1
6.7
4.7
5.9
-0.1
-1.6
7.3
-1.7

6.5
4.1
6.8
9.1
5.9
17.7
5.0
12.5
-2.7
-0.2
7.4
0.5

5.2
3.1
5.5
3.7
7.8
11.7
4.3
6.7
-1.1
-1.2
11.0
0.9

1.7
-0.3
2.2
1.4
4.4
4.6
-5.7
-3.7
-0.5
-2.7
3.8
-5.1

4.7
2.7
5.0
4.9
5.5
6.7
7.5
9.1
-0.9
-2.0
6.1
-4.0

5.3
3.3
5.6
5.0
5.2
8.3
6.9
7.9
-0.8
-2.3
5.6
-3.0

5.5
3.4
5.7
5.0
5.0
7.6
6.9
7.2
-0.5
-2.7
5.4
-1.9

Memo items: GDP
SSA excluding South Africae
Oil exportersf
CFA countries
South Africa
Nigeria
Kenya

4.5
4.6
4.4
3.3
4.6
2.9

7.2
8.0
4.6
5.5
6.4
7.0

6.1
6.6
4.2
3.7
6.0
1.6

3.8
3.9
1.7
-1.8
5.6
2.6

5.8
5.9
4.1
2.7
7.6
5.0

6.4
6.3
4.7
3.5
7.1
5.2

6.2
6.0
4.5
4.1
6.2
5.5

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.

Source: World Bank

122

Global Economic Prospects January 2011: Regional Annex

lower-middle-income country. Outside the oil
sector Ghana’s economy will still register strong
growth, particularly in construction services aslarge infrastructure projects are carried out. The
inflows from the oil sector, if not managed
prudently, could discourage the incentive
structure for agricultural exports.

and 4.1 percent in 2011 and 2012 respectively.
With R811bn (rands) targeted to improve
infrastructure over the next three years, public
investment is likely to provide support to theeconomy, including employment. However,higher growth levels would likely be needed tosignificantly reduce the high levels of
unemployment (25.3 percent).

Risks to the outlook
Nigeria is expected to continue its strong growth
performance in 2011, with GDP expanding 7.1
percent before moderating in 2012 to 6.2 percent
closer to its medium term trend growth rate. The
non-oil sector should be a major driver ofgrowth, benefitting from new offshoredevelopments and an improved security situationin the Niger Delta area. The scaling-up of
government spending on infrastructure will also
reinforce growth prospects. However, theupcoming elections may however lead investors
to hold-off investments until a peacefultransition is in place.

The main downside risk to the growth prospectsof Sub-Saharan African countries stems from apossible faltering in the global economic
recovery. Most countries have depleted the fiscal
space they had created during the pre-crisis
period, and have not had time to rebuild it. As aresult, few would be able to conduct the kind ofcounter-cyclical policies that helped limit
disruption during the past crisis should there bean early faltering of the recovery process.

Supported by increasing intra-regional trade andproductivity benefits of ongoing infrastructure
investments, Kenya’s outlook remains
favorable, with growth projected above trend at
5.2 and 5.5 percent in 2011 and 2012. However,droughts could hinder growth in the agriculture
sector and private investment spending may also
slow in the run-up to the 2012 election.

The fiscal austerity measures in the EU, many ofwhich will be carried out during the forecasthorizon could dampen growth prospects in theregion, especially so as Europe remains thelargest trading partner for several Sub-SaharanAfrica countries. Further, though contagion fromthe EU debt crisis to Sub Saharan Africa has
been limited thus far, a further round or
intensification of European banking-sector
consolidation could both reduce the supply andraise the cost of international capital for Sub
Saharan African borrowers. This is all the more
important since a record number of Sub-Saharansovereigns are planning to issue internationalbonds over the forecast horizon. Among Asian
countries, developments in China will be
important for sub Saharan Africa, given theburgeoning trade and investment links between
the two regions. A significant slowdown in
China could reduce growth propects in sub
Saharan Africa, particularly for metal, mineraland oil exporters.

As oil production begins, Ghana is projected tobe the fastest growing economy in sub-Sahara
Africa, with a growth rate of 13.4 percent in2011 and 10 percent in 2012. A recent revision
to Ghanaian GDP data has raised estimates of its
income 60 percent, suggesting that it is now a

With the agriculture sector being the largest
employer in the region and contributing a large
share of GDP in many countries in the region,
unfavorable weather conditions, such as wide
spread droughts,
could threaten growthprospects by reducing output as well as

Notwithstanding efforts to diversify the
economy from the oil sector, growth prospects
over the forecast horizon in Angola willcontinue to be tied to developments in the oil
sector. With oil prices projected to be broadly
stable over the forecast horizon, the fiscal policy
should cease to be a drag on growth. As a result,
GDP is expected to expand by 6.7 and 7.5
percent in 2011 and 2012, respectively –potentially resulting in increased inflationarypressures.

123Global Economic Prospects January 2011: Regional Annex

the sub-region whose currencies are effectively
pegged to the rand (e.g. Lesotho). Like South
Africa, rand appreciation implies reduced
international competitiveness, reduced
inflationary pressures and potentially increased
joblessness. Outside Southern Africa,
fluctuations in euro could affect external
competitiveness in the CFA member states.

dampening domestic demand, as food prices rise.
A related risk is a spike in the prices ofagricultural food products on international
markets. Though many staples in the region are
non-traded and their markets are mainly
domestic in nature, some key commodities suchas rice, flour, sugar and vegetable oil are
imported in large quantities. As a result, asignificant rise in the local currency cost of theseinternationally traded commodities could have asignificant effect on the incidence of poverty andon growth prospects.
Similarly, for oil
importing countries, a spike in oil prices could
lead to macroeconomic instability with its
deleterious consequences on economic growth.
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 increase in the smoothtransition of power in many countries in theregion, there still remain a number of instanceswhere the political developments leading to theelections and in its aftermath have been adeterrent to economic activity. In 2010 for
instance, growth prospects in Madagascar,
Comoros, Cote d’Ivoire and Guinea wereseverely dented by political unrest. Hence theevolution of the political cycle over the forecasthorizon will be consequential to individual
country growth outcomes.
The appreciation pressures associated with therising inflows of hot money in emerging
economies is unlikely to be a direct growth risk
to many Sub-Saharan African countries.
However, South Africa has and is likely tocontinue to be affected by the appreciation of therand. Its manufacturing sector, which accounts
for 16.4 percent of the economy, has become
increasingly less competitive because of randappreciation. Rand appreciation has indirect
effects for other countries in the region,
particularly in the Southern Africa region. For
countries whose local currencies are not pegged
to the rand (e.g. Mozambique), the strengtheningof the rand implies a depreciation in their local
currencies against the rand, better export
prospects and higher imported inflation. The
opposite effect however occurs for countries in124

Global Economic Prospects January 2011: Regional Annex

Table R6.4 Sub-Saharan Africa country forecasts(annual percent change unless indicated otherwise)
2007

2008

2009

Est.
2010

8.3
-2.2

20.3
17.9

13.3
8.5

0.7
-10.0

3.0
-5.1

6.7
-4.0

7.5
-3.3

4.6
-7.2

4.6
-11.8

5.1
-9.0

3.8
-9.5

2.8
-9.1

4.9
-8.6

4.2
-8.5

6.3
8.3

4.8
14.5

3.1
3.5

-3.7
-4.4

7.8
-2.1

6.5
-1.5

5.9
0.9

6.4
-12.8

3.6
-20.1

5.0
-24.4

3.5
-19.4

5.0
-23.1

5.7
-23.7

5.2
-24.0

0.4
-13.7

3.6
-27.4

4.5
-30.2

3.5
-12.3

3.7
-9.6

4.1
-10.0

4.6
-8.9

5.7
-10.1

8.6
-14.9

6.5
-8.6

2.8
-9.6

4.3
-6.7

5.8
-5.4

6.6
-12.1

4.2
-3.2

3.5
1.4

2.9
-1.9

2.0
-5.1

3.0
-2.7

3.8
-2.6

4.3
-2.6

0.7
-4.4

3.7
-6.7

2.2
-9.5

2.4
-7.9

3.0
-8.1

3.3
-7.4

3.3
-6.7

9.5
-36.6

0.2
-14.7

-0.4
-19.8

-1.6
-28.7

3.7
-26.0

4.0
-23.0

4.0
-20.8

2.1
-6.3

0.5
-2.5

1.0
-15.2

12.3
-9.3

2.1
-10.5

2.3
-11.0

2.3
-10.9

0.0
-1.5

6.3
-2.7

6.2
-13.8

2.7
-13.7

5.2
-17.2

6.9
-18.5

6.9
-18.6

3.2
-2.3

-1.6
-26.1

5.6
-2.2

7.6
-11.1

10.3
-1.2

10.4
3.5

5.4
-0.4

1.6
-0.2

1.7
-0.7

2.2
1.2

3.6
7.1

3.0
4.1

4.1
0.8

4.3
-1.1

30.6
-16.7

21.4
4.7

11.3
10.1

-5.4
-20.0

3.0
-6.2

2.8
-10.0

4.0
-8.0

1.7
-14.1

1.3
-6.4

-11.3
-5.2

4.2
-6.5

2.7
-7.1

3.4
-6.7

3.5
-6.5

5.5
-3.3

11.5
-4.3

10.8
-7.0

8.7
-7.7

9.0
-8.5

9.0
-9.4

8.1
-11.5

1.0
10.6

5.6
12.2

2.3
22.2

-1.0
13.3

5.1
12.7

4.1
10.6

4.1
12.0

95-06
Angolab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Beninb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Botswanab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Burkina Fasob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Burundib
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Cape Verdeb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Cameroonb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Central African Republicb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Chadb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Comorosb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Congo, Dem. Rep.
b
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Congo, Rep.
b
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Cote d Ivoireb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Equatorial Guinea
2
GDP at market prices (2000 USD)
Current account bal/GDP (%)
Eritreab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Ethiopiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Gabonb
GDP at market prices (2005 US$)
Current account bal/GDP (%)

a

125

Forecast
2011
2012

Global Economic Prospects January 2011: Regional Annex

Table R6.4 continuation
2007

2008

2009

Est.
2010

4.4
-8.2

6.3
-10.6

6.1
-6.1

4.6
4.0

5.0
5.2

5.1
6.1

5.4
6.1

4.7
-5.7

6.5
-8.6

8.4
-12.2

4.7
-3.3

6.6
-3.6

13.4
-3.1

10.0
-2.9

3.9
-5.1

1.8
-9.3

4.9
-31.9

-0.3
-10.4

2.6
-7.3

3.6
-8.5

3.6
-9.6

-0.3
-8.3

0.3
-9.5

3.5
-10.1

3.0
-8.6

2.3
-9.4

3.9
-9.9

3.8
-11.1

2.9
-7.5

7.0
-3.8

1.6
-6.6

2.6
-5.7

5.0
-5.7

5.2
-4.5

5.5
-4.3

3.2
-23.4

2.4
13.9

4.5
12.6

2.5
-2.0

3.3
-25.5

3.5
-25.5

3.8
-23.8

3.1
-8.6

6.2
-14.4

7.3
-18.4

0.4
-21.9

0.6
-16.7

2.6
-15.8

3.9
-14.6

2.4
-5.7

8.6
-1.7

9.7
-6.8

7.7
-7.1

6.8
-5.4

7.0
-6.4

7.2
-6.4

5.8
-8.7

4.3
-8.1

4.9
-12.1

4.3
-14.1

5.0
-9.0

5.8
-8.7

5.9
-9.2

3.3
-3.2

1.9
-9.7

3.7
-12.8

-1.1
-13.1

4.9
-11.2

5.4
-12.2

5.4
-12.8

4.4
0.1

5.5
-5.8

5.1
-10.5

3.1
-7.8

4.2
-9.4

4.3
-8.8

4.4
-8.4

8.0
-15.1

7.3
-9.8

6.7
-12.0

6.3
-12.0

7.8
-11.6

7.6
-10.5

7.7
-9.6

4.2
2.8

5.4
7.9

4.3
0.5

-0.8
-1.7

4.2
-1.6

4.2
4.1

4.8
4.1

3.5
-7.1

3.3
-8.3

9.5
-12.1

1.0
-21.2

3.6
-20.3

6.0
-20.7

6.8
-20.1

4.6
6.4

6.4
16.7

6.0
13.8

5.6
12.5

7.6
10.7

7.1
9.2

6.2
8.2

8.3
-4.7

7.9
-4.3

11.2
-4.9

4.1
-8.5

6.5
-6.7

6.5
-9.0

7.0
-6.4

4.4
-5.7

4.9
-11.6

3.3
-13.7

2.2
-13.6

4.0
-14.3

4.2
-14.2

4.4
-15.3

95-06
Gambia, Theb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Ghanab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Guineab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Guinea-Bissaub
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Kenyab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Lesothob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Madagascarb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Malawib
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Malib
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Mauritaniab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Mauritiusb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Mozambiqueb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Namibiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Nigerb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Nigeriab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Rwandab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Senegalb
GDP at market prices (2005 US$)
Current account bal/GDP (%)

a

126

Forecast
2011
2012

Global Economic Prospects January 2011: Regional Annex

Table R6.4 continuation
2007

2008

2009

Est.
2010

Forecast
2011
2012

2.8
-13.4

9.7
-26.8

-0.9
-44.0

-7.6
-37.2

6.2
-45.3

4.0
-26.5

5.0
-19.1

4.6
-12.3

6.4
-13.0

5.5
-15.3

4.0
-14.9

4.7
-11.6

5.2
-11.1

5.9
-10.5

3.3
-1.2

5.5
-7.2

3.7
-7.1

-1.8
-4.1

2.7
-4.1

3.5
-4.8

4.1
-5.2

6.2
-6.3

10.2
-7.4

6.8
-2.3

4.5
-7.1

5.9
-1.9

5.3
-1.4

5.8
-2.1

3.5
-0.8

3.5
-2.2

2.4
-8.1

1.2
-13.8

1.9
-12.4

2.8
-12.5

2.0
-13.0

5.4
-6.4

7.1
-10.8

7.4
-13.0

6.0
-8.4

7.0
-8.3

7.2
-9.3

6.9
-9.7

3.2
-9.6

1.9
-8.6

1.8
-7.4

2.5
-8.1

3.3
-8.5

3.5
-7.0

3.4
-7.1

7.0
-5.3

8.4
-4.0

8.7
-5.5

7.1
-2.8

6.3
-3.6

6.5
-3.8

8.6
-1.3

3.8
-12.9

6.2
-8.4

5.7
-9.2

6.3
-5.5

6.4
-4.5

6.5
-6.0

6.7
-6.7

-2.2
-11.5

-6.9
-0.5

-14.1
-1.5

4.0
-1.8

5.7
-1.3

5.7
-1.1

6.0
-0.9

95-06
Seychellesb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Sierra Leoneb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
South Africab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Sudanb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Swazilandb
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Tanzaniab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Togob
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Ugandab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Zambiab
GDP at market prices (2005 US$)
Current account bal/GDP (%)
Zimbabweb
GDP at market prices (2005 US$)
Current account bal/GDP (%)

a

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 momentin 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.

Source: World Bank

127