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GlobalEconomic
Prospects

Commodities at the Crossroads

2009

GlobalEconomic
Prospects

Global
Economic
Prospects
Commodities at the Crossroads2009© 2009 The International Bank for Reconstruction and Development / The World Bank
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ISBN: 978-0-8213-7799-4
eISBN: 978-0-8213-7801-4
DOI: 10.1596/978-0-8213-7799-4
ISSN: 1014-8906
Cover photos: Oil platform worker in Urucu, Brazil by Hervé Collart/Corbis (left); Molten steel
being poured in Tangshan, China by Yang Liu/Corbis (top right); Farmers in Kenya by Curt
Carnemark/The World Bank (bottom right)
Cover design: Critical Stages
The cutoff date for the data used in this report was November 20, 2008. Dollars are current
U.S. dollars unless otherwise indicated.

Contents

Forewordxi

Acknowledgments
Abbreviations
Overview

xiii

xv

1

Chapter 1 Prospects for the Global Economy
15
Financial markets
19
Outlook for high-income OECD countries
24
Outlook for the developing countries
27
World Trade
36
Commodity markets
39
Key risks and uncertainties
45
Long-term prospects and poverty forecast
46
Chapter 2 The Commodity Boom: Longer-Term Prospects
51
Characteristics of the current commodity price boom
53
The roots of the boom in commodity prices
57
Long-term demand prospects
64
Long-term supply prospects
74
Projections
85
Conclusions
89
Chapter 3 Dealing with Changing Commodity Prices
95
Commodity dependence and growth
98Managing primary commodity booms
102
Poverty impacts of higher commodity prices
113
Dealing with high food and fuel prices
121
The international response to high commodity prices
Conclusions
131
Technical Annex: Sensitivity Analysis
132

127

v

C O N T E N T S

Appendix: Regional Economic Prospects
141
East Asia and the Pacific141
Europe and Central Asia
147
Latin America and the Caribbean
153
Middle East and North Africa
159
South Asia
166
Sub-Saharan Africa
171

FiguresO.1
The recent commodity boom was the largest and longest of any boom
since 1900
4
O.2
Real commodity prices in local currency units increased by between 75 and150 percent but have fallen since4
O.3
Slower growth should ease commodity demand
5
O.4
Technological progress has reduced the quantity of commodities used per unitof GDP5
O.5
Oil prices are having a direct impact on food prices
8
O.6
On average, poor countries are dependent on commodities but relatively
resource poor
9
O.7
Primary commodity exporters are exhibiting fewer signs of the behaviors linked to the“resource curse”
10
O.8
Exchange rates, inflation, and government expenditures in new versus established oil
exporters, 2001–06
10
1.1
GDP growth18
1.2
Emerging market equities are hit hard as turbulence evolves to crisis
22
1.3
Emerging-market bond spreads widen, especially for corporates
22
1.4
Private debt and equity flows decline by a third in 2008
23
1.5
Change in GDP in the United States, Europe, and Japan25
1.6
The contribution of U.S. domestic demand to GDP growth25
1.7
U.S. household wealth falls sharply in the last quarters
26
1.8
GDP to decline across the OECD26
1.9
East Asian countries show steep falloff in output growth27
1.10
Output growth in Latin America, South Asia, and Europe andCentral Asia is fading28
1.11
Investment was the driving force for growth in developing countries28
1.12
Developing-country GDP growth is expected to fall below 5 percent in 200930
1.13
Headline inflation is easing across industrial countries30
1.14
Inflation in emerging markets surged on higher food and energy prices30
1.15
Key developments in 2008 for East Asia and the Pacific33
1.16
Sovereign bond spreads widen across Europe and Central Asia
33
1.17
In Latin America and the Caribbean, current accounts of largest
economies diverge
34
1.18
Oil revenues, recovery from drought underpin growth in the Middle East and North
Africa in 200835
1.19
South Asian production slips in the last months
36
1.20
In Sub-Saharan Africa, primary commodity exports increased as prices surged36
1.21
World trade is expected to decline in 2009 for the first time since 1982
37vi

C O N T E N T S

1.22
1.23
1.24
1.25
1.26
1.27
1.28
1.29
1.30
1.31
1.32
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
2.18
2.19
2.20
2.21
2.22
2.23
2.24
2.25

Decline in high-income import growth affects developing-country exports
37
Developing-country exports have been strong, even outside China
37
Developing-country current account surpluses to wane after 200838
Current account balances for commodity-exporting and -importing developing-countrygroups (excluding China)
39
Almost all currencies have depreciated against the dollar
39
Commodity prices surged before retreating in the second half of 200840
Crude oil prices correct sharply after unprecedented run-up
40
Grains prices show sharp declines from recent peaks
43
Most vulnerable countries will benefit from the decline in grains and oil prices
45
First-round income impact of lower commodity prices will be positive in more thanhalf of developing countries
45
Revised poverty estimates following from new price survey
49
The recent commodity boom was the largest and longest of any
boom since 1900
55
The real local currency price of commodities rose much less than the real
dollar price56
Oil and metal prices led this boom, with food prices rising only much later
56
Global growth lasted longer and was stronger during the recent commodity boom thanin earlier ones
57
Dormant capacity helped keep oil prices low in the 1990s
59
Real spending by major American multinational oil companies declined by 60 percent
in the 1980s
59
Global metal demand also fell during the transition
59
Real food prices were broadly stable in developing countries until mid-2007
61
Most of the decline in global grain stocks reflects lower stocks in China
63
Outside of China, only wheat stocks are unusually low
63
Demand for most commodities has grown less rapidly than GDP but more rapidly
than population
64
The quantity of most commodities used per unit of GDP was declining
until recently
65
Metal intensities have declined steadily in high-income countries but have reversed in
China since 1993
69
Metal intensities in China are much higher than elsewhere70
Weaker population growth should slow demand for food71
Per capita grain demand tends to stop rising when income reaches
around $5,00072
Demand for edible oils grew much faster than population in Asia
72
Food crop prices have become sensitive to oil prices
73
Output of virtually all commodities has increased since 1965
74
Almost all of the additional oil supply since the 1970s has come from
nontraditional sources
75
Rather than declining, known oil reserves keep rising75
Gas reserves are almost as large as oil reserves
76
Agricultural productivity has been rising rapidly over the past 20 years
80
For key crops, most of the increase in output was due to increased yield, not increased
area planted
81
Yield growth has decelerated recently81vii

C O N T E N T S

2.26
2.27
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
A1
A2
A3
A4
A5
A6
A7
A8
A9
A10
A11
A12

viii

The stock of unused but potentially arable land is enormous
82
Developing countries spend less on agricultural R&D than high-income countries
83
More-diversified developing countries grew more rapidly from 1980 to 2006
98
Poorer countries are more dependent on nonfuel primary commodities
98
On average, poor countries are dependent on commodities but relatively
resource poor
99
Government spending by primary commodity exporters responded less to export
booms in this decade than in the 1980s
103
Public expenditures in Sub-Saharan Africa grew much less quickly in the 2000s thanin the 1980s
103
Oil-exporting countries with large reserves spent a smaller portion of their revenue
from the recent boom in oil prices, 2000–06
105
Imports and current account positions suggest more savings from commodity revenuesby oil exporters than by nonfuel commodity exporters
106
Primary commodity exporters limited the real appreciation of their currencies during
the recent boom
107
Many oil exporters are suffering significantly higher inflation
107
New oil exporters are experiencing more macroeconomic volatility than establishedproducers
108
Commercial bank lending to commodity-dependent economies in Sub-SaharanAfrica is rising
108
Corruption is highest among fuel exporters, although the difference has
narrowed
109
The increased grain bill could exceed 5 percent of GDP in more than
20 countries
116
Real food prices in developing countries rose less than prices of internationally traded
foods
119
Developing countries have responded to rising food prices with a varietyof policies
122
Countries have tended to expand cash transfers and school feeding programs when
responding to higher food prices
122
After India banned rice exports, international prices rose124
GDP growth eases in several East Asian economies
142
Export growth in East Asia turns down on falling OECD demand
143
Exchange rates decline sharply as carry trades unwind
144
Gross capital inflows to East Asia contracted 40 percent in 2008
144
Deepening global financial crisis affects Europe and Central Asia
148
Core inflation is rising in several countries of Europe and Central Asia
152
Contributions to GDP growth in Latin America and the Caribbean
153
Bond spreads have increased sharply for many Latin American countries
155
Exchange rates in Latin America and the Caribbean fell sharply against the dollar inlate 2008
155
Inflation still high in Latin America and the Caribbean despite sharp falloff in foodand fuel prices
156
Current account positions in the Middle East and North Africa set to shift
dramatically161
Markets in the Middle East and North Africa are hard hit byfinancial crisis161

C O N T E N T S

A13
A14
A15
A16
A17
A18

Inflation rises across the Middle East and North Africa
162
Notable slowing of growth across the Middle East and North Africa in 2009
Key international finance links in South Asia, 2007169
Bond spreads for African countries jumped after mid-September
173
African headline inflation jumps as food prices skyrocket
174
Economic growth to slow in Sub-Saharan Africa
178

166

TablesO.1
Food price hikes and consumption shares vary by region
11
O.2
Higher food prices have increased both the incidence and severity of poverty
worldwide12
1.1
The global outlook in summary17
1.2
High-income OECD countries: growth and related indicators25
1.3
Developing regions: growth and related indicators29
1.4
Forecast of commodity prices
40
1.5
Poverty in developing countries by region, selected years
47
2.1
Principal characteristics of major commodity booms
55
2.2
Comovement among major commodity prices, 1960–2007
60
2.3
Impact of a 10 percent increase in incomes on commodity demand65
2.4
Modern goods make less intensive use of commodities
65
2.5
Fundamental economic factors drive future commodity demand66
2.6
Energy demand is projected to slow in the baseline scenario
69
2.7
Energy demand could decline further under more aggressive climatechange policies
69
2.8
Developing countries will account for most of the projected demand for various foods,
2000–30
72
2.9
Historically, estimates of oil reserves have kept pace with production76
2.10
Increased investment has stabilized reserve-to-production ratios for somecommodities
77
2.11
Oil’s share in global energy supply is projected to decline78
2.12
Potential gains from extending the green revolution remain large
82
2.13
With some exceptions, yield growth for key agricultural commodities has been highest
in South and East Asia
83
2.14
Agricultural sector simulation results, 2005–30
86
2.15
Energy sector simulation results, 2005–30
87
3.1
Non-oil or resource-rich countries have higher per capita incomes than resourcedependent countries, 200699
3.2
Ratios of reserves to production vary greatly among oil exporters
105
3.3
Assets in sovereign wealth funds grow in commodity-exporting countries
107
3.4
Country studies suggest that high oil prices have large poverty impacts
115
3.5
Higher food prices raise poverty more in urban areas than in rural areas117
3.6
Observed real price shocks and food shares of consumption vary across developing
regions119
3.7
Poverty effects of the changes in relative food prices120
3.8
Fiscal costs of selected antipoverty measures vary widely
122
3.9
Increasing rice self-sufficiency can be more costly than relying on imports
124
3A.1
Sensitivity analysis
132
A1
East Asia and Pacific forecast summary
142ix

C O N T E N T S

A2
A3
A4
A5
A6
A7
A8
A9
A10
A11
A12
Boxes
1.1
1.2
1.3
1.4
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10

x

East Asia and Pacific country forecasts
146
Europe and Central Asia forecast summary
148
Europe and Central Asia country forecasts
151
Latin America and the Caribbean forecast summary154
Latin America and the Caribbean country forecasts
158
Middle East and North Africa forecast summary
160
Middle East and North Africa country forecasts
164
South Asia forecast summary
168
South Asia country forecasts
170
Sub-Saharan Africa forecast summary
172
Sub-Saharan Africa country forecasts
176

Chronology of recent developments in the financial crisis
20
Commodity prices and inflation in developing countries
31
Impact of commodity prices on external balances and capital flows
41
The impact of the new price survey on poverty estimates
48
Commodity price cycles
54
Developing-country growth and global commodity demand in the recent past
58
The historical link between crude oil and other commodity prices
62
Alternative fuels for transportation
68
Understanding the rise in Chinese metal intensities
70
Declining costs of resource extraction
75
The rise of biofuel production
79
State-owned firms and output efficiency
80
Genetically modified crops—the next green revolution?
84
The impact of severe shocks on economic progress
100
Efforts to capture a larger share of windfall commodity revenues
104
Combating the corrupting influence of high commodity revenues
109
Successful sovereign wealth funds
110
National and international marketing strategies
111
Malawi government hedging of maize price and supply risks, 2005–08
113
Critical assumptions underlying the estimation of the poverty impactof food price increases
118
Conditional cash transfers are most effective in getting money to the poor
126
Removing fuel subsidies in Ghana
127
The international response to rising food prices
128

ForewordE

ACH YEAR, Global Economic Prospects

explores critical “here and now” economic developments relevant to lowand middle-income countries. Past editions
have examined the sustainability of developingcountry growth over the long term, importancefor developing countries of international andregional trade liberalization, and migration
and remittances. Last year’s report looked at
the pace and determinants of technologicaldiffusion in developing countries.
This year’s Global Economic Prospects
finds the global economy at a crossroads,
transitioning from a sustained period of verystrong developing country–led growth to oneof substantial uncertainty as a financial crisis
rooted in high-income countries has shaken financial markets worldwide. Commodity markets too are at a crossroads with the very highprices of 2007 and early 2008 having fallen bymore than half in many instances.
Great uncertainty surrounds the implications of this crisis for developing countries. Initially, the repercussions for developing countries of the financial turmoil that characterized2007 and the first half of 2008 were limited.
However, since September 2008, the intensification of the banking crisis, the collapse of several global financial players, and the sharp increase in emerging market bonds spreads havedramatically altered the outlook for developing countries. These events constitute the kindof disorderly adjustment that has been discussed in previous reports as a risk.
Materialized, it implies a sharp slowdown fordeveloping countries and the possibility that
serious crises may emerge.
While the measure of that slowdown and its
near-term implications for growth and incomes
are important, governments in developing
countries also need to be mindful of the longerterm implications of their policy response.
Thus, while countercyclical policy may help reduce the short-term costs of the slowdown,care must be exercised to react prudently so as
not to endanger longer-term fiscal sustainability and growth prospects. For as serious as thecoming slowdown may be, developing-country
growth is expected to recover after the crisis is
over.
Commodity markets have seen spectacularswings over the past 24 months as enormous
tensions first built up and were then released.
The extended and sharp rise in commodity
prices prompted concerns that the world wastransitioning into a new phase of commodity
scarcity—a concern that the recent dramatic
drop in commodity prices has only partiallyalleviated. Long-term supply and demandprospects for commodities suggest that whilecommodity prices are likely to be higher thanthey were during the 1990s and early 2000s(when they were depressed by excess supply),
the recent peaks that have been observed areunlikely to be the new norms. Over the longrun, demand for commodities is not expected
to outstrip supply. Even though per capita incomes in developing countries are expected tocontinue rising rapidly, population growth isslowing and with it global GDP growth. As axi

F O R E W O R D

result, the pace at which commodity demand
expands should also ease. Assuming that efficiency with which commodities are both employed and produced continues to improve as
it has done over the past few decades, supply
should keep pace with demand.
However, policy will need to be supportive
if such a positive result is to materialize. In
particular, agricultural yields have declined inrecent years. Unless governments in developing countries and aid agencies take concrete
steps to increase investment in rural infrastructure, agricultural research and development, and agricultural extension services, it ispossible that global agricultural productivity
growth will slow. Higher food prices would
follow and many countries that are now selfsufficient in food (notably those that still havefast growing populations) would become large
net importers of food. On the energy side,
policies to combat carbon emissions would
help slow the depletion of hydrocarbon resources, by speeding both demand-side andsupply-side substitution toward cleaner energy
sources. If successful in slowing global warming, these could also help prevent the verylarge agricultural productivity losses predictedby some in the second half of this century.
The recent boom in commodity prices has
challenged policy makers in both producing
and consuming countries. Encouragingly,
commodity producers appear to have managed their windfall revenues more prudently
than in the past. Instead of expanding spending programs in line with increased revenues,
many have saved a much larger share of theserevenues—reducing the likelihood that they
will need to cut back spending in a procyclicalmanner now that commodity prices (andxii

global growth) have declined. However,countries with new-found commodity wealthor newly independent commodity-rich states
have not shown similar restraint and may
encounter more difficulties during the current
downturn.
Higher food prices are estimated to haveincreased global poverty by some 130–155
million people. Most countries responded to
the food crisis by expanding existing social
safety net programs, which made good sense
given the profound and long-term consequences that increased malnutrition could
generate. However, in many instances the response was poorly targeted and expensive.
Now that food prices are declining, countries
need to take steps to revamp their social welfare systems so that they are better targeted
and that the next time a similar crisis comesalong, additional spending will be more effective in limiting poverty impacts.
At the international level, steps need to betaken to prevent producing countries from exacerbating shortfalls by introducing exportbans or by withholding stocks from the global
market. An international scheme to share information about private and public stocks andcoordinate their management during times ofcrisis is worth pursuing. Similarly, funding forinternational food aid programs should bemade more predictable and agencies should beendowed with a line of credit that would
allow them to respond rapidly to future foodemergencies in a way they cannot at present.
Justin Yifu Lin
Senior Vice President andChief Economist
The World Bank

AcknowledgmentsT

HIS REPORT WAS produced by staff from the World Bank’s Development Prospects Group.
Andrew Burns was the lead author and manager of the report, with direction from Uri
Dadush. The principal authors of the report were John Baffes, Donald Mitchell, Elliot(Mick) Riordan, Shane Streifel, Hans Timmer, and William Shaw. The report was produced under
the general guidance of Justin Yifu Lin.
Several people contributed substantively to chapter 1. Elliott (Mick) Riordan and Hans Timmer
were its main authors. The Global Trends Team, under the leadership of Hans Timmer, wasresponsible for the projections. The projections and regional write-ups were produced by Teng
Jiang, Annette De Kleine, Elliot (Mick) Riordan, Cristina Savescu, and Ani Silwal in coordination with country teams and the offices of the regional Chief Economists and PREM directors
including Luca Barbone, Marcello Guigale, August Kouame, Ernesto May, Vikram Nehru, Ritva
Reinikka, Sudir Shetty, and Augusto de la Torre. The short-term commodity price forecasts were
produced by John Baffes, Betty Dow, Donald Mitchell, and Shane Streifel. The remittances forecasts were produced by Sanket Mohapatra, while Shaohua Chen from the Development ResearchGroup and Dominique van der Mensbrugghe generated the long-term poverty forecast.
John Baffes, Andrew Burns, William Shaw, and Shane Streifel were the main authors of Chapter 2, with written contributions from Donald Mitchell, Marian Radetzki, Varun Kshirsagar,
Denis Medvedev, and Dominique van der Mensbrugghe. Chapter 3 was written by Donald
Mitchell and William Shaw with written contributions from Ataman Aksoy, Margaret Grosh,
and Rafael de Hoyos Navarro. Both Chapters 2 and 3 benefited from the expert research assistanceof Varun Kshirsagar and Teng Jiang.
The accompanying online publication, Prospects for the Global Economy (PGE), was produced
by a team led by Cristina Savescu and comprised of Sarah Crow, Betty Dow, Kathy Rollins, Ani
Silwal, Cybele Arnaud, and Ying Yu with technical support from Gauresh Rajadhyaksha. The
translation process was coordinated by Jorge del Rosario (French and Spanish) and Li Li(Chinese). A companion pamphlet highlighting the main messages of the commodities section of
the report was prepared by Kavita Watsa and Roula Yazigi.
Several reviewers offered extensive advice and comments throughout the conceptualization
and writing stages. These included Charles Blitzer, Christopher Delgado, Sebastien Dessus,
Christopher Gilbert Sheldon, Santiago Herrera, Justin Yifu Lin, William Maloney, William Martin,
Celestin Monga, Vikram Nehru, Marian Radetzki, Ana Revenga, Alexander Sarris, Katherine
Sierra, Luiz Pereira da Silva, Claudia Paz Sepulveda, and Daniel Villar.
Marty Gottron edited the report. Hazel Macadangdang managed the publication process
and Merrell Tuck-Primdahl managed the dissemination activities. Book design, editing, andproduction were coordinated by Aziz Gökdemir of the World Bank’s Office of the Publisher,along with Stephen McGroarty, Denise Bergeron, Andrés Meneses, and Susan Graham.

xiii

Abbreviations

ASEAN

Association of South Eastern Asian Nations

CEE

Central and Eastern European countries

CIS

Commonwealth of Independent States

CPI

consumer price index

EMBI

Emerging Markets Bond Index

EMBIG

Emerging Markets Bond Index Global

EU

European Union

FDI

foreign direct investment

FSU

former Soviet Union

GCC

Gulf Cooperation Council

GDPgross domestic product

GFRP

Global Food Crisis Response Program

GIDD

Global Income Distribution Dynamics Model

IDA

International Development Association (World Bank)IEAInternational Energy Agency

IMF

International Monetary Fund

IPO

initial public equity offering

LSMS

Living Standards Measurement Survey

MSCI

Morgan-Stanley Composite Index

OECD

Organisation for Economic Co-operation and Development

OPEC

Organization of Petroleum Exporting Countries

PPP

purchasing power parity

PCSC

Programme Complémentaire de Soutien à la Croissance

RIGA

Rural Income-Generating Activities

saar

seasonally adjusted annualized ratetoe

tonne of oil equivalent

UAE

United Arab Emirates

USD

U.S. dollar

WFP

World Food Programmexv

Overview

T

he release of this year’s Global Economic
Prospects finds the world economy at a
crossroads. Markets all over the world are engulfed in a global economic crisis, with stock
markets sharply down and volatile, almost all
currencies having depreciated substantiallyagainst the dollar, and risk premiums on a wide
range of debt having increased by 600 or morebasis points. Commodity markets too haveturned a corner. Following several years of increase, prices have plummeted, and althoughwell above their 1990s levels, they have given
up most of the increases of the past 24 months.
Chapter 1 of this report examines themedium-term implications of this crisis fordeveloping-country growth, inflation, andworld trade. Chapter 2 looks at longer-term
supply and demand prospects in commodity
markets. It takes into account the long-term
growth prospects of developing countries
and their rising share in world GDP (grossdomestic product), the declining quality of
new pools of resources, and the influenceof technology on both demand and supply.
Finally, chapter 3 reports on the poverty impacts of high commodity prices and examines
the effectiveness of policies in both producing and consuming countries in dealing withthe challenges posed by periodic bouts ofhigh commodity prices.
This report does not deal with water, fish,or timber, all commodities of critical importance to developing countries and the globe
but which fall outside the scope of this report
either because of their public-goods characteror, in the case of timber, because of its treatment in a recent report (World Bank 2007).

The global financial crisis threatens shortterm prospects in developing countries
The banking crisis that erupted in September
2008, following more than a year of less acute
financial turmoil, has substantially reinforced
the cyclical downturn that was already underway. Following the insolvency of a large number of banks and financial institutions in the
United States, Europe, and the developingworld, financial conditions have becomemuch tighter, capital flows to developing
countries have dried up, and huge amounts ofmarket capitalization have evaporated.
The crisis began in high-income countries,
but developing countries have been caught up
in its wake. As of mid-November, developingcountry equity markets had given up almost allof their gains since the beginning of 2008 andinitial public offerings had disappeared. Risk
premiums, which had risen to more than 800
basis points on sovereign bonds and 1,000 oncommercial debt, have declined but remained
well above 600 basis points in every
developing region. As corporate bonds had
been one of the most important source ofdeveloping-country finance, these developmentssuggest that a sharp slowing in developingcountry investment growth is to be expected.
Bank lending and foreign direct investment inflows were also down, but less dramatically.
The increased volatility and losses emanatingfrom the banking sector have caused investors
worldwide to sell stocks and increase theirholdings of less risky assets, notably U.S. treasuries. As a result, the currencies of virtually
every developing country in the world has depreciated vis-à-vis the dollar.

1

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Following a series of efforts by central banks
and governments to resolve the growing crisis
through liquidity injections and various ad
hoc measures, policy makers have now acted
forcefully to restore confidence in the international banking system, including the partial
nationalization of nine banks and trillions ofdollars in rescue plans introduced by governments in the United States and Europe andrecent multilateral meetings to address weaknesses in the global financial architecture. At
the time of this writing (November 20, 2008),
it is too soon to judge the effectiveness of thesemeasures in restoring confidence in the banking system. However, they do constitute thekind of forceful and credible action that has
been needed, and interbank lending rates havefallen substantially and although they remain
volatile, stock and bond markets have greeted
these measures favorably.
Notwithstanding these steps, growthprospects for both high-income and developing countries have deteriorated substantially,
and the possibility of a very deep global recession cannot be ruled out.
Even before the emergence of a full-blown
financial crisis in September 2008, global
growth showed significant weakening. Economic growth slowed sharply in Europe andJapan and in many developing countries inthe second quarter of 2008. In the UnitedStates, the continued disruption in financial
markets and the fall in housing prices caused
domestic demand to fall in 6 of the past 12
quarters. However, strong export growth—
driven in part by developing-country importdemand—spared the U.S. economy from recession until recently when its GDP declined
0.3 percent in the third quarter of 2008. In
developing countries, overall GDP growth
also remained robust in the first half of theyear. However, slower growth in high-income
countries and the weakening of capital inflows,in combination with commodity-priceinduced losses in real income, generated a
sharp deceleration in industrial production,
investment, and international trade beginningin the third quarter.

2

At the same time, rising commodity prices
and tight capacity in many countries (following
years of very fast growth fueled by ample liquidity) caused both headline and core inflation
to pick up throughout the world, with headline
inflation rising by some 5 percentage points
among developing countries. Weaker growthand falling commodity prices have alreadycaused inflationary pressures to ease in somecountries. However, the significant losses in real
income endured by many people in developing
countries and the still overheated state of someof their economies could generate secondround price increases that either push inflation
higher or stabilize expectations at high levels.
The combination of a relatively strong
first half and a much weaker second half is
expected to cause GDP growth to slow to 1.3
percent in high-income countries and to 6.3 percent in developing countries in 2008. The slowdown is projected to intensify in 2009 because
most of the real-economy side effects of thebanking crisis will be felt in the final months of2008 and the first two quarters of 2009.
The main mechanism for the slowdown inboth developing and high-income countries
will be through investment, which for 2009 is
expected to decline 3.1 percent in high-income
countries. In developing countries, investment
growth is projected to slow sharply to 3.4 percent in 2009 from more than 13 percent in2007. Because low-income countries have lessaccess to international capital markets, theslowdown will affect them mainly through indirect mechanisms, including slower global
growth, lower commodity prices, slackening
remittance receipts, and partial scaleback in
aid flows.
Overall global GDP growth is projected to
decline to 0.9 percent in 2009, with developing economies expanding by 4.5 percent—wellbelow the 7.9 percent growth rate recorded in2007. International trade should decelerate
sharply, with global export volumes declining
for the first time since 1982. As a result, bothcommodity prices and inflation are projectedto ease, with oil prices averaging about $75 abarrel in 2009 and food prices projected toO V E R V I E W

decline by about 23 percent compared with
their average for 2008.
This financial crisis and the expected
abrupt slowing of global growth come at a
moment when developing countries considered as a whole are more vulnerable than they
have been in the recent past. Higher commodity prices have raised the current accountdeficits of many oil-importing countries toworrisome levels (they exceed 10 percent of
GDP in about one-third of developing countries), and after having increased substantially,
the international reserves of oil-exporting
developing countries are now declining as ashare of their imports. Moreover, inflation ishigh, and fiscal positions have deteriorated
both for cyclical reasons and because government spending has increased to alleviate theburden of higher commodity prices.
Thus, even in the baseline scenario, where
the rapid equity declines of September andOctober are assumed to end and where credit
begins to thaw as recent policy actions improve financial market confidence, a numberof developing countries are likely to be subjected to substantial strains, possibly includingbank failures and currency crises. In these very
uncertain circumstances, policy makers must
place a premium on reducing the likelihoodof domestic turmoil, by reacting swiftly andforcefully to emerging difficulties, including, if
necessary, seeking assistance from the International Monetary Fund (IMF).

very serious. Global financing conditions
would deteriorate rapidly, and apparently
sound domestic financial sectors could findthemselves unable to borrow or unwilling tolend—both in international and domestic markets. Such a scenario would be characterized
by a long and profound recession in highincome countries and substantial disruption
and turmoil, including bank failures and currency crises, in a wide range of developing
countries. Sharply negative growth in a numberof developing countries and all of the attendantrepercussions, including increased poverty andunemployment, would be inevitable.
Although a receding concern, high inflationin developing countries, remains a problem, especially if the financial turmoil is resolved relatively quickly. While global growth would stillslow in 2009 under such a scenario, the substantial policy stimulus that has been introduced
could cause growth in both developing and developed countries to surge in 2010, reigniting inflationary pressures and forcing a subsequent
tightening of policy and a second bout of slowing growth. Policy in countries that currently
have large current account deficits and high inflation needs to be particularly vigilant. These
economies continue to be vulnerable and investors skittish; under these conditions, theircurrencies are likely to remain particularly sensitive to changing market perceptions.

Uncertainty continues to cloud the outlook

The sharp rise in commodity prices over the
past five years, like the earlier booms of the lastcentury, was associated with a period of strong
economic growth (partly fueled by relatively
loose fiscal and monetary policy) and a periodof global uncertainty, and it has generated
significant inflationary pressures. This mostrecent boom has been the most marked of thepast century in its magnitude, duration, andthe number of commodity groups whose prices
have increased (figure O.1).
The strength and duration of the boom
mainly reflected the resilience of GDP growth
between 2003 and 2008.

While this sober outlook represents a likely
outcome, a wide range of outcomes remains
possible. The financial turmoil could intensify
further, sparking a prolonged credit crunchand global recession. A milder downturn isalso possible, if credit conditions do not deteriorate as much as anticipated in the baseline.
At the time of this writing, the possibility
that the situation in high-income countries will
deteriorate substantially cannot be ruled out.
Should credit markets fail to respond to the robust policy interventions taken so far, the consequences for developing countries could be

The commodity market boom has come toan end3

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure O.1 The recent commodity boom was
the largest and longest of any boom
since 1900
Real non-energy commodity prices, index (1977–79 5100)
380
1917 (just prior to WW I)
1974 (first oil crisis)

330
280

1951 (postwar rebuilding)2008 (forecast)

230
180
130
80
1900

1920

1940

1960

1980

2000

Source: Grilli and Yang (1988) for 1900 to 1947; World Bank for1948 to 2008.

In the oil and metals sector, the supply pressures that built up over the past five years andwhich drove prices to record heights stemmed
mainly from slow-growing supply capacity.
That slow growing supply capacity resulted
because for much of the 1990s rising demandin the rest of the world was met by the slow
reabsorption of idle capacity created following the 1980 oil shock and the collapse of
demand in the former Soviet bloc when theseformerly communist countries began to allocate resources according to market signals. As
a result of this idle capacity, prices remained
low in the oil and metals sectors and firms did
not have the economic incentives to increase
productive capacity.
Furthermore, because of low prices and because incremental demand was being met by thiscapacity, investment in the oil and metals industries plummeted, and the sectors that supplied
the inputs necessary for exploration and exploitation atrophied. That in turn created a mismatch between the underlying rate of growth of
supply capacity and demand. When the spare capacity was exhausted in the early 2000s, supply
was no longer able to keep pace with strengthening demand, and prices began to rise.
The story in agricultural markets is different.
Food-based demand for agricultural crops has
been relatively stable. However, diversion offood crops toward biofuel production has
increased sharply. Between 2003 and 2007,

4

two-thirds of the global increase in maize production went to biofuels. Although the initial
impact was confined to the maize market, as
farmers switched land away from wheat andsoybean production to grow maize, the price of
these commodities also began to rise. Higher oil
and fertilizer prices also increased food production costs, especially in high-income countries
where they can account for as much as 30 percent of overall costs. This factor, plus biofuel demand for grains, has made the price for theseproducts much more sensitive to changes in oil
prices. Finally, a series of poor wheat crops inAustralia compounded the situation, driving
down stocks and contributing to the price rise.
In addition to these fundamental drivers,
agricultural prices have been influenced both byincreased investor interest in these commodities
as an asset class and by government policies, including the decision by several countries to impose export bans. All of these factors are driven
by forward-looking expectations and may haveexacerbated both the upward rise in prices during 2007–08 and their more recent decline.

Commodity prices are declining in
response to slower GDP growthLike earlier commodity booms, this one hascome to an end. Prices in all commodity markets
have fallen sharply since July 2008 (figure O.2),

Figure O.2 Real commodity prices in local
currency units increased by between
75 and 150 percent but have fallen since
Real local currency commodity price indexes, CPI-deflated(Jan. 2000 5 100)
300

Energy

250
200
150

Food

100
Metals and minerals
50
Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan.
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: World Bank.

O V E R V I E W

In the longer term, growth in the demandfor commodities should ease
The strength, breadth (in terms of the number ofcommodities whose prices have increased), andduration of the current commodity boom haveprompted speculation that the global economy
is moving into a new era characterized by relative shortage and permanently higher (and evenpermanently rising) commodity prices.
This outcome does not appear likely. Overthe next two decades, slower population
growth and weaker (though still strong) income
growth are projected to cause trend global GDP
growth to ease (figure O.3) and, with it, the demand for commodities. As discussed later, theextent to which commodity demand does slow
and how easily supply is able to keep pace withdemand will very much depend on the policy
environment, the pace of technological change,and external factors such as climate change.

Figure O.3 Slower population growth should
result in weaker GDP and commodity demand
Growth of GDP, annual average (percent)543Developing
countries

6

High-income
countries

reflecting slower GDP growth, increased supplies and revised expectations. Because commodity prices reflect forward-looking
expectations, the sharp slowing of growth thatis expected over the next year has caused
prices to decline rapidly even though the underlying supply and demand tensions are littlechanged from just a few months ago whenthese prices were close all-time highs.
Some metals prices have already fallen topre-boom levels and the dollar price of many
internationally traded foods has fallen back totheir 2006 levels. While much weaker GDP
growth is projected to cause commodity prices
to ease further in the short run, they should
nevertheless remain higher than they were during the 1990s. Real food prices are projected to
decline by 26 percent between 2008 and 2010,energy prices to fall by 27 percent, and metals
prices to decline by 32 percent.

Contribution
to GDP
growth from
population
growthContribution
to GDP
growthfrom percapitaincomes

2
1
0
1990s

2000s

2015–30

Source: World Bank LINKAGES model.

manufactured goods) has reduced the quantityof metals and energy required to produce aunit of GDP by an average of 0.9 and 0.8 percent a year respectively (figure O.4). The foodintensity of GDP has also declined as an increasing share of the world’s population hasreached income levels where per person demand for basic food commodities is stable.
Beginning in the middle 1990s, the decline
in metals intensities began to reverse. That reversal is explained almost entirely by increasing metal intensities in China, which began
Figure O.4 Technological progress has
reduced the quantity of commodities used
per unit of GDP
Commodity intensity of demand index (1971 5 1.00)
1.10
1.05
1.00
0.95
0.90
0.85
0.80
0.75
0.70

Moderating demand for metals depends
critically on increased efficiency in China
Over the past 50 years, a combination of conservation measures, technological change, andchanges in the structure of global GDP (services tend to be less commodity-intensive than

1971

1977

1983

1989

1995

2001

EnergyMetals

Metals (excluding China)

Food

Source: World Bank calculations, using data from the World
Bureau of Metal Statistics, the IEA, and the FAO.

5

G L O B A L

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P R O S P E C T S

2 0 0 9in 1995 and grew even more sharply at the
beginning of the 2000s. The uptick in metals
intensities was associated with the investment,
manufacturing, and export booms in thatcountry. Currently, metal intensity in China isfour times higher than in developed countries
and twice as high as in other developing countries. China’s metal intensities are expected
to stabilize in coming years and then begin tofall as the country’s very high investment rate
declines and the transitional shift in global
manufacturing capacity from high-income
countries to China slows.
Assuming China’s metal intensity stabilizes
and then falls in coming years, global demand
for metals—which has outpaced GDP in recent
years—should first realign itself with GDP
growth over the next few years and then decline
further during the next decade, reaching about
2.7 percent a year in the period 2015–30.

75 percent in developing countries by 2050,
substantially reducing private transportation’s
dependency on liquid fuels.
In the baseline scenario, demand for oil is
expected to continue rising to around 114 million barrels a day (mb/d) by 2030 (comparedwith 87 mb/d today). Energy demand is projected to grow somewhat more quickly as coal,natural gas, and non-fossil-fuel energy sources
increase their share in total energy supply. The
extent to which this shift occurs will depend
importantly on the policy environment. A
more proactive stance toward restraining carbon emissions could speed the pace at whichalternative energies become economically
viable and reduce the expected increase inreliance on coal-powered electrical plants.

Future energy demand depends on
improving automobile efficiency

The pace at which the growth in supply capacity in the oil and metals sectors catches up to
demand will depend on how quickly capacity inthe heavy and specialized equipment and labor
supply sectors can be restored. Years of low
prices and weak investment have reduced
capacity in these sectors, and as a result,delivery times and costs of inputs have morethan quadrupled in many instances. High prices
for these components are speeding the alleviation of these constraints. With the expectedslowing of global GDP growth and lower
commodity prices, investment demand has
eased and prices for these specialized investment
goods are expected to fall further. Nevertheless,deliveries are projected to continue trailingdemand for some time, and prices will remain
relatively high for the next several years.
Over the longer run, the price of extracted
commodities should fall—although they are
not expected to fall to their levels in the
1990s. Higher prices than in the past will be
required to ensure that firms continue to invest in new capacity.
Although the absolute quantity of fossil
fuels and metals in the earth’s crust is declining and the quantity that is extracted each

Demand in the energy sector will depend
critically on the pace at which energy efficiency continues to improve, especially in thetransport sector. Since 1970 conservation efforts and technological progress have reduced
energy demand by 56 percent, compared witha no-change scenario (IEA 2006). With some
75 percent of future energy demand expected
to come from the transport sector, especiallyfrom developing countries, the pace of futureenergy demand growth (and its composition)
will depend heavily on future efficiency gains
in car technology.
Prospects for such improvements are good,
if policy continues to be supportive of bothconservation and efficiency measures. Alreadyexisting technologies—available either in initial rollout phases or as prototypes (flex-fueland hybrid cars, plug-in hybrids, and electricand hydrogen-powered vehicles)—could help
to more than double fuel efficiency. An ambitious (and successful) policy to speed the development and diffusion of these technologies
could see the share of these vehicles rise to
90 percent in the high-income world and to

6

Over the next 20 years, supplies ofextracted commodities are likely
to remain ample

O V E R V I E W

year is rising, there appears little likelihoodthat the world will run out anytime soon. Historically, proven reserves of both metals andoil have tended to rise even more rapidly than
production, remaining surprisingly constant in
the case of oil at about 40 years of production.
In part, that is because measured reserves,
rather than being an accurate count of the resources remaining in the ground, bear a closer
resemblance to the inventory of product thatfirms can readily bring to the market. So longas firms have ample “known reserves” for expected future demand, they have little incentive to find more.
As production increases and more known
reserves are brought into service, additional
reserves will likely be discovered. In general,these newer reserves tend to be of lower quality and higher cost than existing ones. However, historically improvements in extraction
technology have advanced quickly enough tokeep the cost of exploiting new sources stableor even falling, despite increased remotenessand poorer quality. The projected long-term
price of a barrel of oil of $75 (real 2005 dollars) is based on the expectation that such a
price will be sufficient to incite additional
output from high-cost sources such as the
Canadian oil sands.
Even if certain resources do become scarce,
ample alternatives exist. For example, if thepace at which new oil reserves are discovered
declines, the rising price for oil will makealternative sources of energy (including coal,natural gas, nuclear, and renewable alternatives) more competitive and induce increased
conservation and technological change. Simulations suggest that if oil production fails torise between now and 2030, oil prices mightdouble but most of the energy shortfall would
be met by increased coal and natural gas consumption—albeit at higher cost.

Food demand will slow with lower
population growth, but biofuels could
expand crop demand very rapidly
Because an increasing share of the world’s
population has reached income levels where

demand for most primary food commodities
no longer rises with income, demand for food is
expected to slow—broadly in line with weaker
population growth. However, the potential
role of biofuel demand for food crops greatly
complicates the picture. Given today’s technology, maize can be profitably transformed
into ethanol at oil prices in excess of $50 abarrel. Above that price, every percentage
point increase in the barrel price of oil causes
maize price to rise by 0.9 percent (figure O.5),
which means the maize market is effectively
tied to the oil market (this relationship is notstatistically significant when oil is below $50 abarrel). Moreover, because farmers have responded to high maize prices by increasingly
growing maize in fields where they once grew
wheat and soybeans, prices of these (andother) commodities have also become increasingly sensitive to oil prices.
Given that the energy market is muchlarger than the market for maize (if all theworld’s maize were used to produce biofuels,
it would only meet 8 percent of energy demand), biofuel demand has the potential tochange permanently the nature (and price)of agricultural commodities. The International
Energy Agency (IEA), for example, suggeststhat biofuel demand for grains could increaseby 7.8 percent a year over the next 20 years(compared with 1.2 percent annual increases
for food demand). If this prognosis is borne
out, 40 percent of global grain production
could be going to biofuels by 2030.
It is probably premature to argue that thenature of these markets is permanently
changed. On the one hand, technological improvements are likely to lower the cost of
producing ethanol from maize (and sugar),which in turn will lower the threshold oil
price above which these food crops become
sensitive to oil prices. However, technologicalchange may also give rise to alternative
sources of energy that make ethanol production from food crops uneconomic. Suchalternatives might include biofuels made from
cellulose or other nonfood sources, solar
power, or hydrogen-based systems. In these7

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9cases, the new, stronger connection that has
been created between the energy market andthe grain markets would be broken, and foodprices would likely fall significantly.

Figure O. 5 Oil prices are having a direct
impact on food prices
Oil price per barrel versus food price per ton
a. Soybeans vs. Crude Oil Prices

Strong productivity growth and unused
crop land should ensure adequate foodsupply at the global level

Soybeans ($/ton)
700
600
500
400
300
200
100
0
0

20

40

60

80

100

120

140

100

120

140

100

120

140

Crude oil ($/bbl)
b. Wheat vs. Crude Oil Prices
Wheat ($/ton)
500

400

300

200

100

0
0

20

40

60

80

Crude oil ($/bbl)
c. Maize vs. Crude Oil Prices
Maize ($/ton)
350
300
250
200
150
100
50
0
0

20

40

60

80

Crude oil ($/bbl)
Source: World Bank.

8

Food supplies are unlikely to fall short of demand. Over the past 30 years, agricultural
productivity has improved much faster thandemand; as a result, agricultural output has
increased rapidly even as the share of agricultural workers in total employment has steadily
declined and prices fallen.
Longer-term prospects are somewhat
clouded by the gradual exhaustion of the easy
productivity gains offered by the green revolution. In addition, climate change threatens
yields in many developing countries, althoughmost of this effect is not likely to be felt until
after 2030. Assuming that policies are put
in place to expand infrastructure and facilitate the diffusion of the new technologies(including biotechnologies) that have sustained
agricultural productivity in high-income countries, agricultural output should more than keep
pace with food demand over the long term.
However, if developing countries are notsuccessful in combating recent trends for yields
to decline by increasing investment in rural
agriculture and through the spread and adoption of more productive seed varieties andfarming techniques, there is a real risk thatmany countries, notably in Africa (where population growth is expected to be faster), will
move from a position of being broadly selfsufficient in food to being net food importers.
Most of the shortfall would be met by production from high-income countries, where productivity growth has not slowed.
Even if biofuel demand increases substantially, enormous potential exists for bringing
additional (albeit lower productivity) land into
cultivation. That said, if biofuel-related demand for crops is much stronger or productivity
performance disappoints, future food supplies
may be much more expensive than in the past.

O V E R V I E W

Simulations suggest that under these unfavorable circumstances, food crop prices could be as
much as 30 percent higher than in the baseline
scenario.

Commodity-producing countries aremanaging the revenue windfall better thanthey have in the past
Historically, countries whose economies areheavily dependent on commodities exports
have tended to grow less quickly than thosewith more diverse economies. This tendency
mainly reflects low GDP and underdevelopment of their nonresource sectors rather than
the actual quantity of resources held by thesecountries. Indeed, measured by per capita
value-added from resources, high-income
countries tend to be more resource rich thandeveloping countries, while their large nonresource sectors mean they are also less resource
dependent (figure O.6).
Resource dependence need not result inslow growth. But to realize the potential ofresource wealth, governments need to avoid
following policies that exacerbate the tendency

Figure O.6 On average, poor countries are
dependent on commodities but relatively
resource poor
Value of per capita primarycommodities in exports(US$ thousands)

Share of primarycommodities in total
merchandise exports (%)

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0
Primary exports per capita(left axis)

Primary exports/exports(right axis)

Low-income
countries

Lower-middle-income
countries

High-income
countries

Upper-middle-income
countries

Source: World Bank.

for resource dependence to generate poor
growth outcomes. These include:• The tendency for government spending
in resource-dependent countries to risein booms and fall procyclically during
busts;• The tendency for strong revenue inflows
to cause an excessive real appreciationof the currency that hurts the competitiveness of the nonresource sectors of
the economy; and• The tendency for large commoditybased revenues to foster rent-seeking
behavior, corruption, and even politicalviolence.
Encouragingly, during the course of the recent commodity boom, fiscal spending inresource-dependent developing countries has
been much more prudent than during earlier
booms. Partly as a result, the currencies ofmost countries have appreciated by less thanin the past. Moreover, corruption among commodity exporters has improved relative todiversified exporters (figure O.7), suggestingthat perhaps this mechanism for reducing thedevelopment potential of resource wealth has
been weakened as well.
Exceptions include newly independentcommodity exporters or states with newly
found resource wealth. Government spending
in these countries has kept pace with or evenexceeded export revenues, and their currencies
have appreciated much more strongly thanthose with more experience of commodity
booms (figure O.8). With prices now sharply
lower, such countries may be encountering
additional fiscal pressures. In addition, oil exporters with relatively low reserves are notsaving significantly more than those with highreserves and, as a result, may be exacerbating
the competitiveness problems of their non-oil
sectors. That, in turn, could be creating afuture problem, because these countries, unlike
those with ample reserves, will have to rely on
their non-resource-based sectors to generatemost of the growth in coming years.

9

G L O B A L

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P R O S P E C T S

2 0 0 9Figure O.7 Primary commodity exporters are
exhibiting fewer signs of the behaviors
linked to the “resource curse”

Figure O.8 Exchange rates, inflation, andgovernment expenditures in new versus
established oil exporters, 2001–06

a. Government expenditures have increased by much lessthan export revenues% change
60
50

Percentage change in the share of GDP
8

New producers

40
Change inexports/GDP

630

Established producers

20

4

10

2

0

0

⫺10

⫺2

Real exchange
rate with US$

Change in government
expenditures/GDP⫺4

Percentagechange in
CPI, 2008

⫺6
1980s

2000s

Source: World Bank.
b. The currencies of commodity exporters have appreciatedmodestly
Percentage change in trade-weighted real effective
exchange rate
1050Recent boom

⫺5
⫺101980s boom

⫺15
⫺20
Non-oil exporters

Note: Increase indicates appreciation.
c. Corruption in commodity exporting countries
has declined

Better

Index
0.0
⫺0.2
⫺0.4

Worse

Diversified exporters
Agricultural exporters⫺0.8

Note: New producers are defined as countries dependent on oilthat began production after 1985 or were established as a country
after 1985, including Azerbaijan, Chad, Equatorial Guinea,
Kazakhstan, Sudan, and the Republic of Yemen (Turkmenistan
lacks data for inflation and the real exchange rate). The
established producers include Algeria, Angola, Republic of Congo,
Gabon, Islamic Republic of Iran, Libya, Nigeria, Oman, andRepública Bolivariana de Venezuela. The real exchange rate with
the United States (rather than the trade-weighted real exchange
rate as in figure 3.5) is reported here to include sufficient countries
for a useful comparison between the two groups.
a. Real exchange rate with the U.S. dollar, where increaseindicates appreciation. Data for Equatorial Guinea are for
2001–04.
b. Percentage change in consumer price index in 2008.
c. Change in ratio of government expenditure to GDP from2001 to 2007.

Oil and mineral exporters

commodities, such as agricultural producers,
where the benefits of high prices are less concentrated. Encouragingly, much of the spending appears to be directed toward investment
goods, which should contribute to future
production potential. In a number of Africancountries, however, investment spending has
been financed by heavy bank borrowing,
which may pose significant problems as loans
become due, now that commodity prices havedeclined and access to credit has becomemuch more difficult.

⫺1.0
1996

10

Source: World Bank and IMF data.

Oil exporters

Source: IMF data; World Bank staff calculations.

⫺0.6

Change ingovernment
expenditure/GDP, 2001–07

2006

Source: Kaufmann, Kraay, and Mastruzzi 2007; World Bank data.

High commodity prices pose challenges forthe poor, especially in consuming nations

In addition, spending from resource revenues in the private sector remains high. Thisis especially true for exporters of non-oil

For consuming nations, high commodity
prices pose a number of challenges. In the caseof heavily traded commodities such as oil,sharp price hikes can pose serious balance ofO V E R V I E W

payment difficulties and increase the vulnerability of net importers. In the case of foodcommodities, which are mainly consumed in
the same country in which they are produced, the issue for most countries is one of atransfer of wealth between producers andconsumers. That said, some countries are significant net importers of food and have suffered significant balance of payment impacts
from high food prices as well. Both fuel andfood prices have boosted inflation and cut into
real incomes in developing countries.
In general, economic policy should not resist changes in relative prices but should seek
to assist adjustment to changing circumstances. However, the magnitude of thechanges over the past several years has been
unusually large with important implications
for inflation, balance of payments, and poverty
in developing countries. Moreover, because
high food prices can increase malnutrition
among the very poor, resulting in permanentcognitive and physical damage, even a temporary but large hike in food prices demands a
prompt and well-targeted policy response.
At the global level, the cost of higher foodand fuel prices to consumers in developing
countries during 2008 is estimated to havebeen about $680 billion. The price increases
had major macroeconomic effects. High oil
prices increased current account deficits in a
number of countries by as much as 5 percentof their GDP. Both food and fuel price increases have led to a sharp uptick in inflation.
In addition, by increasing costs, the food andfuel increases have increased the number ofpoor and the extent of their poverty. In general, higher food prices have had a more pronounced effect on poverty, because households
in poor countries spend 50 percent or more of
their income on food and only 10 percent onfuel. Moreover, for very poor households, foodtends to claim an even higher share in expenditures, and fuel a much lower share. Finally,
the poverty impacts are likely to be more significant because the demand for food is moreinelastic than household demand for fuels, because the former can be replaced by biomass.

Not all foods prices have risen by as much as
the prices for rice, maize, and wheat, however.
Moreover, during 2007 and the first half of2008, the dollar was depreciating so that local
currency prices rose by less than the dollar
prices. As a result, the real-local-currency increase in the price of food actually consumed indeveloping countries was much less than the
54 percent increase observed in internationallytraded and dollar-denominated food prices(table O.1). Moreover, not all food consumed inpoor countries is traded and the share of nontraded foods in total consumption varies acrossregions. In Africa, for example, real food pricesrose by an average of 8.3 percent, comparedwith 19.8 percent in the Middle East, which relies much more heavily on imported foods.
Overall, the rise in food prices between 2005
and the beginning of 2008 is estimated to haveincreased the share of the population of East
Asia, the Middle East, and South Asia livingin extreme poverty by 1 or more percentage
points. Impacts in Africa were less pronounced
because food prices rose by less on average andTable O.1 Food price hikes and consumption shares vary by region

Region

Price
shock

Food
share among
the poor(percent)
Rural population
East Asia and Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Developing world
Urban Population
East Asia and Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Developing world

12.4
0.2
6.9
25.9
5.0
9.6

71.5
63.4
51.2
64.5
65.3
68.0

6.7

66.1

13.8
0.5
1.6
12.5
4.8
4.9

67.5
57.8
44.1
57.1
64.4
53.0

4.1

60.4

Source: World Bank.
Note: Price shocks differ between the rural and urban populations because of differing degrees of urbanization among
countries included in the aggregates.

11

G L O B A L

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2 0 0 9because a much larger share of the population
lives in rural areas. In general, rural dwellers
have been less seriously affected because, in addition to being consumers, many are producers
and benefit from higher revenues. The impact
on the urban poor was much higher, increasing
the incidence of poverty by more than 1.5 percentage points in East Asia, the Middle East,
South Asia, and Sub-Saharan Africa (table O.2).
Overall the number of extremely poor is estimated to have increased by between 130 and
155 million, and the poverty deficit (the annual
cost of lifting the incomes of all of the poor toTable O.2 Higher food prices haveincreased both the incidence and severityof poverty worldwide
January 2005–December 2007

RegionUrban population
East Asia and Pacific
Europe andCentral Asia
Latin America
and the Caribbean
Middle Eastand North Africa
South Asia
Sub-Saharan Africa
Developing world

Initial levels:

Change in:Poverty
Incomeheadcount gap ratio

Poverty
Incomeheadcount gap ratio(percent)(percentage points)

13.2

20.3

6.3

2.7

2.5

8.7

0.0

0.2

3.7

37.6

0.1

0.7

2.7
32.3
34.1

17.8
25.0
38.1

2.4
2.0
1.7

5.7
0.5
0.3

15.3

27.1

2.9

0.5

31.9

23.2

4.9

0.7

8.2

6.6

0.0

0.0

Rural population
East Asia and Pacific
Europe andCentral Asia
Latin America
and the Caribbean
Middle Eastand North Africa
South Asia
Sub-Saharan Africa

18.6

43.9

0.1

0.1

15.4
43.3
54.9

22.9
24.0
41.5

0.7
0.8
0.3

0.9
0.3
0.0

Developing world

37.1

28.2

2.1

0.1

Source: World Bank, using the Global Income Distribution
Dynamics model.
Note: The per capita poverty line equals 1.25 international
2005 dollars a day. The ratio of food in total consumption
among the poor is computed as described in De Hoyos andLessem (2008). East Asia excludes China, and the Middle
East comprises Jordan, Morocco, and the Republic of Yemen.
The income gap ratio expresses, as a percent of the poverty
line, how much the income of the average poor person islower than the poverty line.

12

the poverty line) increased by $38 billion, or 0.5
percent of developing-country GDP.
For the very poor, reducing consumption
from already very low levels, even for a shortperiod, can have important long-term consequences. Already, higher food prices during
2008 may have increased the number ofchildren suffering permanent cognitive andphysical injury caused by malnutrition by
44 million. It is therefore critical that countries react to higher food prices by increasing
the assistance they make available to thosemost at risk.
Most countries have reacted to the hike infood and fuel prices by some combination ofincreased government spending on existingsocial safety net programs, be they subsidies,conditional transfer systems, or food distribution schemes. Others have responded by seeking to hold domestic prices down by reducing
taxes or instituting restrictions on exports.
Such programs have been relatively expensive, increasing government expenditures by
as much as 2–4 percent of GDP. Moreover, inmany cases poor targeting means that much ofthis spending does not benefit those most in
need. And, by interfering with market prices,
these programs often impede adjustment, reducing producers’ incentives to increase output and consumers’ incentives to conserve. As
such they likely exacerbated the extent of pricerises and extended their duration.
Going forward, policy makers need torestructure their support so that it is bettertargeted on the very poor. Doing so will help ensure that the next time food (or energy) prices
spike, assistance programs will be both more
affordable and more effective at delivering assistance to those most in need. Of the options
available, targeted cash transfers tend to succeed
best because they have relatively low administrative requirements and minimize the diversion
of benefits toward less needy populationgroups. Unfortunately, these programs may also
exclude the many poor who are either unable orunwilling to meet the conditions attached to theprogram, which are designed to dissuade all but
the most needy from participating. In-kindO V E R V I E W

programs, such as school feeding and the distribution of fortified weaning food for toddlers,
can be effective, especially in fiscally constrained
countries. Subsidies, even targeted ones, tend to
be much less efficient, with as little as one-fifthof the money spent benefiting the poor. Public
works programs rarely provide sufficient coverage to meaningfully target poor families. Whatever policies are adopted, it is critical that theoffsetting income support be clearly presented
as temporary and include phaseout strategies toavoid creating an unnecessary longer-term fiscal
burden.

The role for international policy
Ultimately, given the scope of the costs involved, neither individual governments nor international agencies are in a position to offset
the costs of higher food and fuel prices entirely. However, well-targeted programs aremuch more affordable. For the poorest countries, these too may be beyond reach fiscally,
and in these cases, the international community has a role.
Steps so far have concentrated on reallocating existing funds toward those most in needand on strengthening both the financial andinfrastructural capacity of emergency food aid
agencies such as the World Food Programme(WFP). Further steps that might be considered
include providing the WFP with a more stablesource of financing and affording it a line ofcredit so that it is able to act quickly in instances where food prices are unusually high.
Policy makers might also examine
prospects for improving the coordinated management of grain reserves so that they can be
more easily brought to the aid of those in
need. Steps might include the constructionof storage facilities in strategic parts of theworld and the creation of a management
system perhaps along the lines of that usedby the IEA for oil. Individual food-importingand -exporting nations may wish to explore
the use of market-based future contracts as analternative to building stocks and restricting
exports. Such contracts can reduce both priceand quantity uncertainty by providing for
guaranteed delivery of fixed quantities ofgrains at fixed prices. They can even be written conditionally, providing an option to sellor buy that can be exercised depending onmarket conditions.
Trade reform will necessarily form part ofthe solution as well. Steps are required tosanction effectively countries that use export
restrictions as a mechanism to control domestic prices. Not only do such restrictions
interfere with the domestic supply response,
they also tend to exacerbate the price hikes
and shortages in the rest of the global economy. Although a successful conclusion to theWorld Trade Organization’s Doha Round of
multilateral trade negotiations might result inhigher prices in the short run, it would likely
prove beneficial to developing countries byimproving the competitiveness of their agricultural sectors and reducing their reliance on
imported food.

References
De Hoyos, R., and R. Lessem. 2008. “Food Sharesin Consumption: New Evidence Using Engel
Curves for Developing Countries.” World Bank,
Washington, DC.
Grilli, Enzo R., and Maw Cheng Yang. 1988. “Primary
Commodity Prices, Manufactured Good Prices,and the Terms of Trade of Developing Countries:
What the Long Run Shows.” World Bank Economic Review 2: 1–47.
IEA (International Energy Agency). 2006. Energy
Technology Perspectives: Scenarios & Strategies
to 2050. Paris: OECD/IEA.
Kaufmann, D., A. Kraay, and M. Mastruzzi. 2007.
Governance Matters VI: Aggregate and Individual Governance Indicators for 1996–2006. WorldBank Policy Research Working Paper 4280,
Washington, DC.
World Bank. 2007. At Loggerheads: Agricultural
Expansion, Poverty Reduction, and Environment
in the Tropical Forests. Washington, DC: World
Bank.

13

1
Prospects for the Global EconomyThe stresses in the financial markets of theUnited States that first emerged in thesummer of 2007 transformed themselves into afull-blown global financial crisis in the fall of
2008: credit markets froze; stock markets
crashed; and a sequence of insolvencies threatened the entire international financial system.
Massive liquidity injections by central banks
and a variety of stopgap measures by governments proved inadequate to contain the crisis
at first.
The initially hesitant policy response has
become increasingly robust. The United States
government introduced a $700 billion rescue
package and has taken equity positions in ninemajor banks and several large regional banks.
Various debt and deposit guarantees have also
been introduced. At the same time, European
governments have announced plans for equity
injections and purchases of bank assets worth
some $460 billion, along with up to almost$2 trillion in guarantees of bank debt. At thetime of this writing, November 20, 2008, markets remain volatile despite the forcefulness ofthese measures and signs that credit conditions are improving somewhat in high-income
countries. Both private-sector and sovereigninterest rate spreads for developing countries
have spiked even higher, and a growing list of
countries have been forced to seek assistancefrom the International Monetary Fund (IMF).
During the initial phases of this financial
crisis in 2007, the effects of the financial turmoil on developing countries were relatively

modest. However, as the crisis intensified in2008 and especially since mid-September, risk
aversion (the absence of which had been thehallmark of the preceding boom) has increased, and capital flows to developing countries have seized up. As a result, the currencies
of a wide range of developing countries depreciated sharply, and developing-market equity
prices have given up almost all of their gains
since the beginning of 2008. Initial public equity offerings have disappeared, and risk premiums have increased to more than 700 basis
points on sovereign bonds and to more than
1,000 basis points on the debt of developingcountry firms. Very recent data on bank lending and foreign direct investment inflows are
not available, but indications are that these inflows have also declined, but less dramatically.
Virtually no country, developing or highincome, has escaped the impact of the widening
crisis, although those countries with stronger
fundamentals going into the crisis have beenless affected. The deterioration in financing
conditions has been most severe in countries
with large current account deficits, and in
those that showed signs of overheating andunsustainably rapid credit creation before thefinancial crisis intensified. Of the 20 developing countries whose economies have reacted
most sharply to the deterioration in conditions(as measured by exchange rate depreciation,
increase in spreads, and equity market declines), 6 come from Europe and Central Asia,
and 8 from Latin America and the Caribbean.

15

G L O B A L

E C O N O M I C

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2 0 0 9

Much tighter credit conditions will see
investment and GDP growth slow sharply
In this climate, growth prospects for both
high-income and developing countries have deteriorated substantially, and the possibility of aserious global recession cannot be ruled out.
Even if the waves of panic that have inundated credit and equity markets across theworld are soon brought under control, thecrisis is likely to cause a sharp slowdown in
activity stemming from the deleveraging in
financial markets that has already occurred
and that is expected to continue. In the baseline
forecast presented in this chapter, much tighter
credit conditions, weaker capital inflows to
middle-income countries, and a sharp reduction in global import demand are expected tobe the main factors driving the slowdown indeveloping countries. Import demand is projected to decline by 3.4 percent in high-income
countries during 2009, while net private debt
and equity flows to developing countries areprojected to decline from $1 trillion in 2007
to about $530 billion in 2009, or from 7.7 to
3 percent of developing-country GDP. As a result, investment growth in developing countries
is projected to slow dramatically, rising only
3.5 percent in middle-income countries, compared with a 13.2 percent increase in 2007.
A pronounced recession is believed to havebegun in mid-2008 in Europe, Japan, and mostrecently, the United States. This recession is projected to extend into 2009, yielding a decline inhigh-income country GDP of 0.1 percent thatyear (table 1.1). In developing countries,
growth is projected to slow to 4.5 percent in2009, down from 7.9 and 6.3 percent in 2007
and 2008. Overall, global GDP is projected to
expand only 0.9 percent in 2009 (figure 1.1)—
below the rate recorded in 2001 and 1991 andindeed, the weakest since records became
available beginning in 1970.
Because low-income countries have less access to international capital markets, the slowdown will affect them mainly through indirect
mechanisms, including reduced demand fortheir exports, lower commodity prices, andreduced remittance inflows. International trade16

is projected to decelerate sharply, with global
export volumes falling by 2.1 percent in2009—the first time they have declined since1982 and eclipsing the 1.9 percent falloff that
occurred in 1975. Export opportunities fordeveloping countries will fade rapidly becauseof the recession in high-income countries andbecause export credits are drying up and export insurance has become more expensive.
Slower growth in high-income countries is
estimated to have reduced remittance flows
into developing countries from 2 to 1.8 percent of recipient country GDP between 2007
and 2008. At the country level, the extent offurther slowdown will depend critically on exchange rate developments, with recent swings
in bilateral exchange rates dwarfing the expected changes in remittances denominated inhost-country currencies.
The global growth recession is projected tocause both commodity prices and inflation toease further, with oil prices averaging about$75 a barrel (bbl) in 2009, and food and metal
prices projected to decline by about 23 and26 percent, respectively, compared with theiraverage levels in 2008. Nevertheless, commodity prices will remain well above the very
low levels of the 1990s.
Lower commodity prices should reduce theburden on some segments of the poor (notably
urban dwellers), whose purchasing power has
declined because of high food and fuel prices(see chapter 3). Lower prices should also help
dampen headline inflation. Indeed, the rapid
rise of food and energy prices over the courseof 2007 and the first half of 2008, coupled withtight capacity in many countries (following
years of very fast growth fueled by ample liquidity) caused headline and core inflation topick up throughout the world. Headline inflation increased by 5 percentage points or more in
most developing countries, and more than halfof developing countries had an inflation rate inexcess of 10 percent by the middle of 2008.
This financial crisis and the expected abrupt
slowing of global growth comes at a moment
when developing countries considered as awhole are more vulnerable than they have been

P R O S P E C T S

F O R

T H E

G L O B A L

E C O N O M Y

Table 1.1 The global outlook in summary(percentage change from previous year, except for interest rates and oil prices)
2006

2007

2008*

2009†

2010†

9.8

7.5

6.2

⫺2.1

6.0

2.2
3.3

1.7
2.6

3.3
4.5

1.6
2.5

1.8
2.8

29.1
64.3
20.4
1.6

17.0
71.1
10.6
5.5

22.4
101.2
42.3
9.0

⫺23.2
74.5
⫺26.4
2.1

⫺4.3
75.8
1.8
1.3

5.2
3.1

5.3
4.3

3.3
4.9

1.9
3.8

2.5
4.2

Real GDP growthe
World
Memo item: World (PPP weights)f
High-income countries
OECD countries
Euro Area
Japan
United States
Non-OECD countries
Developing countries
East Asia and the Pacific
China
Indonesia
ThailandEurope and Central Asia
PolandRussian Federation
TurkeyLatin America and the Caribbean
Argentina
BrazilMexicoMiddle East and North Africa
AlgeriaEgypt, Arab Rep. of
Iran, Islamic Rep. ofSouth Asia
Bangladesh
India
Pakistan
Sub-Saharan Africa
Kenya
NigeriaSouth Africa

4.0
5.0
3.0
2.9
2.9
2.4
2.8
5.5
7.7
10.1
11.6
5.5
5.1
7.5
6.2
7.4
6.9
5.6
8.5
3.8
4.9
5.3
1.8
6.8
5.9
9.0
6.6
9.7
6.2
5.9
6.1
5.2
5.4

3.7
4.9
2.6
2.4
2.6
2.1
2.0
5.6
7.9
10.5
11.9
6.3
4.8
7.1
6.6
8.1
4.6
5.7
8.7
5.4
3.2
5.8
3.1
7.1
7.8
8.4
6.4
9.0
6.0
6.3
7.1
6.5
5.1

2.5
3.6
1.3
1.2
1.1
0.5
1.4
4.3
6.3
8.5
9.4
6.0
4.6
5.3
5.4
6.0
3.0
4.4
6.6
5.2
2.0
5.8
4.9
7.2
5.6
6.3
6.2
6.3
6.0
5.4
3.3
6.3
3.4

0.9
1.9
ⴚ0.1
⫺0.3
⫺0.6
⫺0.1
⫺0.5
3.1
4.5
6.7
7.5
4.4
3.6
2.7
4.0
3.0
1.7
2.1
1.5
2.8
1.1
3.9
3.8
4.5
3.5
5.4
5.7
5.8
3.0
4.6
3.7
5.8
2.8

3.0
3.9
2.0
1.9
1.6
1.5
2.0
5.3
6.1
7.8
8.5
6.0
5.0
5.0
4.7
5.0
4.9
4.0
4.0
4.6
3.1
5.2
5.4
6.0
4.2
7.2
6.2
7.7
4.5
5.8
5.9
6.2
4.4

Memo items
Developing countries
excluding transition countries
excluding China and India

7.8
6.0

7.9
6.1

6.3
5.0

4.6
2.9

6.2
4.7

Indicator

Global conditions
World trade volume
Consumer prices
G-7 countriesa,bUnited States
Commodity prices (US$)
Non-oil commodities
Oil price (US$ per barrel)c
Oil price (percent change)
Manufactures unit export valued
Interest rates$ LIBOR, 6-month (percent)€ EURIBOR, 6-month (percent)

Source: World Bank.
Note: PPP ⫽ purchasing power parity; * ⫽ estimate; † ⫽ forecast.
a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
b. In local currency, aggregated using 2000 GDP weights.
c. Simple average of Dubai, Brent, and West Texas Intermediate.
d. Unit value index of manufactured exports from major economies, expressed in U.S. dollars.
e. GDP in 2000 constant U.S. dollars, 2000 prices, and market exchange rates.
f. GDP measured at 2000 PPP weights.

17

G L O B A L

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2 0 0 9Figure 1.1 GDP growth
Asian Dot-com
crisis crisis
Forecast

Real GDP, percentage change
8High-income countries
6
4
2
0
⫺2
1980

1984

1988

1992

1996

2000

2004

2008

Developing countries, excluding China and India
Developing countries
Source: World Bank.

in the recent past. Higher commodity prices
have widened current account deficits of many
oil-importing countries to worrisome levels(they exceed 10 percent of GDP in about onethird of developing countries), and after having increased substantially, the international
reserves of oil-exporting developing countries
are now declining as a share of their imports.
Moreover, inflation is high, and fiscal positions
have deteriorated both for cyclical reasons andbecause government spending has increased toalleviate some of the burden of higher commodity prices.
Although the global recession is likely to be
protracted, some elements of an eventual recovery can already be discerned. These include
early movement toward stabilization in the
housing sector in the United States; continued
progress on debt workouts and a strengthening of balance sheets among both banks andhouseholds; a gradual easing of credit conditions as government rescue packages take holdand investors begin to return to heavily discounted equity markets; increases in real incomes (stemming from lower food and fuelprices) among individuals with relatively highmarginal propensities to consume; and increased space for fiscal and monetary policies
as inflationary pressures ease and government
outlays on food and fuel subsidies decline intandem.

18

Prudent and vigilant policies are key
as uncertainty continues to cloud theoutlook
Although this sober outlook represents alikely outcome, the situation remains unstable, and a wide range of outcomes are possible, including a scenario where the reboundof growth in 2010 is weaker, held back bycontinuing banking sector restructuring, andnegative wealth effects resulting from lower
housing and stock market prices.
An even sharper recession is also possible.
If the freeze in credit markets does not thaw as
anticipated in the baseline, the consequences
for developing countries could be catastrophic. Financing conditions would deteriorate rapidly, and apparently sound domestic
financial sectors could find themselves unable
to borrow or unwilling to lend—in both international and domestic markets. Such a scenario would be characterized by a long andprofound recession in high-income countries
and substantial disruption and turmoil, including bank failures and currency crises, in awide range of developing countries. Sharply
negative growth in a number of developing
countries with all of the attendant repercussions, including increased poverty and unemployment, would be inevitable.
Although it is a receding concern, high inflation in developing countries remains a problem,
especially if the impact from the current crisis
on developing-country investment demand isless pronounced, and the stimulus provided byvarious rescue and fiscal packages in highincome and developing countries feeds a rapid
expansion in demand. Under such a scenario,
global growth would still slow in 2009, which
would tend to dampen inflationary pressuresinitially, but growth could be expected to snap
back much more sharply in 2010. Countries
that now have large current account deficits
and high inflation could suffer from a renewed
overheating of their economies. Policies would
have to be very prudent in these circumstances,because the currencies of these countries arelikely to remain sensitive to changing market
perceptions and increased risk aversion.

P R O S P E C T S

The challenge for policy makers is not only
to prevent an escalation of the crisis and to mitigate the downturn but also to ensure a goodstarting position once the rebound sets in. For
developing countries, this means responding
rapidly and forcefully to signs of weakness indomestic banking sectors, including resorting
to international assistance where necessary. It
also means pursuing a prudent countercyclicalpolicy, relying on automatic stabilizers, social
safety nets, and infrastructure investment that
addresses bottlenecks that have become binding constraints on long-term sustainablegrowth in many countries.
In the current circumstances of heightenedrisk aversion and investor skittishness, policy
makers need to be especially wary of taking
on excessive levels of debt or creating the conditions for an inflationary bubble by reacting
too aggressively to the global slowdown.
Although it is important for policy makers toreact quickly to emerging problems, it is alsoessential that steps and conditions attached toassistance be well focused on overcomingsome of the fundamental sources of weakness. Otherwise there is a risk that governments lose the support of markets and taxpayers in their efforts to limit the extent ofnear-term disruptions.

Financial markets
The deterioration in financial
conditions accelerated markedly
in September 2008T

he protracted turmoil that has plagued
global financial and credit markets since
mid-2007 escalated in September 2008, withthe sudden collapse of major financial institutions, first in the United States and subsequently in Europe. The crisis has spread
rapidly to emerging markets and has raised
fears of systemic risk to the international
financial system. Growing concerns aboutcounterparty risk have disrupted credit markets, especially the interbank and commercial
paper markets.

F O R

T H E

G L O B A L

E C O N O M Y

Earlier in the year major banks were still
able to attract new equity investors in an effort
to rebuild their capital bases, which wereeroded by significant losses stemming fromlarge write-downs on mortgage-backed securities and other assets. However, investor confidence was shaken by the March collapse of
Bear Sterns, the seventh largest securities firmin the world in total assets. In September andOctober, authorities in the United States andEurope had to respond with extraordinary
steps, including large injections of liquidity; coordinated reductions in policy interest rates;
the takeover of major financial institutions; enhancements in deposit guarantees; and plans topurchase impaired financial assets (such as the
U.S. Troubled Asset Repurchase Program, or
TARP), to take equity positions in commercial
banks, and to intervene in the commercial
paper markets (box 1.1).

The turmoil has had a dramatic
impact on emerging market assets
Although financial institutions in developing
countries are believed to have limited direct
exposure to U.S. subprime assets and related
securities, the financial turmoil has affectedvirtually all emerging-market economies as
high-income-country banks and investment
funds withdrew from emerging markets andconverted a broad range of risky assets into
more liquid holdings. The rapid increase inrisk aversion has also led to a forceful unwinding of the carry trade. The sell-off in risky assets carried a dramatic impact on equity prices,bond spreads, and currencies in virtually all
emerging-market economies and has also contributed to tighter domestic credit conditions inlarger countries, including India, the RussianFederation, and Brazil, and smaller countries,
including Thailand and the Philippines. Thesedevelopments were reinforced as local investors also moved out of equity markets, andmore generally, out of investments denominated in local currencies.
Countries with large current accountdeficits, and therefore most dependent on foreign capital, were hit hardest by the substantial

19

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E C O N O M I C

P R O S P E C T S

2 0 0 9Box 1.1 Chronology of recent developments in thefinancial crisisF

inancial stress escalated in the United States andEurope over the course of 2008, beginning withthe takeover of Bear Stearns by JP Morgan in March,and culminating in September when several major
institutions came under severe distress.
Week of September 7
The U.S. government seized control of Fannie
Mae and Freddie Mac, institutions that own or guarantee about one-half of all mortgage assets in the
United States.
Week of September 14
The U.S. investment bank Lehman Brothers filed
for bankruptcy and Merrill Lynch was taken over by
the Bank of America for $50 billion.
The U.S. government seized control of American
International Group Inc., providing an $85 billion
emergency loan and taking a 79.9 percent equity
stake in the firm.
Britain’s largest mortgage lender, HBOS, agreed tobe purchased by Lloyds TSB in an $18.9 billion deal.
The Russian government pledged to provide$120 billion to support financial markets and banks(the amount was increased by $50 billion on
October 7).
U.S. Treasury Secretary Henry Paulson introduced
the Troubled Asset Relief Program, a key element of
which enables the government to buy up to $700 billion of mortgage-backed securities. An amended
version was signed into law on October 4th.
Week of September 21
Goldman-Sachs and Morgan Stanley becamebank holding companies.
The U.K. government nationalized the mortgage
bank Bradford and Bingley (a loan portfolio of$90 billion).
Week of September 28
Washington Mutual became the largest bankfailure in U.S. history, with assets valued at$328 billion.
The Belgian, Dutch, and Luxembourg governments each took a 49.9 percent equity stake in theoperations of the banking and insurance company
Fortis within their respective borders, each injecting$16.4 billion in capital. One week later, the Dutch
government took full control of the company’s
operations in the Netherlands. Fortis’ operations in20

the BENELUX countries were later sold to the
French commercial bank, BNP Paribas.
The German government, together with commercial banks and federal regulators, provided $50 billion in credit guarantees to Hypo Real Estate.
Citigroup agreed to buy the banking operationsof Wachovia.
France, Belgium, and Luxembourg injected$9.2 billion into the French-Belgian bank Dexia.
The Icelandic government took a 75 percent equity
stake in Glitnir, the country’s third-largest bank.
The Swedish central bank announced that it
would lend up to $700 million to the Swedish unitof the Icelandic bank Kaupthing.
Ireland announced unlimited guarantees on retail,commercial, and interbank bank deposits. Similar
measures were adopted in Austria, Denmark,Germany, Greece, Iceland, Italy, and Portugal.
Sweden, the United Kingdom, and the United Statesraised limits on deposit guarantees. On October 3,
European finance ministers agreed to raise the minimum guarantee on bank deposits to €50,000 acrossall EU member states.
Week of October 5
The Icelandic government loaned $683 million to
Kaupthing, and seized control of Landsbanki, andsought a $5.5 billion loan from Russia.
The Spanish government established a $40 to$68 billion emergency fund to purchase assets heldby Spanish banks.
The U.S. Federal Reserve intervened in thecommercial paper market for the first time since theGreat Depression.
The British government made available $87 billion in emergency loans to the banking system andoffered to purchase capital in eight of the largest
banks. The package includes guarantees of £250 million for new debt and the same for liquidity
provisions.
The central banks of the United States, the Euro
Zone, Canada, Sweden, and Switzerland each cut
their benchmark rates by half a percentage point in
an unprecedented coordinated effort. Separately,
China’s central bank lowered its key one-year lending rate by 27 basis points, the second reduction inthree weeks.

P R O S P E C T S

The Icelandic government placed Glitnir into receivership, seized control of Kaupthing Bank, andabandoned its attempt to peg the krona at 131 per
euro, established one day earlier, after it touched 340
against the euro.
California, the most populous U.S. state, asked
federal authorities for a $7 billion emergency loan as
it was unable to obtain financing in the wake of thebankruptcy of Lehman Brothers.
The British government announced a $685 billion
plan to restore confidence in financial institutions,which included insuring up to $438 billion in new
debt issued by banks, along with providing as muchas $88 billion in equity capital.
The National Bank of Ukraine seized control ofProminvestbank, the country’s sixth-largest bank.
Week of October 12
European governments announced financing
packages totaling over $2.5 trillion. The packages include recapitalizing the banking sectors, credit guarantees on interbank lending, and direct loans.
The British government injected $60 billion in equity capital into the country’s three largest banks.
The United States announced that it would commit $250 billion of the $700 billion rescue package
to recapitalize the banking sector.
Week of October 19
The IMF agreed with Iceland on an economic
recovery program supported by a two-year loanof $2.1 billion.

tightening of credit conditions in international
markets. One-third of developing countries are
running current account deficits in excess of
10 percent of GDP, many of which may beforced to restrict domestic demand severely as
capital inflows dry up. During 2007, for example, several countries were the recipients ofvigorous increases in private debt flows that
fueled credit growth to the domestic private
sector and intensified inflation pressures. A
year later private debt flows to the banking
sector declined dramatically in a number ofcases: by $13.2 billion in Kazakhstan, $6.6 billion in Russia, $3.7 billion in South Africa,

F O R

T H E

G L O B A L

E C O N O M Y

The Belarusian authorities requested financial assistance from the IMF under a program that could
be supported by a Stand-By Arrangement.
The Pakistani authorities requested discussions
with the IMF on an economic program supported byfinancial assistance from the IMF.
Week of October 26
IMF staff agreed with the Hungarian and Ukrainian authorities’ economic programs supporting loansof $15.7 and $16.7 billion, respectively.
The European Union stood ready to provide aloan of $8.1 billion to Hungary and the World Bank
agreed to provide $1.3 billion.
The IMF announced the Short-Term Liquidity
Facility designed to channel funds quickly to emerging markets that have a strong track record, but thatneed rapid help during the current financial crisis to
get them through temporary liquidity problems.
Week of November 9
The Leaders of the Group of Twenty agreed to aplan of action to restore global growth and achieve
needed reforms of the world’s financial systems.
IMF staff and Pakistani authorities reached agreement on an economic program supported by a $7.6
billion loan. The Executive Board of the IMF was
expected to discuss the program shortly under the
IMF’s Emergency Financing Mechanism procedures.
Week of November 16
IMF staff and Serbian authorities agreed on an
economic program supported by a $0.5 billion loan.

$3.1 billion in Turkey, and $2.1 billion in
Ukraine (comparing January through September 2008 with the same period in 2007).
All middle-income countries, even withcurrent account surplus positions, have cometo be substantially affected by the financial
crisis. A Revealed Vulnerability Index indicates the extent to which financial conditions
for developing countries have deteriorated
since September 15, 2008 (upon the failure ofLehman Brothers). The vulnerability index
averages the standardized depreciation of currencies, domestic equity market losses, and increases in risk premiums, as well as the decline

21

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure 1.2 Emerging market equities are hit
hard as turbulence evolves to crisis
MSCI equity price indexes (January 2005 5 100)
250
Emerging markets
200

Euro Area

150
100
United States
50
Jan.
2005

Jan.
2006

Jan.
2007

Oct. 2007
Jan.
2008

Source: Morgan-Stanley, Standard & Poor’s.

in gross capital flows to a country over thepreceding 12 months. The index shows that
virtually all middle-income countries are experiencing financial stress.
Emerging-market equity prices—as captured by the Morgan-Stanley Composite
Index (MSCI)—tumbled by over 60 percent(in dollar terms) from their peak of October
2007, bringing prices back to levels attained at
the beginning of 2005 (figure 1.2).1 The massive correction in equity prices was widespread across emerging market economies,
with the largest declines found in a number ofEuropean and Central Asian economies—
Ukraine (80 percent), Romania (75 percent),
Bulgaria (75 percent), and the Russian Federation (73 percent). Other large emerging market economies, including Brazil, China, andIndia, experienced corrections of over 60 percent. Despite the declines of the past year, equity prices in emerging markets remain above
those in mature markets from a longer-term
perspective, albeit characterized by muchhigher volatility.
The selloff in emerging market assets triggered a marked depreciation of exchange rates
in a large number of countries, reversing muchof the appreciation of the past two years. For
example, the Brazilian real dropped by 40 percent against the dollar (20 percent against theeuro) from early August to mid-November
2008, but the currency stands only 8 percent
below its January 2007 dollar value. The

22

South African rand depreciated by nearly 60
percent against the dollar (38 percent against
the euro) from late October 2007 to midNovember 2008. Similarly, the Turkish liradepreciated by over 40 percent against the
dollar (20 percent vis-à-vis the euro) from late
October 2007 to mid-November 2008, but
the currency has appreciated by 6 percent inreal effective terms between January 2007 andOctober 2008.
The banking crisis that erupted in September
2008 is restricting credit to developing countries, and in particular to the least creditworthy
borrowers. Sovereign bond spreads widened toa peak of 1,100 basis points in late October
2008 from 330 points in late August—well
above the record 150 basis points registered inJune 2007—before recovering to just over 700
basis points by mid-November. At that time,
sovereign bond spreads exceeded the “distressed debt” threshold of 1,000 basis points in
14 of 38 emerging market economies currently
part of JPMorgan’s EMBI Global Index.
Corporate bond spreads jumped by still morethan sovereign spreads (figure 1.3). Spreads onrisky non-investment grade (BB-rated) emerging market corporate bonds widened to 1,750
basis points in mid-November, up more than
1,450 points since mid-2007.

Figure 1.3 Emerging-market bond spreads
widen, especially for corporates
Spreads in basis points
1200
1000
800

Corporate
CEMBI composite

600
400
200
0
Jan.
2007

Sovereign
EMBIG composite
May
2007

Sep.
2007

Jan.
2008

May
2008

Sep.
2008

Source: JPMorgan-Chase.
Note: CEMBI ⫽ Corporate Emerging Markets Bond Index;
EMBIG ⫽ Emerging Markets Bond Index Global.

P R O S P E C T S

The rise in spreads was only partially offset
by a 1.3 percentage point decline in the benchmark yield on 10-year U.S. Treasury notes between June 2007 and November 2008, so theyield on dollar-denominated sovereign bonds
issued by emerging markets reached 10.5 percent, the highest in four years.

Private capital flows expected tocontinue decline
Even before the intensification of the financial
crisis, tighter credit conditions were curtailinggross private debt and equity flows to developing countries (figure 1.4). Cross-border syndicated bank loan commitments declined to$315 billion over the 12-months ending
October 2008, down from a record $400 billion a year earlier (but still above levels
recorded over 2005–06). Bond issuance by developing countries decreased to $72 billion
over the year to October, down from a record
high of just over $170 billion at mid-2007.
Corporate bond issuance declined sharply,
with large falloffs in South Africa (by $15.6
billion), India ($12.8 billion), and Russia($9.4 billion). Indeed, non-investment-gradebonds by corporations located in emerging
markets accounted for about 40 percent of
total issuance from January to October 2008,
compared with 60 percent over 2005–06. And
equity issuance plummeted along with falling
equity prices to total $90 billion in the period,

Figure 1.4 Private debt and equity flows
decline by a third in 2008
US$ billions
400

Bank loan
commitments
Equityissuance

300
200
100

Bond
issuance
0
Jan.
2004

Jan.
2005

Source: Dealogic Analytics.

Jan.
2006

Jan.
2007

Jan.
2008

F O R

T H E

G L O B A L

E C O N O M Y

down from a record high of $200 billion
achieved at the start of 2008.
Even assuming a restoration of market confidence and a thawing of credit markets andcapital movements, overall credit conditions
for emerging markets will remain substantially tighter than in the recent past. As a consequence, net private debt and equity flows todeveloping countries are anticipated to decline
from the record-high $1.03 trillion (7.6 percent of developing-country GDP) set in 2007
to about $530 billion (3 percent of GDP) in2009. Although net foreign direct investment
should be moderately more resistant to thedownturn (as in past episodes), tighter credit
may cause high-income firms to reduce theirforeign direct investment by much more thanthey did during earlier financial crises, whichwere centered in developing countries.

Tightening of credit sharply reduces
domestic growth prospects
Before the financial turmoil developed into acrisis of global proportions, developing countries were affected mainly by slowing demand in
high-income countries through the export channel. Many developing countries had shownstrong resilience in the face of the gradually deteriorating external environment, because theireconomies were supported by strong investment
growth and shielded by large amounts of international reserves. This situation has changed
dramatically since September 2008.
Unlike gradual adjustments in markets forgoods and services, adjustments in financial
markets come fast and suddenly, and theyoften tend to “overshoot.” More importantly,
the escalation of the crisis directly affects theengine for domestic growth in many developing economies, because obtaining finance forcapital spending has become abruptly moredifficult. Moreover, the crisis is placing strongpressure on foreign exchange reserves and, atthe same time, can reveal dangerous currency
mismatches in private sector balance sheets.
During the global boom of the past five
years, local banks and private companies
whose local currencies were appreciating

23

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9found it attractive to borrow abroad indollars. With the sudden turnaround in currency movements, the currency mismatch on
private sector balance sheets has likely led to
substantial losses across firms and banks andeven for households. To the extent that thisdevelopment results in loan defaults, it may
strain domestic banking systems and placepressure on banks to find alternative sourcesof funding at a time when global financing
conditions have deteriorated markedly. Stressinduced by currency movements thus carries
the potential to further degrade prospects forinvestment spending in developing countries.

Outlook for high-incomeOECD countries

T

he intensification of the financial crisis in
the United States, and its widening tomajor European countries in the autumn of
2008, is expected to exact a significant toll on
economic activity across the high-income
countries belonging to the Organisation for
Economic Co-operation and Development(OECD). Even if confidence in global credit
markets is restored quickly, reductions in thefinance available for firms and consumers,
coupled with a slowdown in developingcountry import demand, have set the stage fora recession in the United States, Europe, andJapan beginning in the second half of 2008 andlasting into 2009.

A movement to joint recession across key
OECD countries
Through the first quarter of 2008, the slowdown among the OECD countries was fairly
moderate (although industrial production
stagnated in the quarter): exports benefited
from strong import demand from developing
countries and from oil exporters, while falling
imports served to boost the contribution of
net trade to GDP growth. But GDP fell to
0.3 percent growth (at an annual rate) in thesecond quarter for the key advanced
economies, down from 2.4 percent in 2007;
and as GDP growth moved to decline across24

the United States, Europe, and Japan during
the third quarter, OECD growth dropped to⫺0.5 percent.
Industrial production slipped to negative
ground across all major OECD economies inboth the second and third quarters of the year,
as fading overseas demand combined with alack of domestic orders tied to sluggish conditions in housing and autos in a number ofcountries (table 1.2, first and second panels).
Growth of export volumes dropped from 14.6
percent in 2007 to 2.5 percent during the third
quarter (saar), as intra-OECD trade (especiallywithin Europe) softened at the same time as
developing-country demand slowed.
During the second quarter, conditions in
Europe and Japan deteriorated sharply.
Japan’s GDP declined at a steep 3.7 percent
seasonally adjusted annualized rate (saar), andEuro Area GDP fell 0.7 percent (figure 1.5 andtable 1.2, first panel). A falloff in householdspending tied to the effects of much higher inflation, a decline in investment, anda dramatic shift in the growth contributionof trade all contributed to the turnaround. In
Europe, increased sluggishness in export markets and the long bout of euro appreciationpressured exports and imports into negative
territory in the second quarter, with contributions to overall growth slipping to nil from 1.4
points in the final quarter of 2007.
In the United States, conversely, GDPpicked up 2.8 percent (saar) in the second
quarter, as fiscal stimulus and looser monetary
policy boosted consumption spending. Moreover, the pace of decline in residential investment slackened, while contributions fromtrade—still benefiting from the weak dollar—
increased to a large 1.6 percentage points ofgrowth (figure 1.6). U.S. domestic demand has
been depressed since the final quarter of 2006,
as a rise in domestic savings helped to unwind
the global imbalances that were of suchconcern a couple of years ago. As financial
dislocations heightened in the third quarter,
including unprecedented declines in equity markets in Europe, Japan, and the United States,
consumer spending came under increasing

P R O S P E C T S

F O R

T H E

G L O B A L

E C O N O M Y

Table 1.2 High-income OECD countries: growth and related indicators
Seasonally adjusted
annualized growth

Growth year-over-year

Growth year-over-year

Indicator, country

2006

2007

Q108

Q208

Q308

H108

Q308

GDP growth (percent)High-income OECD
United States
Japan
Euro Area
Germany
FranceUnited Kingdom

2.9
2.8
2.4
3.0
3.2
2.4
2.8

2.4
2.0
2.1
2.6
2.6
2.1
3.0

1.5
0.9
2.5
2.6
5.7
1.6
1.1

0.3
2.8
⫺3.7
⫺0.7
⫺1.7
⫺1.1
0.0

ⴚ0.5
⫺0.3
⫺0.4
⫺0.8
⫺2.1
0.6
⫺2.0

1.9
2.3
1.0
1.7
2.2
1.6
1.9

0.5
0.8
0.0
0.3
0.8
0.6
0.3

Industrial production
High-income OECD
United States
Japan
Euro Area
Germany
FranceUnited Kingdom

2.9
2.2
4.1
3.4
5.9
0.9
0.7

2.4
1.7
2.9
2.8
6.1
1.2
0.4

0.1
0.4
⫺1.7
1.3
4.9
0.1
⫺1.7

ⴚ3.2
⫺3.2
⫺3.5
⫺4.5
⫺3.2
⫺6.1
⫺2.9

ⴚ3.8
⫺5.9
⫺4.3
⫺2.6
⫺4.7
⫺2.6
⫺5.8

1.4
1.0
1.8
1.2
4.2
0.7
⫺0.2

ⴚ2.2
⫺4.5
⫺1.9
⫺1.8
⫺2.3
⫺1.9
⫺3.0

Consumer pricesa
High-income OECD
United States
Japan
Euro Area
Germany
FranceUnited Kingdom

2.3
3.2
0.3
1.9
1.7
1.7
2.3

2.0
2.9
0.1
2.3
2.3
1.5
2.3

3.1
4.3
0.7
3.3
2.8
2.8
2.2

3.2
4.0
1.2
3.5
3.1
3.2
2.4

4.0
4.9
2.1
3.9
2.9
3.0
5.0

3.2
4.2
1.0
3.4
3.0
3.0
2.3

4.0
4.9
2.1
3.9
2.9
3.0
5.0

Export volumes
High-income OECD
United StatesJapan
Germany
FranceUnited Kingdom

13.9
10.5
8.1
13.0
9.9
11.7

14.6
6.9
5.9
6.2
3.7
⫺10.4

9.2
5.3
4.0
11.0
32.6
0.7

2.8
14.7
2.1
0.4
⫺14.6
⫺1.3

2.5
21.9
⫺12.9
⫺5.9
⫺0.1
4.2

6.7
9.8
7.1
6.4
5.1
⫺0.8

4.8
11.2
⫺1.6
3.9
4.2
0.2

Source: National statistical agencies through Haver Analytics and Thomson/Datastream.
Note: CPI inflation for high-income OECD countries is GDP weighted.
a. Year-over-year growth rates.

Figure 1.5 Change in GDP in the UnitedStates, Europe, and Japan

Figure 1.6 The contribution of U.S. domestic
demand to GDP growth

GDP growth (percentage change)

Percentage points (4-quarter moving average)
662

Q4, 2007
Q1, 2008
Q2, 2008
Q3, 2008

4

Contribution ofdomestic demand
4

0

2
U.S. GDP

ⴚ2
ⴚ4
United States

Euro Area

Germany

Source: World Bank, national statistical agencies.

Japan

0
Q1
Q1
2000 2001

Q1
Q1
Q1
2002 2003 2004

Q1
Q1
Q1
2005 2006 2007

Q1
2008

Source: U.S. Department of Commerce; World Bank calculations.

25

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure 1.7 U.S. household wealth falls
sharply in the last quarters
US$ billions

1,000

Q2, 2007

0
ⴚ500
ⴚ1,000Q4, 2007

500

Q2, 2008

Q3, 2007

1,500

Q1, 2008

2,000

ⴚ1,500ⴚ2,000Total
assetsHouseholdreal estate

FinancialassetsEquities,
mutual funds

Source: Federal Reserve.

pressure (figure 1.7).2 And with export performance for OECD economies fading on theback of sputtering global demand, the EuroArea and Japan fell into technical recession in
the quarter, while growth in the United States
reverted to decline.

Financial crisis places outlook under
exceptional uncertainty
Given the dramatic developments over September to November 2008, the depth of thecoming recession is difficult to gauge. Should
credit markets remain frozen and asset prices
continue to fall, then the decline in output
over the next year could be extreme. However,
the extraordinary measures now being taken
by fiscal and monetary authorities are expected to eventually restore confidence so thatbanks will no longer hoard cash, and businesses can obtain the finance essential for normal operations. Nevertheless, the outlook forOECD countries remains grim. A common
element is a falloff in domestic demand—increasingly deep in business capital spending—no longer offset by support from net trade
because of a coincident marked slowdown ingrowth among the developing countries.
With U.S. private consumption dropping an
unprecedented 3.1 percent in the quarter, the26

decline in GDP would have been much more
severe save for the contribution of net trade.
Notwithstanding that GDP is projected to decline more sharply in the fourth quarter of
2008, growth for the year is expected to register 1.4 percent, because of the strong contributions of trade in the first half of the year. An
abrupt decline in investment and a 1 percent
falloff in consumer spending are expected tocause GDP to fall in both the first and second
quarters of 2009, with a shallow recovery beginning in the second half of the year. GDP is
projected to decline by 0.5 percent for all of2009 but to recover to a still below-par 2.0 percent in 2010 (figure 1.8).
Financial conditions in the Euro Area are
now also perilous. After having fallen 0.7 percent in the second quarter (saar), GDPdropped 0.8 percent during the third quarterand is expected to register modest declines incoming quarters before picking up steam toward the end of 2009. Growth is expected toregister a weak 1.1 percent increase for 2008as a whole and a 0.6 percent decline in 2009,
before strengthening in 2010 to a still belowtrend advance of 1.6 percent. The depth of recession in Europe should be comparable tothat in the United States, in part because corporate finance in Europe is more reliant on thebanking sector but also because lower commodity prices will dampen import demand in

Figure 1.8 GDP to decline across the
OECD
Real GDP growth (percentage change)
4
Dot-comrecession

United States

Forecast

3
2
Japan
1

Euro Area0⫺1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: National statistical agencies, World Bank.

P R O S P E C T S

the Middle East and North Africa, a region
that has been an important origin of export
demand for Europe. The rapid decline in output, plus the drop in commodity prices should
alleviate inflationary pressures in Europe. But
the recent depreciation of the euro measured
against the dollar may continue, as investors’
continue to perceive U.S. government securities
as safe-haven assets.
Aside from sharp equity market declines,
Japan’s financial markets have been less affected (through mid-November 2008) by
fallout from the global financial and banking
crisis. Nevertheless, the macroeconomic landscape is surprisingly similar to that in the
United States and Europe. Household spending has retrenched, higher inflation has compressed purchasing power, and consumer sentiment has plummeted to 17-year lows. The
Tankan survey of business investment intentions has been marked down steeply, in linewith a downward shift in expectations forJapan’s export prospects. Slumping import demand in emerging Asia has been amplified bya tightening of policy interest rates in countries
such as India, Indonesia, the Philippines, andThailand to stem inflation pressures. During
the third quarter, Japan’s GDP dropped by
0.4 percent (saar) and for the remainder of
2008, creeping spillover from the credit crunch
and falling exports will cause Japan’s GDP to
recede further, coming to register 0.5 percent
growth for the year. Recession in Japan is expected to be less pronounced than elsewhere,with output declining by 0.1 percent in 2009
before picking up to 1.6 percent in 2010 asglobal investment demand revives and stimulates Japanese exports.

F O R

T H E

G L O B A L

E C O N O M Y

Slowing growth in the high-income economies,
falling equity markets, and reduced international capital flows cut into investment in developing countries, while a sharp acceleration
in inflation linked to the surge in commodity
prices constrained consumer spending.
Industrial production (outside of China)
had been robust but began to slow in mid2008. In the rest of East Asia, the downward
shift in production growth has been sharp,
dropping from 20 percent in January (saar) toa decline of 5 percent by May 2008, before recovery to nil by September (figure 1.9).
More dramatic has been the steep recent
falloff in China’s industrial production growth,from 20 percent in July to a decline of 0.2 percent in September (saar). Softening export
growth, together with tightening micromanagement of inventories—given uncertain sales
prospects—have underpinned this development. This, in turn, has carried aggregate production growth in East Asia to zero as of thethird quarter.
Output growth also faded in India and elsewhere in South Asia, while production in Hungary, Poland, Turkey, and the Baltic states began
to decline more recently. Output dynamics havealso faltered in Latin America, as production in
Chile, Colombia, and Mexico have dropped tonegative ground, while that in Brazil has slowed

Figure 1.9 East Asian countries show steep
falloff in output growth
Industrial production (percentage change, saar)
30
25

China

East Asia & Pacific2015

Outlook for the developing
countries(A deeper discussion of developments in eachof the six developing regions may be found in
the Regional Appendix in this book.)
ven before international credit channels
froze, there were increasing signs of slowing economic activity in developing countries.

E

10
5
0
⫺5
⫺10
Jan.
2006

East Asia, excluding China
Jun.
2006

Nov.
2006

Apr.
2007

Sep.
2007

Feb.
2008

Jul.
2008

Source: World Bank data.

27

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure 1.10 Output growth in Latin America,
South Asia, and Europe and Central Asia isfadingIndustrial production (percentage change, saar)
20
South Asia

15

10

5

0
⫺5

Latin America& Caribbean

⫺10
Jan.
2006

Jun.
2006

Nov.
2006

Europe &Central Asia

Apr.
2007

Sep.
2007

Feb.
2008

Jul.
2008

Source: World Bank data.

sharply (figure 1.10 and table 1.3, second
panel). Imports across developing regions arealso showing signs of easing, reflecting a softening of domestic demand. And export volumes
from emerging markets displayed fading momentum over the first three quarters of 2008,
notably in Latin America, as import demand in
the OECD countries declined sharply. Overall
GDP growth for the developing countries
slowed from the 7.9 percent advance recorded
in 2007 to 5.3 percent (annualized) during thesecond quarter of 2008 (see table 1.3 and associated notes).

prospects. The effects of the global financial
crisis on developing countries will differ by region and by the ability of individual countries
to offset adverse effects on domestic banking
sectors and the broader financial market.
Emerging-market corporate borrowers already are seeing a sizable widening of spreads
and are increasingly being shut out of international bond markets (see discussion above). A
pullback in syndicated bank lending is emerging (as commercial banks and other financial
institutions in the high-income countries shore
up balance sheets by limiting new lending orby calling in existing lines of credit), and initial public equity offerings from key emerging
markets have dried up. Even before the freezing of credit flows that has accompanied thebanking crisis, overall capital inflows to developing economies were down 35 percent overthe first nine months of 2008 from the same
period a year earlier.

The slowdown is likely to be more
pronounced in 2009
Looking forward, recent adverse trends are
anticipated to intensify, driven by an especiallysharp decline in investment growth in developing countries, weaker exports as import demand from high-income economies declines,
and lingering and in some cases still-escalating

Figure 1.11 Investment was the driving force
for growth in developing countries
Contribution to real GDP growth (percentage points)

Financial turmoil likely to curb
investment
Fixed investment has been a powerful driving
force for growth across developing countries
over the last decade, particularly in East Asiaand the Pacific and in Europe and Central
Asia, increasing its contribution to overall
growth to almost 4 percentage points in recent
years, and well outstripping contributions
from trade (figure 1.11). But the intensificationof the credit crisis in the United States has severely constrained finance to developing countries, with ominous implications for growth

28

4
3
2

Investment

10
Net exports⫺1
1992 1994 1996 1998 2000 2002 2004 2006 2008a
Source: World Bank data.
a. Projected.

P R O S P E C T S

F O R

T H E

G L O B A L

E C O N O M Y

Table 1.3 Developing regions: growth and related indicators
Growthyear-over-year

Seasonally adjusted
annualized growth

Growthyear-over-year

Indicator

2006

2007

Q108

Q208

Q308

H108

LatestGDP growth (percent)Developing countries
East Asia and the PacificSouth Asia
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa

7.7
10.1
9.0
7.5
5.6
5.3
5.9

7.9
10.5
8.4
7.1
5.7
5.8
6.3

7.5
9.4
11.3
8.8
4.4
4.0
4.9

5.3
9.2
2.9
⫺1.2
5.4
3.8
5.2

—
—
—
—
—
—
—

6.9
9.0
8.3
5.9
5.3
4.0
4.5

—
—
—
—
—
—
—

Industrial production
Developing countries
East Asia and the PacificSouth Asia
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa

8.8
13.0
10.6
7.6
4.3
⫺0.8
3.9

9.7
15.0
9.1
6.9
4.3
⫺0.5
5.8

10.6
18.3
9.5
5.9
0.2
8.6
⫺2.1

9.6
17.1
1.1
3.3
0.4
3.5
15.6

ⴚ2.4
0.2
⫺4.1
⫺9.8
3.6
⫺0.2
⫺9.3

9.2
14.7
6.1
5.1
3.4
3.6
6.5

5.0
10.2
1.0
0.3
2.2
3.5
4.7

Consumer pricesa
Developing countries
East Asia and the PacificSouth Asia
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa

6.2
5.1
7.6
5.6
5.6
5.1
6.2

6.1
5.3
7.6
8.0
6.5
7.2
6.0

8.6
7.7
10.1
11.0
8.8
11.2
8.2

10.4
9.5
11.0
11.3
9.7
10.8
10.4

9.9
8.2
22.0
11.0
7.5
12.7
11.3

9.5
8.6
10.6
11.2
9.3
11.0
9.3

9.9
8.2
22.0
11.0
7.5
12.7
11.3

Export volumesa
Developing countries
East Asia and the PacificSouth Asia
Europe & Central Asia
Latin America and the Caribbean

13.9
19.2
4.8
11.8
6.9

14.6
18.7
9.0
11.8
4.5

14.0
16.2
13.8
14.3
0.7

13.8
17.0
9.4
10.3
⫺2.5

—
17.1
12.8
—
⫺11.4

14.0
16.2
13.8
14.3
⫺0.7

—
19.2
10.5
—
⫺5.4

Source: National Statistical Agencies through Haver Analytics.
Note: Growth rates at annual or annualized rates, unless otherwise indicated. Consumer prices for regions are medians. Quarterly2008 growth for developing regions is based on data available for key economies. No data on export volumes for South Asia and
Sub-Saharan Africa are available. East Asia and Pacific: China, Indonesia, Malaysia, the Philippines, and Thailand. South Asia:
India. Europe and Central Asia: Czech Republic, Hungary, Poland, Russian Federation, and Turkey. Latin America and the
Caribbean: Argentina, Brazil, Chile, Colombia, and Mexico. Middle East and North Africa: Arab Republic of Egypt. SubSaharan Africa: Nigeria, and South Africa.
a. Quarterly data, year-over-year growth.

inflation. Developing-country GDP growth isprojected to decline to 4.5 percent in 2009,
more than 3 percentage points below the average of the past five years (figure 1.12). No
region or country is likely to escape thisgrowth recession. Recovery in 2010 to a 6.1
percent advance is predicated upon a relatively
quick improvement in financial and growth
conditions among the high-income countries, aprospect currently subject to a high degree of
uncertainty.

Growth outcomes for 2009 are anticipatedto vary significantly across developing countries and regions, depending on their relianceon external flows and bank lending to financeinvestment, trade links to deeply affected
high-income countries, direct and indirect exposures to the subprime mortgage crisis, andthe degree of participation of foreign banks inthe domestic financial sector. Moreover, policy
responses to the crisis will play a large role inshaping the near-term economic outlook.

29

G L O B A L

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P R O S P E C T S

2 0 0 9Figure 1.12 Developing-country GDP growthis expected to fall below 5 percent in 2009

Figure 1.13 Headline inflation is easing
across industrial countries

Real GDP (percentage change)

Percentage change (saar)

89
United States

Forecasta7Euro Area (HICP)

6

6
3
5
0

4

Japan
⫺3

3

Jan.
2006

2

Jan.
2007

Jan.
2008

Source: World Bank data.

1a. Year-over-year.
Note: HICP ⫽ Harmonized index of consumer prices.

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World Bank.

Inflation has been rising but is now
set to decline
The projected global growth recession andmuch lower commodity prices should help
ease the surge in inflation observed over 2007
and 2008. Headline consumer price inflation
among the OECD countries increased from amodest 2 percent in 2007 to a 4 percent yearover-year pace in the third quarter of 2008,
led by increases in the United States (4.9 percent), the Euro Area (3.9 percent), and theUnited Kingdom (5 percent). Although thepeak in commodity prices appears to havepassed, the momentum of headline inflation
during August picked up to 8.5 percent in the
United States before easing in September,while falling to 2.3 percent in Japan and to
3.6 percent in Europe (figure 1.13).
Consumer price inflation accelerated much
more quickly in developing countries than in
the advanced economies (figure 1.14, andtable 1.3, third panel). In the majority of developing economies, most of the increase inheadline inflation was attributable to the direct
effects of higher commodity prices; increases
in core inflation (which excludes food andenergy) were limited. Indeed, inflation indeveloping countries has remained relatively
low over the past five years of rapid growth,30

despite substantial increases in oil and metals
prices since 2003 (box 1.2). However, thesharp rise in food and fuel prices in the firsthalf of 2008 pushed median inflation in thedeveloping world to 12 percent by July 2008,
and more than 30 countries were facing
double-digit inflation rates.
In a welcome development, median inflation has since retreated to below 10 percent in
September, as falling commodity prices have
improved CPI developments across a wide
range of developing countries.

Figure 1.14 Inflation in emerging markets
surged on higher food and energy prices
Median inflation rates (%)
129Developing countries

63High-income OECD countries
0
Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan.
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: World Bank data.

P R O S P E C T S

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Box 1.2 Commodity prices and inflation indeveloping countries

S

trong growth in developing countries during the
1960s coincided with a low-inflation environment, while high inflation during the subsequent two
decades coincided with low average growth (box figure 1.2a). The recent sharp pickup in GDP growthoccurred in an environment of low and stable inflation. Although the causality is always difficult to untangle, the potential adverse impact of high inflationon the ability to interpret price signals, on disciplined
fiscal management, and on savings and investment
are well understood.
These negative effects underscore the importanceof preventing an acceleration of inflation beyond the
direct impact of increased commodity prices.
The relatively low inflation of the recent past can
be clearly illustrated at an aggregate level with amodel that explains median inflation in the developingworld as stemming from commodity price increases
in local currencies (measured as a median) andpersistence (inflation tends to depend on past
inflation as a result of indexation and as inflationary
expectations are adjusted). In the model, CPIt
denotes consumer price inflation in developing
countries, Pt denotes annual commodity prices, bothin (median) local currencies for the 1962–2008
period. Numbers in parentheses denote t-ratios, and⌬ denotes the first-difference operator:

Box figure 1.2a Inverse long-term correlation
between inflation and growth
Percentage change(5-yr moving average)
16

Percentage change(5-yr moving average)

Developing-country real
GDP growth (right axis)

8

12

6

8

4

4

2
Developing-country
median inflation (left axis)

001965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: World Bank.

Box figure 1.2b How do internationalcommodity prices explain inflation indeveloping countries?
Log scale
0.20
Dynamic
simulation

0.15

0.10

0.05
Actual consumption index
0.00
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006
Source: World Bank.

⌬log(CPIt)⫽0.01⫹0.09 ⌬log(CPIt⫺1)⫹0.79 ⌬log(Pt),(1.39) (5.09)(11.60)adjusted R2 ⫽ 0.78.
Box figure 1.2b shows a dynamic simulation of
the equation since the 1960s.
Inflationary pressures during the 1970s are well
explained by a combination of commodity price increases and persistence. During the 1990s, however,many developing countries experienced high inflation
unrelated to commodity prices and therefore not explained by the estimated equation. These increases in
inflation were caused more by loose policy reactions
to debt crises, especially in Latin America, and thetransition toward market economies in Europe. In
the recent period, inflation has actually remained
lower than the model would predict, largely as a result of institutional reforms, which made monetary
policy more independent in many countries and inflation targeting more prevalent.
The literature provides a range of explanations
for the relatively low inflation of recent years.
Dominant in the debate is the role of inflation expectations, which have been brought down sharply byinstitutional reforms. Increased competition in global
markets, making it more difficult to pass throughincreases in the higher costs of production, is anotherexplanation. Moreover, the additional low-cost31

G L O B A L

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2 0 0 9supply from developing countries, notably China,
in global markets carried deflationary effects. And
the share of commodities in world production andtrade has declined over time, as a result of which theimpact of commodity price increases is now substantially less than during the 1970s (box figure 1.2c).
On the other hand, many of the factors that have
kept inflation low over the last five years may havelost a degree of efficacy. Indeed, with the recent risein commodity prices, the share of commodities in the
global economy, and with that, their effects on thegeneral price level, is increasing rapidly. Many fastgrowing developing countries have reached capacity
constraints in infrastructure, energy, and other inputs
to production, and the increase of low-cost goods inglobal markets is waning. With broader inflation
rates rising, it becomes easier to pass through cost
increases, and, importantly, low inflation expectations might be revised upward quite quickly. These
are serious challenges to be faced to prevent a
reemergence of a high-inflation environment. In thebaseline forecast, we assume that as a result of the
sharp global growth slowdown and the recent de-Box figure 1.2c Commodities are a declining
share in global merchandise trade
Nominal shares (%)
30
25
20
Oil
15
10

Agriculture01963 1968 1973 1978 1983 1988 1993 1998 2003
Source: World Bank.

clines in commodity prices, headline inflation willease gradually, even if core inflation moves up moderately. But the probability of higher inflation is certainly not negligible.

Many countries that experienced the
sharpest run-up in inflation have been subjected to a dangerous combination of escalating
food and energy prices and generally tight conditions in domestic markets, caused by a rapid
increase in credit creation. Of the 24 countries
where inflation picked up by more than 5 percentage points within the past year, 10 are inEurope and Central Asia, where inflation was
spurred by very strong capital inflows orbooming commodity revenues. Other countries
subject to strong domestic inflationary pressures include Bolivia, Chile, the Philippines,
República Bolivariana de Venezuela, andVietnam. Some of the biggest jumps in headline inflation were seen in Sub-Saharan Africancountries, but that is largely because food
represents more than 50 percent of consumption in many African countries.
The ramp-up of commodity prices over
2006–08 and the associated acceleration of
inflation have posed difficult policy challenges.
The continued practice of official subsidization

32

Ores and metals

5of fuels and basic foodstuffs across many
countries in the Middle East and North Africa,
and East and South Asia is contributing towider fiscal deficits, narrowing the room policy makers have for maneuver in other areas,
including targeted income support, investmentin the Millennium Development Goals, andcountercyclical fiscal policy. Many monetary
authorities have faced a trade-off between
supporting growth and dampening inflationand inflation expectations. Brazil, Indonesia,
Mexico, the Philippines, South Africa, andThailand have raised policy rates by 25 basis
points or more. The recent fall in commodity
prices and the global slowdown are likely toease this difficulty over time, and indeed, ashift toward monetary accommodation is now
under way to mitigate a portion of the growthdampening effects of the financial crisis.

Regional outlooks
GDP in East Asia and the Pacific increased by
8.5 percent in 2008, down from 10.5 percent in

P R O S P E C T S

Figure 1.15 Key developments in 2008 forEast Asia and the Pacific (excluding China)
Percentage change

2006
2007
2008

12
9
6
3
0
⫺3
⫺6
Export Industrial Median Median Terms
growth production inflation policy rate of trade(interest
rate)

GDP
growthSource: World Bank.

2007. (Excluding China, growth in the region
fell to 5.3 percent, from 6.2 percent in 2007.)
Of importance to the slowing pace of growth,
China’s GDP growth in the third quarter eased
to 9 percent, from 10.6 percent in the firstquarter, on a slump in investment and exports.
Rising oil and food prices boosted median inflation in the region to 9 percent in 2008, compared with 5 percent over the preceding
2 years. The deterioration in the outlook forJapan and the United States reduced export
growth, which for East Asian countries outsideof China fell from 10.5 percent in 2006 to
4 percent in 2008 (figure 1.15). In turn, manufacturing output fell from 5 percent growth in2007 to a decline of the same magnitude in
2008. And gross capital flows fell by a third, to$64 billion over the year to September 2008.
Prospects for 2009 and 2010 have dimmedwith the deterioration in the external environment. The global banking crisis has had little
direct effect on the region, but several countries
are more vulnerable to spillovers in the form of
higher corporate spreads, reduced capital
flows, and plummeting domestic equity markets. Private sector investment in particular
stands at risk. Although China is well cushioned against coming shocks, several countries
remain exposed to a steep downturn in world

F O R

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trade and more difficult financing conditions.
While the decline in oil and food prices will
support external positions and provide somerelief on the inflation front, reduced investment
spending is expected to contribute to a substantial slowdown in regional growth to 6.7 percent
in 2009. A gradual recovery in key foreign markets will offer fresh impetus for exports andproduction and will help return growth in theregion to a 7.8 percent pace by 2010.
In Europe and Central Asia, output is likely
to increase by 5.3 percent in 2008, down from
7.1 percent in 2007, though growth held up remarkably well during the first half of the year.
First-half GDP growth in Russia (7.8 percent),
Poland (6 percent), Turkey (5.8 percent), andRomania (8.8 percent) were grounded in strong
domestic demand, along with higher oil prices
and fiscal revenues for the region’s hydrocarbon exporters. But in 2009 deteriorating external positions and new risks from the global
banking crisis are likely to depress prospects forvulnerable countries, and the downside risks
are substantial. Sovereign spreads jumped in
October 2008, notably for the Russian Federation and Turkey, and especially for Ukraine andKazakhstan (figure 1.16).

Figure 1.16 Sovereign bond spreads widen
across Europe and Central Asia
Spreads in basis points
900
750
600
450
300
150
0
Jul.
2007

Oct.
2007

Jan.
2008

Apr.
2008

Jul.
2008

Oct.
2008

Bulgaria

Hungary

PolandRussian Federation

TurkeySource: JPMorgan-Chase.

33

2 0 0 9

34

Figure 1.17 In Latin America and the
Caribbean, current accounts of largest
economies diverge
Current account balance as a share of GDP (%)
4
3
2
1

2010

While most countries have maintained forward momentum, a divergence in growth performance has emerged: Latvia is in recession,
the Romanian economy is overheating, andthe Kyrgyz Republic, Tajikistan, andMoldova, which are receiving World Bank
support, are facing the impact of rising foodprices. The situation in Russia shifted dramatically from concerns about domestic overheating to fears of financial crisis, as equity prices
gyrated with the turmoil in global markets,and oil prices fell.
Most countries have experienced strong
growth in domestic demand, but net trade hasremained a drag on growth. At the same time,
rapid credit expansion and wage escalation
has made the region more vulnerable to deterioration in external financing conditions. The
medium-term outlook points to a sharp decline
in regional growth to 2.7 percent in 2009, driven by a falloff in investment tied to difficult
financing conditions and a marked weakening
in export market demand. Growth is projected
to firm to 5.0 percent by 2010, as credit markets
stabilize, inflation pressures ease, and growthin external markets resumes, paving the way
for a revival in spending and exports.
Latin America and the Caribbean countries
have enjoyed four years of robust growth,
while current account surpluses, accumulationof reserves, and improved policies have served
to restrain core inflation rates, improve thequality of banking systems, and build up substantial buffers against financial contagion.
However, in 2008 headline inflation jumped
in response to higher oil and food prices, andpolicy makers in countries such as Brazil andChile raised interest rates. Gross capital
inflows to the region compressed by 45 percent between January and September 2008,
compared with the same period in 2007. The
deterioration in external demand and in international financial markets, combined with therecent falloff in commodity prices, reduced
GDP growth to 4.4 percent in 2008 from 5.7
percent in 2007.
The global slowdown and a shortfall in capital flows present substantial risks to sustained2009

P R O S P E C T S

2006

E C O N O M I C

2007
2008

G L O B A L

0
⫺1
⫺2
⫺3
⫺4
BrazilArgentina

MexicoSource: World Bank.

growth, pressuring private sector investment inparticular. As commodity prices continue toweaken, some major exporters, Argentina ofnote, will likely see current account surplus positions shift to deficit. For other countries, including Brazil and Mexico, the depth of recession in the United States and Europe will turnexports to negative growth, while contraction
in imports should lead to a return of surplus
position (figure 1.17).
GDP growth in the region is expected todrop to 2.1 percent in 2009 before recouping
to 4 percent by 2010. Country-specific events
could also pose a challenge: conditions in several Andean countries have tended toward lessstability; República Bolivariana de Venezuela
has seen another wave of nationalizations, andits growth is expected to fall from 8.4 percent in 2007 to 3.2 percent by 2010; andArgentina’s GDP is expected to slow from
8.7 percent in 2007 to 4 percent by 2010, witha 1.5 percent growth trough in 2009.
The developing countries of the Middle
East and North Africa region offer a good example of the diversity of effects stemming fromthe ramp-up in global fuel and food prices—atboth extremes of the spectrum. In oil-exporting economies, a rise in oil and natural gas
revenues to $200 billion supported 5.8 percent growth in 2008, down from 6.4 percent

P R O S P E C T S

in 2007. Slower domestic demand growth in
the Islamic Republic of Iran (where GDP
growth declined from 7.8 percent to 5.6 percent) was a key factor in this development.
Outside Iran, growth among oil exporters
stepped up to 5.9 percent.
In the more-diversified economies that arehighly dependent on oil and food imports, exports slowed in 2008 as growth turned sluggish among key trading partners in Europe
and the United States. But strong recovery in
Morocco following drought in 2007 and continued solid performance in Tunisia and Jordan
boosted growth to 5.7 percent from 3.8 percent. For the region as a whole, these developments yielded a flat profile of activity at 5.8 in2008 (figure 1.18).
The region’s oil exporters will face the challenge of diminished revenues in 2009. The
global oil price is anticipated to fall from its
July 2008 peak ($145/bbl) to below $80 in2009. Growth in oil-exporting countries is
projected to slow to 3.9 percent in 2009. Although their economies are unlikely to be severely affected by developments in financial
markets, several countries stand more exposedto spillover effects from these developments,
including Lebanon, Jordan, and the Arab
Figure 1.18 Oil revenues, recovery fromdrought underpin growth in the Middle Eastand North Africa in 2008
GDP growth (%)

World Bank average oil price ($/bbl)
110

8
Oil prices (right axis)

100
90

6

80
70
4
60
50
2

40
30

0

20
2000 2001 2002 2003 2004 2005 2006 2007 2008
Diversified economies GDP (left axis)
Oil exporters GDP (left axis)

Source: World Bank data.

F O R

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E C O N O M Y

Republic of Egypt. Moreover, oil-exporting
members of the Gulf Cooperation Council arevulnerable to losses on international investment positions, potentially prompting a hiatus
in the recent buildup of foreign direct investment within the region. For the region’s oilimporting economies, lower energy prices will
reduce the import bill and provide somebreathing space on the inflation front following the surge in prices in the first half of 2008.
Growth for the region should recover to a
5.2 percent pace by 2010 as external demand
recovers, and declines in hydrocarbon prices
give way to a period of greater stability.
GDP growth in South Asia eased to an estimated 6.3 percent in 2008, from 8.4 percent in2007 and from a 25-year high of 9 percent
during 2006. High food and fuel prices,
tighter international credit conditions, andweaker foreign demand have led to worsening
external accounts and contributed to a
slowdown in investment growth. Deterioration in trade balances, however, has been offset in large part by large remittance inflows,
particularly for Bangladesh, Nepal, and Sri
Lanka, where remittances represent 8 percent
of GDP or more. Policy makers responded tohigh commodity prices and rising inflationpressures by partially adjusting domestic fuelprices, cutting development spending, and(initially) tightening monetary policy.
The global financial crisis is placing further
downward pressure on growth. Lower capital
inflows (down 40 percent, over JanuarySeptember 2008 compared with the same
period in 2007) and harder credit terms will
reduce private investment, while reduced remittance inflows will add to pressures on growth.
Food and fuel price subsidies have pushed
fiscal outlays higher, reversing recent progressin fiscal consolidation. And increasing deficits
are narrowing the scope to provide support
for other urgent public programs, including
the region’s overburdened infrastructure. The
slowdown in growth is most apparent in India
and Pakistan, where industrial production fell
sharply, and the momentum of production forSouth Asia has recently declined from a peak35

G L O B A L

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2 0 0 9Figure 1.19 South Asian production slips inthe last months

Figure 1.20 In Sub-Saharan Africa, primarycommodity exports increased as prices
surgedIndustrial production (percentage change, saar)
Primary commodities as a share of total exports (%)

20
South Asia
Developing
countries

15

90
Sub-Saharan Africa
80

10
70
5
60
0
High-income OECD countries
⫺5
Jan.
2006

50
Sub-Saharan African oil-importing countries

Jan.
2007

Jan.
2008

Source: World Bank.

of 12 percent in April 2008 to a decline of
2 percent in August (saar) (figure 1.19).
South Asia’s GDP is expected to drop to
5.4 percent in 2009 but to recoup to 7.2 percent by 2010. Firming growth will be supported by improving external demand andlower commodity prices.
Growth in Sub-Saharan Africa, outside ofSouth Africa, increased to a remarkable 7 percent in 2007, the highest in some 35 years, as
outcomes for both oil-importing and oilexporting countries were robust. Growthamong oil exporters increased to 8.2 percent
in 2007, exceeding 5.5 percent gains for a
fifth year running; growth in oil-importing
economies breached a 25-year record, gaining
5.4 percent. GDP advances have become more
broad-based and less volatile in recent years,
especially among oil importers. And a notableand encouraging feature of Africa’s recent performance is the sustained contribution of investment to overall GDP growth.
In 2008, activity outside of South Africa remained strong at 6.6 percent as GDP gains
among oil-producing countries eased moderately to 7.8 percent, joining the larger group ofoil-importing countries where GDP gains
slowed to 4.2 percent in the year. Investment
continues to provide an underpinning for GDP
growth, while net exports are contributing to

36

40
1976

1981

1986

1991

1996

2001

2006

Source: UN Conference on Trade and Development, Comtrade.

growth despite a sharp slowdown in global
trade (figure 1.20).
The region’s growth is expected to decline to
4.6 percent in 2009, before firming to 5.8 percent by 2010 as a result of recovery in external demand. Excluding South Africa, growthis anticipated to ease to 5.7 percent in 2009
and to accelerate to 6.6 percent in 2010. But
this scenario is subject to significant downside
risks. Should the global slowdown prove much
deeper than anticipated, fostering a sharp fallin world trade growth, the contribution of net
exports to African GDP growth will diminish.
And many countries in the region have become more vulnerable to terms of trade
shocks, as high fuel and food prices have led
to a deterioration in external positions overthe past years. Higher food and fuel prices
have also widened the poverty gap, raising therisk of possible social unrest.

World Trade

W

orld trade volumes are expected to contract in 2009 for the first time since1982 (figure 1.21). This decline is driven firstand foremost by a sharp drop in demand, as
the global financial crisis imposes a rare simultaneous recession in high-income countries
and a sharp slowdown across the developingP R O S P E C T S

F O R

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G L O B A L

Figure 1.21 World trade is expected to
decline in 2009 for the first time since 1982

Figure 1.22 Decline in high-income import
growth affects developing-country exports

Growth of global trade volumes (percentage change)

Import volumes(percentage change)

12

15

E C O N O M Y

Import volumes(percentage change)
China exports(right axis)

U.S. imports(left axis)

40

9
10

30

5

20

6

3
0
0

⫺3
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

⫺5
Jan.
1999

10

Latin America &Caribbean exports(left axis)
Jul.
2000

Jan.
2002

Jul.
2003

Jan.
2005

Jul.
2006

0

Jan.
2008

Source: World Bank data.

Source: World Bank data.

world. The global credit crunch is likely to affect private investment especially, which is themost cyclical and most internationally traded
component of GDP. At the same time, thecredit crunch is restricting export finance. Already there is anecdotal evidence that commercial bank trade credits are drying up and thatexport receipts are becoming more difficult toinsure. Similarly, exporting firms may cut backon shipments if their access to credit lines islimited. Finally, the crisis has been associatedwith sharp, unpredictable swings in exchange
rates, which also will hamper trade.
Signs of an economic slowdown have beenvisible for some time (growth in U.S. importdemand was already falling in 2005), but they
have been building at a much more gradualpace than occurred, for example, during the
sharp correction in 2001, when import
growth dropped from plus 15 percent tominus 5 percent within a year (figure 1.22).
The current gradual decline in demand growthmeans that some exporting countries have hadtime to shift to higher growth markets in developing countries. For example, while theshare of the United States in India’s exports
fell from 17.1 percent in 2004 to 15.3 percent
in 2007, China’s share in India’s imports rosefrom 5.5 percent to 8.4 percent.

In addition, several countries (many in
Latin America) that experienced a slowing ofexports because of low U.S. demand growth
benefited from higher commodity prices.
Moreover, the impact on the volume of world
trade was mitigated by the strong intraregional growth of trade in East Asia, largely
driven by China’s continuing integration into
global markets. China’s import and export
growth continued to exceed 20 percent overthe past two years; while outside of China, export growth remained robust (figure 1.23).
Figure 1.23 Developing-country exports
have been strong, even outside Chinaa

Export volumes of developing countries (percentage change)
35
Momentum (annualized 3 month over 3 month)30
25

Annual (12-month moving average)

20
15
10
5
0
⫺5
⫺10
Jan.
1992

Jan.
1996

Jan.
2000

Jan.
2004

Jan.
2008

Source: World Bank data.
a. Excluding China.

37

G L O B A L

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2 0 0 9These mitigating and compensating factors
are unlikely to be active in 2009. The slowdown in high-income import demand has accelerated, few growth centers are left to which
exports can be redirected, and commodity
prices are falling. Thus developing countries
are set to experience a sharp, but likely temporary, fall in their export revenues. Those
countries with insufficient reserves to sustain
import growth will need to rely on some combination of exchange rate depreciation andslower growth to restrain imports.
Remittance flows to developing countries,
which reached an estimated $283 billion in2008 (Ratha, Mohapatra, and Xu 2008),
began easing in the second half of the year andare projected to slow sharply in 2009. Migrant earnings in host-country currency terms
are anticipated to be compressed by the recession in the industrial economies, lower revenues in high-income oil-exporting countries,and slower growth in many developing countries that are destinations for migrants.
While the baseline projection is for remittance flows to developing countries to decline
as a share of recipient-country GDP from 1.8
to 1.6 percent in 2009, the extent of the decline at the country level will depend criticallyon exchange rate developments. Recent
swings in bilateral exchange rates have outweighed the expected change in remittances
denominated in host-country currencies. Future exchange rate movements will also play
an important role.

2009. The sharp downturn in world trade hits
the United States especially hard: export volumes are expected to drop 2.6 percent in 2009,
while imports contract 1.1 percent. Overall, thehigh-income OECD countries’ current accountdeficit is projected to narrow by $185 billion to$375 billion in the year.
The lower industrial-country deficit has its
counterpart in lower surpluses in high-income
oil exporters and in developing countries. The
current account surplus in developing countries
is expected to fall from a peak $500 billion, or
3.7 percent of GDP, in 2007 to $333 billion, or
2 percent of GDP in 2009 (figure 1.24). While
China’s (and thus East Asia’s) surplus is anticipated to increase, in other regions, surpluses are
expected to narrow, or deficits to widen.
Some appreciation of the impact of the
global recession on current account balances
can be gained by looking at countries groupedby their primary commodity trade (here we
exclude China, because the country’s massive
current surplus—nearly $400 billion in
2008—masks underlying developments acrosssmaller countries). The expected 26 percent
fall in the price of oil and 23 percent fall in
non-oil commodity prices (see the Commodity

Figure 1.24 Developing-country current
account surpluses to wane after 2008
Current account balance (US$ billions)
600
500

All developing
countries

400

Global current account balances are
expected to show substantial shifts
The global recession and attendant decline inworld trade and in commodity prices will havea dramatic impact on current account balances.
Surplus positions in Japan and the Euro Areashould increase to $240 billion and $180 billion, respectively, during 2009 as commodity
prices fall and trade volumes compress. Despite
the improvement in the U.S. terms of trade, its
current account shortfall is expected to deteriorate from $770 billion in 2008 (5.4 percent ofGDP) to $830 billion or 5.8 percent of GDP in

38

300
200
100
0
⫺100
⫺200
2000

2002

2004

2006

2008

2010

East Asia & PacificSouth Asia

Middle East & North Africa

Europe & Central Asia

Latin America & Caribbean
Source: World Bank data.

P R O S P E C T S

Figure 1.25 Current account balances forcommodity-exporting and -importing
developing-country groups (excluding
China)

F O R

T H E

G L O B A L

E C O N O M Y

Figure 1.26 Almost all currencies havedepreciated against the dollar% depreciation since Sept.15 –Oct. 30
14

Current account balance as share of GDP

12
10

6

8

4

6

2

2007
2008
2009
2010

8

4

0

2

ⴚ2

0
HighEast Europe
Latin
Middle South Subincome Asia &&America East & Asia Saharancountries Pacific Central&
North
AfricaAsia Caribbean Africa

ⴚ4
ⴚ6
ⴚ8
ⴚ10

Source: World Bank.
Oil exporters Oil importers / Oil importers Oil and foodimporters
food exporters

Source: World Bank data.

Markets section below) will shift the terms oftrade in favor of oil- and food-importing
countries, following a string of at least five
years of substantial losses. For developingcountry oil exporters, the fall in global demand will reduce both oil prices and export
volumes (which are expected to shift from
5.1 percent growth in 2008 to 0.3 percent in2009), and their current account surplus will
fall from a peak of 6.4 percent of GDP in 2008
to 1.4 percent in 2009 (figure 1.25). By contrast, the current account deficit of developingcountry importers of both oil and food almost
halves, from a peak of 8.1 percent of GDP in2008 to 4.3 percent by 2009, because of lower
commodity prices and a sharp slowdown ofimports from 8.1 percent growth in 2008 to
1.5 percent in 2009. The impact of these global
developments should begin to dissipate in2010 as oil prices stabilize, the prices of nonenergy commodities decline by only 4.3 percent,and world trade begins to recover.
The financial crisis has induced major fluctuations in exchange rates during the autumn
of 2008. Almost every currency in the world
has depreciated against the dollar and the yen,reflecting a “flight to quality” into U.S. Treasury securities, the unwinding of yen-based
carry trades, and the deleveraging of banks,

firms, and investors. No developing-country
currency has appreciated against the dollar bymore than 0.5 percent during this period. On
average, currencies of developing countries
have fallen by 15 percent against the dollar, but
high-income-country currencies (save Japan’s),
have also depreciated (figure 1.26). In general
the competitiveness of the United States, Japan,
China (whose currency has held steady versus
the dollar), and those countries whose currencies have been pegged to the dollar will havebeen reduced; competitiveness for countries
whose currencies have depreciated will be improved in these markets. As a result, the strong
impetus that net exports have provided for
U.S. growth is likely to be attenuated; at thesame time, net exports are likely to support thegrowth recovery of many developing countries.

Commodity marketsCommodity prices—which have been trending higher since 2003—continued the robust rise that began in 2007 into the first halfof 2008. As of mid-November, prices havesince fallen sharply, giving up most of theirgains of the first half of the year. The abrupt
decline reflects a classic response of commodities to slowing global growth at the end of aboom (for more on this subject, see chapter 2),
a decline that has been amplified and accelerated by the financial crisis. In the summer of39

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure 1.27 Commodity prices surged before
retreating in the second half of 2008

Figure 1.28 Crude oil prices correct sharply
after unprecedented run-up

Commodity price indexes(2000 ⫽ 100, current US$)World Bank average crude oil price ($/bbl)

Commodity price indexes(2000 ⫽ 100, current US$)

325
300
275
250

450
Non-energy prices(left axis)

125

400
350

225

300

200

100
75

250

175

200

150

Energy prices(right axis)

125
100
Jan.
2005

150

500

100
Jan.
2006

Jan.
2007

50

150

Jan.
2008

25
Jan.
2004

Jan.
2005

Jan.
2006

Jan.
2007

Jan.
2008

Source: Datastream and World Bank.
Source: World Bank data.

2008, energy prices were 80 percent higher indollar terms than a year earlier, while nonenergy prices were 35 percent higher (figure 1.27
and table 1.4).
Almost all the advance in nonenergy commodity prices during 2008 came from grains(up 60 percent), fats and oils (up 34 percent),
and fertilizers (up 140 percent). Metals prices,which increased rapidly between 2003 and2008, picked up just 8 percent over the first six
months of 2008. Almost all commodity prices
peaked in early or mid-2008, and most have declined sharply since then. Crude oil prices
dropped from $143/bbl in early July to less than$50/bbl in mid-November. The price drop
stemmed from weaker realized demand acrossTable 1.4 Forecast of commodity prices
Percent change

2000–05 2006 2007

Energy
13.5
Oil
13.6
Natural gas
10.4
Coal
12.7
Nonenergy
8.3
Agriculture
6.0
Foods
6.0
Grains
4.8
Raw materials 5.0
Metals andminerals
12.3
Copper
15.2
Source: World Bank data.
f. Forecast.

40

17.3
20.4
33.9
3.1
29.1
12.7
10.0
18.4
22.7

10.8
10.6
1.0
33.9
17.0
20.0
25.6
26.1
9.0

2008

2009f

45.1
42.3
57.2
97.8
22.4
28.4
35.2
50.9
13.0

ⴚ25.0
0.9
⫺26.4
1.8
⫺10.8 ⫺4.2
⫺23.1 ⫺10.0
ⴚ23.2 ⴚ4.3
⫺20.9 ⫺1.3
⫺23.4 ⫺0.3
⫺27.7
2.6
⫺14.9 ⫺2.7

56.9 12.0
5.0 ⫺25.5
82.7 5.9 ⫺0.6 ⫺32.2

2010f

⫺5.5
⫺4.2

OECD member countries, appreciation of thedollar, and concerns about demand prospects inthe wake of financial turmoil (figure 1.28). The
sharp decline in crude oil prices has also been asignificant contributor to declines in other commodities, because these markets are increasingly
linked through production costs and throughthe development of biofuels (see chapter 2).

Falloff in demand in high-income
countries drives decline in oil prices
Oil demand in the OECD countries has been
declining for three years, with most of the reduction in the United States, which was affected by slowing economic activity and theconsumption-dampening effects of higher oil
and gasoline prices. U.S. oil demand fell 5.6 percent over the first 10 months of 2008 (year-overyear). Gasoline consumption dropped 3 percent as consumers reduced the number of miles
driven and began switching to more energyefficient vehicles. Oil demand also slowed inEurope. Overall, OECD demand is expected tofall by more than 2.2 percent during 2008 andby less than 2 percent in 2009. Demand in developing countries and emerging markets has
continued to grow by about 4 percent, with demand strongest in Asia and the Middle East, thelatter fueled until recently by strong economic
growth and in some countries fuel subsidies andthus low consumer prices (box 1.3).

P R O S P E C T S

F O R

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G L O B A L

E C O N O M Y

Box 1.3 Impact of commodity prices on externalbalances and capital flowsDeterioration in external balances has become asignificant problem for many developing countries. Overall, in 2007, current account deficits exceeded 10 percent of GDP in about one-third of developing countries, up from about one-quarter in2006. Twelve countries ran deficits in excess of 20
percent of GDP in 2007. In part, these deficits reflect
the impact of higher oil prices on oil-importing countries: oil balances account for more than half of thecurrent account deficit in one of every two developing countries. Excluding the massive rise in China’s
surplus, the current account deficit of oil-importing
countries has increased significantly during the risein prices, from close to zero in 2002–03 to about$130 billion in 2007, an amount equal to 2.2 percent of GDP (box figure 1.3a). In contrast, the current account surplus of oil-exporting countries improved from 2 percent of GDP to more than 7
percent in 2005–06, though it declined to below 5
percent in 2007.
The rise in oil prices has contributed to, but does
not fully explain, this disparity in current accountbalances. The rise in oil-importing countries’ deficits
has been less than the increase in their net oil balance, while the increase in oil-exporting countries’
surplus has been well below the improvement intheir oil balance (box figure 1.3b). As should be
expected, many countries have made compensating

Box figure 1.3a Oil balances in developing
countries, 2000–07
US$ billions
600
Oil exporters

500
400
300
200

China

100
0
⫺100

Other oil importers⫺200
2000 2001 2002 2003 2004 2005 2006 2007
Source: World Bank.

Box figure 1.3b Oil balances as a share of
GDP in developing countries, 2000–07
GDP (%)
15
Oil exporters

10

5
China
0

⫺5

Other oil importers
2000

2001

2002

2003

2004

2005

2006

2007

Source: World Bank.

adjustments in trade and domestic absorption to accommodate the rise in oil prices. And there is little
correlation between the size of countries’ net oil balance and the size of current account balances. Several oil-importing countries continue to run sizable
current account surpluses (exceeding 10 percent of
GDP in four countries), whereas several oil-exporting
countries are running sizable current account deficits(notably Kazakhstan and Sudan). Some countries(Botswana, Nepal, Paraguay, Swaziland, and Thailand) managed to run current account surpluses eventhough their deficits on the oil component of the
trade balance exceeded 5 percent of GDP.

How have countries been able to finance theirlarge external imbalances?
The financing of increased current account deficits
has not come principally from higher portfolio flows
or reserve drawdowns, but from foreign direct investment and aid. Much of the surge in private debt
and equity flows to developing countries over the
past few years has gone to countries with sizable
current account surpluses. For example, private debt
flows to the 11 countries with current accountsurpluses in 2005–07 accounted for half of the total
to all developing countries (in 2007, Russia ran acurrent account surplus equal to 6 percent of its
GDP and yet received $125 billion in private debt

41

G L O B A L

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2 0 0 9Developing countries with large external imbalances, 2007
(percent)
Country

BurundiSeychelles
Togo
Nicaragua
LatviaGeorgiaFiji
MalawiCurrent accountOil balance

Non-oil commodity balanceCommodity balance

FDI inflows

Net ODA disbursements

⫺37.6
⫺32.7
⫺21.9
⫺21.5
⫺20.8
⫺20.0
⫺18.8
⫺18.6

⫺11.6
⫺36.5
⫺8.5
⫺13.1
⫺3.2
⫺5.5
⫺11.7
⫺4.3

⫺0.4
0.7
4.6
6.5
1.2
⫺1.8
2.9
11.6

⫺12.0
⫺35.8
⫺4.0
⫺6.6
⫺2.0
⫺7.3
⫺8.8
7.3

0.0
18.8
3.5
0.1
7.3
16.9
11.9
—

46.0
1.8
3.6
13.8
0.0
4.7
1.8
21.3

Source: World Bank.
Note: — ⫽ not available. For Burundi, Fiji, Malawi, Seychelles, and Togo, data are for 2006.

flows). And to date few countries have had to draw
down their ample foreign reserve holdings. Instead,of the 13 countries with the largest current accountdeficits (and where data are available), in 8 countries

foreign direct investment covered over half of thecurrent account deficit, and in 4 countries net official
development assistance (ODA) disbursements exceeded 10 percent of GDP (box table).

OPEC producers—reluctant to raise output
significantly during the run-up in prices during the first half of 2008—increased production at midyear, mainly through Saudi Arabia,
which unilaterally agreed in June to lift output
by 0.5 million barrels a day (mb/d). Iraq’s output breeched 2.5 mb/d for the first time since2001 as attacks on infrastructure subsided
somewhat. But increases elsewhere in the Gulf
were partly offset by declines in Nigeria,
where civil strife continued to cause large
supply disruptions.
As discussed in chapter 2, the non-OPEC
supply response has been disappointing. Production has been plagued by several factors
during the current decade, notably rising costs
and taxes, and the ongoing depletion of aging
fields. Despite these constraints, non-OPEC
supplies are beginning to increase in a numberof regions and are projected to rise in thesecond half of 2008 and over 2009–10.
As a result of weakening demand and expected supply increases, oil prices are anticipated to average $75/bbl in nominal terms
during 2008–10, implying a cumulative realdecline of more than 30 percent.

42

Prices for many metals are fallingon the back of weaker demand
Several metals prices have plummeted in recent
months because of slowing global growth andimproving supply prospects. Nickel prices havefallen more than three-quarters from their 2007
peak, partly because of difficulties in the automobile and construction sectors. Prices havefallen below the marginal costs of high-cost
producers, and some plants are being closed
and new projects delayed or reconsidered. Zincprices have fallen almost as much as nickel inpercentage terms. Lead prices have fallen morethan 60 percent on improving supply prospects.
Prices for these metals are expected to decline
further as new capacity comes online.
Copper is among the few metals whose
price remained elevated during the first half of2008, despite weak demand; numerous supply
disruptions tied to strikes in Latin America
and delays bringing on new capacity kept copper prices high. However, prices plunged in
the second half of the year in the wake of thefinancial crisis and the weakening global economic environment. China’s import demandhas been weak in 2008, and the slowdown inP R O S P E C T S

global housing construction more broadly
contributed to diminishing demand. Prices
nonetheless remain well above production
costs and are expected to continue to decline
significantly through 2010 as new capacity
comes online.
Aluminum—the one major metal whose
price has not surged during the current cycle
because of the growth of capacity in China—
became more expensive recently because ofstill-strong global demand and increasing
costs of electricity, a major input to the production of aluminum. The outlook for aluminum prices depends critically on the pace ofinvestment in new capacity (especially in
China and the Middle East), as well as on thelevel of energy costs and deregulation of
power markets. Even if new capacity is concentrated in areas with stranded, low-cost energy sources, such as the Middle East, there islimited downside potential for prices, because
aluminum has been fluctuating near the upper
portion of the cost curve.
Taken together, the index of metals andminerals prices is projected to fall 25 percent
in 2009 and an additional 5 percent in 2010
compared to 2008.

Prices of agricultural commodities are
falling sharply from peaks
Prices for food traded internationally increased
almost 60 percent during the first half of 2008
in dollar terms, with basic staples such as grains
and oilseeds showing the largest increases.
Wheat prices more than doubled, from $200 a
ton to $440 between March 2007 and March
2008, while rice prices almost tripled in the fourmonths ending April 2008 (figure 1.29). Soybean and palm oil prices increased 44 percent
from 2007 to 2008. Prices have since declined
sharply. Wheat prices, for example, fell to lessthan $240 a ton in November. Since their peakin April 2008, grain prices have declined bymore than 30 percent. The spike in rice prices in
April and May 2008, on concerns regarding theadequacy of global food supplies and export
bans, appears to have subsided, with prices
falling from nearly $1,000 a ton to $550 a ton

F O R

T H E

G L O B A L

E C O N O M Y

Figure 1.29 Grains prices show sharp
declines from recent peaks
Commodity prices(current US$)

Commodity prices(current US$)

450

1,000

Wheat (left axis)

400

900

350

800
Maize (left axis)

300

700

250

600

200

500

150

400

100
50
Jan.
2005

Rice (right axis)

Jan.
2006

Jan.
2007

300
200

Jan.
2008

Source: World Bank data.

in November. Export bans that had been inplace were either eliminated by many countries
or partly circumvented through bilateralagreements. For example, Egypt, which had
accumulated 7 million tons of rice during theperiod of its export ban, is expected to curb theintervention soon. Similarly, India has allowed
shipments of non-basmati rice to four African
nations.
Oilseed prices also have fallen sharply. Palmoil prices averaged less than $480 a ton in
November, down from $1,250 a ton in March
2008. Similar declines took place in most edible oils (soybean oil dropped from $1,475 a
ton to $835, and coconut oil from $1,470 a
ton to $705 over the period). The weakeningof edible oil prices reflects not only slowing
economic growth but also improved supplies,
and perhaps mounting pressure in the European Union (EU) to scale back biofuel mandates—most of the EU’s biofuel production is
biodiesel, whose feedstock is rapeseed oil, aclose substitute for palm and soybean oils.
Rubber prices began easing in July andAugust 2008, an unsurprising development because they track crude oil prices closely (synthetic rubber is made from petroleum). Signs
of weakening prices have also been evident inbeverages, with cocoa averaging a little over
$2 a kilogram in November, down from $3.00
in June 2008. Other agricultural commodities,
especially raw materials and some foods such

43

G L O B A L

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2 0 0 9as bananas and sugar, have experienced
smaller declines, because their price increases
were not as sharp and they are less closely
linked to energy prices.
Fertilizer prices experienced the largest increase among all commodity groups in 2008,
with the index up 116 percent between January
and August 2008; prices were driven up by the
combination of strong demand growth (in response to high crop prices), limited surplus
production capacity, higher production costs
related to high energy prices, and an export
tax imposed by China to protect domestic
supplies. Phosphate prices (DAP), for example, increased by almost 110 percent between
January and August 2008 while urea prices
doubled in just four months (December 2007
to April 2008). The decline in crude oil andgrain prices, along with weak demand, however, is now being reflected in fertilizer prices.
Urea, for example, declined to $250/ton (atwo-year low) while DAP averaged below$650/ton as of November 20.
Current crop prospects are favorable.
Grain production is projected to increaseabout 4 percent in the current crop year, andoilseed production is anticipated to rise by
twice as much. Although this production increase will allow some rebuilding of stocks,
continued growth of demand for biofuels
should keep pressure on inventories. Maize
used for ethanol in the United States is expected to increase to 33 percent of the crop in
2008, accounting for nearly all of the increasein global maize consumption and causing
global maize stocks to fall. In contrast, large
increases in wheat and oilseed production
should allow some rebuilding of stocks.
Stocks will remain low by historic standards,
however, and prices will remain vulnerable tosupply disruptions or demand surges.
Overall, grain prices are projected to decline about 28 percent in 2009 and to recoup
3 percent in 2010. Fats and oil prices are anticipated to fall by 27 percent in 2009 and another 5 percent in 2010. And beverages areprojected to decline 18 percent and 4 percent,respectively. Despite these developments, food44

prices are expected to remain much higher
than during the 1990s and more than 60 percent higher than their levels in 2003.
In the baseline, the very tight credit conditions observed in November are projected todissipate during the first quarter of 2009—
which together with a strong crop this season
should ensure that prices do not rise sharply inthe medium term. However, if farmers in highand middle-income countries are unable to getfinancing for seed and fertilizer purchases forplantings for next season, plantings may belower than expected, which could cause agricultural prices to rebound during the 2009/10
crop year. Farmers in key agricultural producing
and exporting countries, including Australia,
Argentina, Brazil, the United States, and theEuropean Union, rely on short-term financing
for inputs (e.g., fertilizer) and longer-term
financing for the purchase of machinery. The
short-term financing is typically guaranteed byplacing land as collateral and to a lesser extent
by hedging in futures markets for a minimum
price guarantee (the latter mostly in the UnitedStates). The credit crunch combined with declining commodity prices has made banks
reluctant to lend. The situation may worsen if
land prices begin to decline—there are alreadysigns that land prices are falling in some EU
countries—or if credit conditions do not begin
to thaw. At the same time, farmers appear tohave lost faith in hedging instruments.

Commodity price declines carry significant
implications for the terms of trade
The decline of commodity prices anticipatedfor 2009 will drive sharp changes in developing countries’ terms of trade. Some 30 countries are expected to gain more than 1.5 percent of GDP from the decline in oil prices(figure 1.30). Of these, Cyprus, Guyana,
Jamaica, Jordan, the Kyrgyz Republic,
Moldova, Nicaragua, the Seychelles, andTajikistan stand to gain more than 2.5 percent
of GDP. And the fall in food prices will help toease both external and fiscal positions (as thecost of food subsidies declines) for many of
the world’s poorest countries, including Benin,

P R O S P E C T S

F O R

T H E

G L O B A L

Figure 1.30 Most vulnerable countries will
benefit from the decline in grains andoil prices

Figure 1.31 First-round income impact oflower commodity prices will be positive inmore than half of developing countries

Oil price shock (as share of GDP)

Terms of trade shock (as share of GDP)

6

5

Seychalles

Vulnerable countries

Jordan

4

0

2

–5

0
⫺2

–10
Argentina

–15

⫺4

–20

⫺6
⫺8
⫺3

E C O N O M Y

Venezuela,
R.B. deKazakhstan
⫺2

⫺1

0

1

–25
Source: World Bank.

Grains price shock (as share of GDP)
Source: World Bank.

first-round income losses in excess of 1.5 percent of GDP (figure 1.31).
Eritrea, Ghana, Guinea, Haiti, Madagascar,
Niger, Senegal, and Togo.
At the same time, oil-exporting countries
will experience large terms of trade losses, with
Angola, Azerbaijan, the Republic of Congo,
Equatorial Guinea, Gabon, the Islamic Republic of Iran, Kuwait, Libya, Nigeria, and Saudi
Arabia incurring first-round income losses inexcess of 10 percent of GDP. Weaker metals
prices are anticipated to reduce incomes bymore than 2 percent of GDP in Chile, Mauritania, Mongolia, Papua New Guinea, Suriname, and Zimbabwe. Countries that rely
heavily on grains exports are likely to be hit
hard. Exporters like Argentina (maize, soybeans, wheat), Bolivia (soybeans), The Gambia(groundnuts), Guinea-Bissau (groundnuts),
Guyana (rice), and Paraguay (soybeans) will
experience losses ranging from 1.6 percent to
9 percent of GDP, though for some the impact
will be softened by falling oil prices.
Taking into account the effects of commodity price declines on both import and export
prices, more than half of the countries in asample of 162 economies are expected to see
an increase in the terms of trade, of which 24
will experience gains in excess of 1.5 percent
of GDP. About a quarter of the countries, including most oil producers, are seen to incur

Key risks and uncertainties

T

he freezing of credit markets, collapse ofstock markets, large shifts in exchange
rates and commodities prices, and unprecedented policy reactions have combined to create an extremely uncertain environment formarket participants and forecasters alike. Several possible outcomes for the global economy
remain plausible at this juncture—even assuming that a catastrophic meltdown of markets isavoided. Global GDP growth could reasonably
be expected to be as strong as 1.4 percent in2009 and as weak as 0.4 percent, comparedwith the baseline projection of 0.9 percent
growth presented in this chapter.
The confidence interval around projectionsfor 2010 is even wider. Instead of the typical
cyclical rebound envisaged in the baseline,
output could remain subdued as consolidationin the banking sector acts as a persistent dragon growth, and credit growth remains almost
stagnant for several years (see Hebling 2005;
IMF 2008). Alternatively, the crisis may haveless pronounced direct effects on the real economy, in which case the aggressive monetaryloosening and large-scale fiscal stimulus thatthe crisis has provoked could lead to a sharper
rebound in 2010. Such a scenario runs the risk

45

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2 0 0 9of reaccelerating inflation, which would likely
need to be followed by a tightening of bothmonetary and fiscal policies.
In such an environment, policy makers inboth developing and high-income countries
must be prepared to weather a worst-case scenario of even lower growth, including the possibility of a decline in world GDP for the firsttime in the postwar period, as well as a financial meltdown that could lead to a sudden stopof credit flows to all but the most creditworthy borrowers. Whatever the eventual outcome, the environment over the next two
years will be radically different from thatwhich was expected only a few months ago,and policies will need to adapt.
Understandably (and correctly) under current circumstances, with the world economy
confronted with systemic financial risks,
short-term attention is focused on dealing
with the immediate crisis, minimizing risks,and reacting to rapidly evolving developments. Major risks concern the possibility ofbalance of payments and currency crises in individual countries—a real risk at this stage forat least some developing countries. A collapseof the domestic banking system in select developing countries is also a tenable possibility.
In the case of Russia, where the economy isflush with petrodollars, the authorities look to
be in a position to rescue domestic financial
institutions. Other countries are less well
positioned and may have to draw upon international assistance, a development that should
be undertaken quickly if necessary. The longer
the global stress lasts, the more currencies may
come under pressure. The increase in corporate spreads still exceeds the increase in sovereign spreads by a large margin. In all cases
preventing a financial crisis in one country
from infecting a broader group of countries
would be difficult. Therefore, instead of exploring the details of a potential crisis, it isparamount to avoid a crisis altogether
through coordinated international action.
From a longer-term perspective, concerns
are of a very different nature. The question is:
How will developing countries emerge from46

the current downturn, and will they retain theunderlying strength, confidence, and strong
macroeconomic fundamentals that underpinned the record growth of the past five
years? The danger for all countries is that too
aggressive an effort to combat what looks to
be an inevitable slowdown may prove too
costly and undermine the strong fundamentals
that had earlier underpinned growth. Countries need to react quickly and forcefully tosigns of weakness in their financial sectors, including by liquidity injections and recapitalizing banks where necessary.
Care must also be taken, however, to avoid
the possible entrenchment of inflationarypressures by ensuring that more general efforts to provide support to banking systems
are highly targeted and efficient, and that any
necessary liquidity injections are reabsorbed
once growth revives. The long-term costs ofsuch policies could be substantial even if they
help to lighten the coming recession. Policy
makers must ensure that the steps taken are
clear and coherent. So far, the worst has been
avoided by huge government interventions. If
the market comes to view such interventions
as ineffective, because they are poorly understood or seen as not addressing the most critical problems, then the policies likely will beineffective. In this case, global economic difficulties could become very serious indeed.

Long-term prospects andpoverty forecastD

espite the current financial turmoil andsharp slowdown in growth anticipated for
2009, longer-term prospects for developing
countries have changed only modestly compared with last year’s forecast. In part prospects
are little changed because a slowdown had already been anticipated, albeit to a much lesser
degree. The primary reason, however, lies in thelong-term supply potential of developing countries, which should allow output to recoup thelost production induced by the coming growthrecession during the first five years of the next
decade.

P R O S P E C T S

Per capita GDP in developing countries
over the period 2010–15 is expected to expand
at a relatively rapid annual pace of 4.6 percent, much faster than the 2.1 percent pace ofthe 1990s and the 0.6 percent average of the
1980s, replicating the average performance of
this decade. Improvements in macroeconomic
policies (lower inflation, relaxation of trade
restrictions, more flexible exchange rate
regimes, and lower fiscal deficits) have combined with structural reforms (privatization
and regulatory initiatives) to reduce uncertainty
and generally improve incentives for investment. Projected future growth rates are higher
than in the 1990s (and much more so than in
the 1980s) in every developing region except
East Asia and the Pacific, where growth is expected to decline somewhat because of an aging
population.
Rapid growth should enable developing
countries, as a group, to achieve the Millennium
Development Goal of halving poverty by 2015.
The poverty forecast for 2015 is 15.5 percent,well below the target of 20.9 percent—half ofthe revised 1990 level as explained in moredetail below. The East Asia and Pacific region
has clearly surpassed its individual target, andSouth Asia is on target. The main concern remains Sub-Saharan Africa. Although the incidence of poverty in the region has been declining over the past decade, at about 37.1
percent in 2015, the share of people living in
extreme poverty will remain well above theregion’s target of 29 percent (table 1.5).
This year’s poverty forecast is consistent
with the World Bank’s revised poverty estimates for developing countries. The newpoverty estimates largely result from a revisionof purchasing power parities (PPP) by using a
new International Comparison Project surveyof prices paid by households. The 2005 survey
improved on the 1993 data and methods used
to prepare previous estimates. The new pricedata reveal that the cost of living is higher inlow- and middle-income countries than had
been suggested by past surveys. Other factors
influencing the changes to the poverty estimates include revisions to national accounts

F O R

T H E

G L O B A L

E C O N O M Y

Table 1.5 Poverty in developing countries
by region, selected years
Region or country

1990

2005

2015

Number of people living on less than $1.25/day (millions)
East Asia and the Pacific
873.3
316.2
137.6
China
683.2
207.7
84.3
Europe and Central Asia
9.1
17.3
9.8
Latin America and the Caribbean
49.6
45.1
30.6
Middle East and North Africa
9.7
11.0
8.8
South Asia
579.2
595.6
403.9
India
435.5
455.8
313.2
Sub-Saharan Africa
297.5
388.4
356.4
Total
1,818.5 1,373.5
947.2
Number of people living on less than $2.00/day (millions)
East Asia and the Pacific
1,273.7
728.7
438.0
China
960.8
473.7
260.9
Europe and Central Asia
31.9
41.9
26.7
Latin America and the Caribbean
86.3
91.3
72.4
Middle East and North Africa
44.4
51.5
33.3
South Asia
926.0 1,091.5
959.5
India
701.6
827.7
714.5
Sub-Saharan Africa
393.6
556.7
585.0
Total
2,755.9 2,561.5 2,115.0
Percentage of the population living on less than $1.25/day
East Asia and the Pacific
54.7
16.8
6.8
China
60.2
15.9
6.1
Europe and Central Asia
2.0
3.7
2.2
Latin America and the Caribbean
11.3
8.2
5.0
Middle East and North Africa
4.3
3.6
2.5
South Asia
51.7
40.3
23.8
India
51.3
41.6
25.4
Sub-Saharan Africa
57.6
50.9
37.1
Total
41.7
25.2
15.5
Percentage of the population living on less than $2.00/day
East Asia and the Pacific
79.8
38.7
21.6
China
84.6
36.3
18.9
Europe and Central Asia
6.9
8.9
6.0
Latin America and the Caribbean
19.7
16.6
11.8
Middle East and North Africa
19.7
16.9
9.3
South Asia
82.7
73.9
56.6
India
82.6
75.6
57.9
Sub-Saharan Africa
76.2
73.0
60.8
Total
63.2
47.0
34.6
Source: World Bank.

and the incorporation of new and more recent
household surveys (see box 1.4 and Chen andRavallion 2008 for more detail).
The new poverty estimates provide a significantly different picture of global poverty—
back to 1990 and for the most recent year, 2005
(figure 1.32). Global poverty in 1990, the benchmark year for the Millennium Development
Goals, is now estimated to have been 41.7 percent of the developing-country population

47

G L O B A L

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2 0 0 9Box 1.4 The impact of the new price survey on
poverty estimatesS

urveys of prices are obviously critical in determining the cost of the common basket of goods andservices in each country that is used to define
poverty. The price surveys determine the purchasing
power parity (PPP) exchange rate used in translating
domestic prices into international dollars. Comparedwith the measure provided by market exchange
rates, these PPP exchange rates provide a more accurate measure of the affordability of nontraded goodsin the poverty basket (because prices of nontraded
goods vary enormously across countries at different
levels of development). Previously, the PPP exchange
rates were based on a 1993 survey of prices that covered relatively few countries and used a weak survey
methodology. In 2005, the World Bank, in partnership with other international organizations and national statistical offices, concluded a new price survey that covers 146 countries—of which 101 aredeveloping—and between 600 and 800 products(World Bank 2008). The survey includes China for
the first time and updates the earlier survey of India,
which dated from 1985. The new price survey has
had two impacts on measured poverty.
First, it has revealed that prices paid by the poor
in developing countries are higher than thought previously, thereby reducing estimates of mean per capita
consumption (or income) based on a common unit,that is, international dollars. In China, for example,
average per capita consumption in 2005 was estimated to be about $2,400 at the old PPP exchange
rate but only about $1,400 at the new PPP exchange
rate. These newer price levels imply quite naturallythat households can afford fewer goods and thatmany more are living on less than a $1 a day.
Second, in light of the new price survey, the definition of the “international” poverty line has beenreevaluated. The international poverty line is meant
to capture a notion of extreme poverty. As such, it iscalculated as the average poverty line of the poorest
countries. Using the new PPP estimates, the newpoverty line for extreme poverty is now measured at$1.25 (in 2005 international dollars, and represents
the average of the poverty lines of the fifteen poorest
countries for which there is data). This new poverty
line is about 14 percent lower than the old international poverty line, which in 2005 dollars is $1.45.
This reflects the higher PPPs for the poorest countries implied by the 2005 survey data. To capture abroader notion of poverty, the World Bank’s poverty
forecast has also presented statistics relevant to theso-called $2/day poverty line that was double the$1/day poverty line and reflected the average of thenational poverty lines of the middle-income countries. The new $2/day poverty line, measured in 2005
prices, represents the median of all of the national
poverty lines in the available surveys.
The increased estimates of prices in many countries and a lowering of the international poverty line
have changed the picture of poverty globally—overtime and in 2005. As reported in Chen and Ravallion (2008), these two effects partially offset eachother. The revisions in the PPPs alone, with nochange in the poverty line, would have raised thepoverty estimate in 2005 from the previous 17 percent to 32 percent. The reduction in the poverty line
to $1.25 a day lowers this estimate to 25 percent.
The net effect is to raise the poverty estimate for2005 by 8 percentage points. The upward revision in
the poverty level does not imply that the rate ofpoverty reduction, say between 1990 and 2005, has
not been as rapid as previously reported.

(compared with the previous estimate of
28.7 percent using the old prices and guidelines). This implies that the target for thepoverty MDG is 20.9 percent, rather than theprevious 14.4 percent. The revisions had a significant affect on all regions, except Latin
America and the Caribbean, which saw only
minor adjustments. The case of China is

48

illustrative. The headcount index for 1990
jumped from 33 percent to 60.2 percent. This
dramatic change was attributable mainly tothe poor price comparison basis for the earlier estimate rather than to any underlying
change in China itself.
The combination of a new estimate of mean
consumption and a new poverty line also

P R O S P E C T S

Figure 1.32 Revised poverty estimatesfollowing from new price survey
Headcount poverty index in 1990
70
60
New
50
40
Old
30
20
10

si
N
a
or
La Su
th
btin
Af
ric
Am Sahaaer
ic ran
a
A
&
fri
C
ar ca
ib
be
an
W
or
ld
to
ta
ls

G L O B A L

E C O N O M Y

It should be noted that the impact on thepoverty forecast of the recent rise in food andenergy prices is not fully reflected in these projections, which largely reflect neutral changes
in per capita incomes.4 As discussed in chapter 3, the increase in food prices between
January 2007 and January 2008 is likely tohave increased global poverty by between
130 million and 155 million people, or by
1.3–1.5 percentage points. With prices now
declining but not expected to return to theirearlier levels, at least some of this deterioration is likely to be permanent.

st

&
Ea

pe
ro
id

dl

e

Eu
M

T H E

&

C

en

tra

lA

In

di

Ea
& st A
Pa s
ci ia
f ic
C
hi
na
So
ut
h
As
ia

a

0

F O R

Source: World Bank data and staff calculations.
Note: The comparison reflects both revisions necessitated by thechange in purchasing power parities and the new international
poverty line, which was $1.45 per day in 2005 dollars under theold methodology and has been revised down to $1.25 per day in2005 dollars with the new methodology.

implies a change in the starting value of thegrowth-to-poverty elasticity. Even if the
shape of the income distribution is broadly
the same as in earlier income surveys (as is thecase for many countries), the fact that thepoverty line intersects the distribution at a different spot means that the impact of a given
increase in per capita incomes has changed.
Nevertheless, the rate of improvement in theheadcount poverty rate between 1990 and2005 has not changed that much using the
new estimates.3 This year’s forecast reports anannual decline in global poverty between
1990 and 2005 of some 3.3 percent, which isvery close to the earlier estimated annual decline of 3.2 percent. However, the higher
poverty level means that 25.2 percent of thedeveloping world’s population was living on
less than $1.25 a day in 2005, compared withlast year’s estimate of 18.1 percent for 2004.
As before, much of decline in global poverty
between 1990 and 2005 results from increased incomes in China, where the level ofextreme poverty fell from over 60 percent in1990 to less than 16 percent in 2005.

Notes
1. Prices are as of November 20, 2008.
2. Total assets of U.S. households began to decline
in the fourth quarter of 2007, as real estate values
dropped by $185 billion and financial assets fell by$200 billion. By the second quarter of 2009, thecumulative decline in household assets amounted to$2.4 trillion, the equivalent of 16 percent of GDP.
3. It is difficult to make an exact comparison because last year’s forecast was benchmarked to 2004,
not 2005 as is this year’s forecast. As well, there havebeen (slight) revisions to historical national income andproduct accounts.
4. Because of the inherent delays in processing
household surveys, the current forecast reflects surveys
that were taken in 2005—before the rapid increase incommodity prices in 2007 and the first half of 2008.

References
Chen, Shaohua, and Martin Ravallion. 2008. “The Developing World Is Poorer Than We Thought, But
No Less Successful in the Fight against Poverty.”
World Bank Policy Research Working Paper, No.
4703, August. World Bank, Washington, DC.
Helbling, Thomas, and Marco Terrones. 2003. “Real and
Financial Effects of Bursting Asset Price Bubbles.”In IMF World Economic Outlook, April 2003.
IMF. 2008. “Financial Stress and Economic Downturns.”
in IMF World Economic Outlook, October 2008.
Ratha, Dilip, Sanket Mohapatra, and Zhimei Xu. 2008.
“Outlook for Remittance Flows 2008–2010.”
Migration and Development Brief 8. World Bank,
Washington, DC.
World Bank. 2008. Global Purchasing Power Parities
and Read Expenditures: 2005 International Comparison Program. Washington, DC: World Bank.

49

2
The Commodity Boom:
Longer-Term ProspectsT

he enduring importance of commodities tothe world economy and their volatility has
been driven home with the rise, and recent
decline, of prices for energy, metals, and food.
Before they began to fall in the second halfof 2008, the real prices of energy and metals
more than doubled over the past five years,
while the real price of internationally tradedfood commodities increased 75 percent (seechapter 1 for more detail on the most recent
developments in commodity markets).
This chapter reviews the main characteristics of this most recent boom in commodity
markets and examines the structure and behavior of both their demand and supply, with aview to better understanding prospects over the
medium to long term. The discussion does notinclude forests or fisheries, given their complexity and the greater importance of issues
related to the public commons than for oil,metals, minerals, and agricultural products.
Several important insights emerge from thischapter that are likely to drive developments
over the next several decades.
The magnitude and duration of the commodity price boom are unprecedented.
• The upswing of the current boom lasted
five years. Average commodity prices
doubled in U.S. dollar terms (in partboosted by dollar depreciation), making
this boom longer and stronger than any
boom in the 20th century.

• Like earlier booms, this one ended whena slowdown in global growth eased demand pressures. The unusual strengthand duration of this boom reflect theunusual resilience, until now, of global
growth, particularly in developing
countries.
For oils and metals, an extended period of
low or falling prices created the conditions forthe boom and help explain the weak supply
response.
• Low prices throughout much of the
1980s and 1990s reflected periods ofrelatively weak growth and abundantspare capacity. Idle capacity arose, bothbecause energy demand declined in thewake of high oil prices in the 1970s andearly 1980s and because demand for oiland metals in the former Soviet Union(FSU) fell sharply when altered economic incentives caused these countries
to radically increase the efficiency withwhich commodities are used.
• During the 1990s, much of the risingdemand for oils and metals was met by
the relatively easy rehabilitation of thisalready-existing capacity. This helped tokeep global commodity prices low anddeterred investment in new supply
capacity, thus depressing activity in the
sectors supplying inputs to commodity
exploration and exploitation.

51

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2 0 0 9• As a result, a mismatch developed between the trend growth of demand andthe trend growth of supply capacity.
This mismatch became apparent in theearly to mid-2000s, when spare capacity
was exhausted and demand began tooutstrip supply, pushing up oil andmetals prices.
• Metals prices also were boosted by strong
demand growth, linked to unusually highand rising metal intensities in China.
Going forward, the intensity of metals demand in China should decline as investment rates fall and market mechanisms
provoke an increase in efficiency similar
to that observed in the FSU.
The supply response in oil and metals is expected to remain sluggish over the next few
years, but new discoveries and technologicalprogress are likely to boost supply over thelong run.
• Ongoing shortages in the sectors thatprovide exploration and exploitation
services, and the long lags between initial investments and the coming onstream of new production, suggest that
supply conditions may remain relatively
tight in the oil and metals sectors andthat prices, although declining, are unlikely fall to their 1990s levels.
• Despite rising production levels, known
reserves of most metals and oil have remained fairly constant because of new
discoveries and improvements in extraction technology.
• Although oil prices are likely to fall
below existing levels during the current
downturn, they are expected to riseduring the recovery and stabilize ataround $75 a barrel in real terms because
new supplies—for example, from offshore oil fields and Canadian tar sands—
have higher production costs, and a majority of known reserves are located inregions that are politically unstable or
not open to outside investors.

52• Given continued technological progress
and appropriate policies, high oil prices
will prompt and use developmentof alternative energy sources (including
renewables) and greater efforts at conservation, raising energy supplies andsignificantly reducing the demand for oil.
• For metals, slower growth in commodityintensive developing countries (as population growth slows and income levels catch
up with the West), the easing of China’s
investment surge, a rise in the share of
total output held by the less-commodityintensive service sector, and substitution
away from expensive materials shouldslow demand over the long term, facilitating a decline in prices.
The extension of the boom to agricultural
markets mainly reflects the rising demand forbiofuels and high energy prices.
• Higher energy and fertilizer prices raised
production costs in agriculture, and the
combination of high oil prices andbiofuel subsidies and mandates boosted
demand for some food crops. Poor harvests in Australia also contributed to a
decline in grain stocks.
• Demand growth for food and feed in developing countries (such as China andIndia) has not accelerated and was not amajor contributor to the rise in foodprices.
• Real-side speculation (the decision to holdon to physical stocks in anticipation offurther price increases) and financial investments along with policy reactions
such as the imposition of export bans, also
contributed to the rapid increase in grain
and oilseed prices during 2007 and 2008.
The prospects for growth in the supply ofagricultural commodities at the global level are
good, while demand growth is likely to slow.
• Historically, agricultural productivity has
increased more quickly than population,

T H E••••

allowing food production to keep pacewith growing demand, even as the shareof the population working in agriculture
declined. Over the next 20 years, assuming sufficient investment is forthcoming
in developing and high-income countries,
the spread of more-intensive production
techniques coupled with improved varieties that are emerging from recent advances in biotechnology, should allow
global productivity gains on par with historical trends despite some productivity
losses caused by climate change.
Considerable potential remains forbringing new (albeit somewhat less productive) land under cultivation in Latin
America, Africa, and the FSU countries.
The demand for agricultural commodities will slow as population growthslows and as incomes in developing
countries continue to rise (at higher incomes, the incremental rise in demand
for agricultural commodities sparked byfurther increases in income is relatively
small).
Robust supply growth and slowing demand are expected to reduce agricultural prices in the long run. Increased
demand for biofuels, however, will extend the period of high prices unlesspolicies change or energy prices fall
more rapidly than expected.
A more-rapid-than-expected warming of
the planet could reduce agricultural productivity sharply, leading to rising foodprices.

While global supply prospects are good, unless policy responds forcefully, food production in many developing countries may fallshort of output gains
Yield gains associated with the green revolution are waning in many countries. Productivity levels in much of Africa and Europe andCentral Asia are also declining; they are only
one half those of best-practice developing
countries, even after having controlled for differences in climate and soil.

C O M M O D I T Y

B O O M :L O N G E R - T E R M

P R O S P E C T S

Unless large-scale agricultural investment
and knowledge creation and dissemination are
stepped up, food production in many of thesecountries will not keep pace with demand. As
a result, these countries will become increasingly dependent on imported food.
Simulations suggest that if productivity
growth in developing countries disappoints,
global food prices will be higher, and many
developing countries—especially those with
rapidly growing populations—will be forced
to import more-expensive food from highincome countries, where productivity growthshows fewer signs of waning.
The remainder of this chapter explores eachof these themes in more detail. The next section compares the main characteristics of thecurrent commodity price cycle with earlier
ones. Then an examination of the long-term
demand and supply sides of commodity markets follows. The chapter then brings the forecasts for supply and demand in commodity
markets together to form a base-case scenario
for prices, along with some alternative scenarios. While a wide range of future outcomes for
supply, demand, and prices are possible, thesimulations support a highest-probability outcome where today’s high prices should induce
sufficient additional supply to keep commodity
prices well below their recent highs over the
medium to long term—although they are notexpected to descend as low as they were in the
1990s. A final section concludes.

Characteristics of the current
commodity price boomBooms and busts are relatively common
occurrences in commodity markets (box 2.1
and figure 2.1). Like its predecessors, this
episode of high prices has occurred during aperiod of strong global growth and heightened
geopolitical uncertainty, and it generated significant inflationary pressures (see chapter 1).1
However, this commodity boom was different in important ways as well. It was among
the most marked of the past century in its

53

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2 0 0 9Box 2.1 Commodity price cycles

54

Box figure 2.1a Volatility of production
around trend, 1960–2007
Bananas
Sugar
Rubber
Zinc
Logs
Tea
Rice
CopperWheat
Palm oil
Maize
Lead
CottonSoybeans
Cocoa
CoffeeAluminum
Petroleum
Iron OreTin
Phosphate
3

5

7

9

11

13

15

Percent
Source: World Bank.

Box figure 2.1b Volatility decomposition of
global revenue for selected commodities,
1986–2006
Volatility decomposition of select commodities (global),
1986–2006
60

Global revenue volatility (%)

40
20
0

of
fe
e
op
pe
r
Le
ad
Zi
nc
O
il
Ti
C n
oc
o
C a
ot
to
n
R
ic
e
Te
a
So Cor
yb n
ea
n
W s
he
at

20

C

t is in the nature of commodities for their prices toshow pronounced cyclical behavior. Indeed, someof the most influential early insights about the roleof expectations in pricing behavior derived from observations of how the interaction between prices andquantities in agricultural markets tended to generate
price cycles (Kaldor 1934).
Prices in commodity markets tend to exhibit cyclicalbehavior because supply decisions (how much to plant,
how many mine shafts to dig) must be made by market
participants well before the final sale price of the commodity is known. Because producers in the market are
uncertain about future demand and the production
decisions of other producers, the tendency in the aggregate is for the independent production decisions to
overcompensate for short-term imbalances between
demand and supply and therefore for commodity prices
to be volatile. The longer the lag between the production or investment decision of producers and the actual
increase in output, the longer the cycle in prices.
Individual commodities differ in the extent towhich they exhibit cyclical behavior and in the mechanisms underlying the cycles. The output of industrial
commodities tends to be most volatile, mainly because their demand tends to fluctuate with the business cycle and (in the case of crude oil) to be subject
to policy-related supply shocks (box figure 2.1a).
While prices of all commodities are sensitive tospare capacity, the duration of booms and busts inthe metals, minerals, and the oil sectors tends to belonger than in agricultural markets because of thelonger lags between investing in new capacity andthe eventual increase in supply.
Their revenues also tend to be more volatile thanrevenues in agricultural commodities becausechanges in production mainly reflect demand shocks.
As a result, both prices and quantities move intandem, rising during periods of high demand anddeclining in periods of low demand. In contrast,
demand for agricultural products tends to be morestable, and volatility tends to stem from supply
shocks. As a result, price movements tend to reducerevenue volatility among agricultural commodities
because prices tend to move in the opposite directionof supply shocks—rising when supply is low andfalling when supply is ample. Thus, for example,
copper, lead, and zinc have much higher price andrevenue volatility than maize, soybeans, and wheat,but the differences in output volatility are much lessmarked (box figure 2.1b).

C

I

Contribution of:
Global price volatility (%)
Global output volatility (%)
Residual (%)
Source: World Bank.

The current boom in agricultural prices is different in this regard, because it reflects a demand shockrather than a supply shock, meaning that prices haverisen even as overall production (including that destined for biofuels) has increased.

T H EC O M M O D I T Y

B O O M :L O N G E R - T E R M

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Figure 2.1 The recent commodity boom was the largest and longest of any boom since 1900
Real non-energy commodity prices, index (1977–79 5100)
380
1917 (just prior to WW I)
330
1974 (first oil crisis)
1951 (postwar rebuilding)280

2008 (forecast)

230

180

130

80
1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Source: Grilli and Yang (1988) for 1900 to 1947; World Bank for 1948 to 2008.

magnitude, duration, and the number of commodity groups whose prices have increased.

The size of the price increases are
unprecedented
The magnitude of commodity price increases
during the current boom is without precedent.

The real U.S. dollar price of commodities has
increased by some 109 percent since 2003, or
130 percent since the earlier cyclical low in
1999. By contrast, the increase in earlier majorbooms never exceeded 60 percent (table 2.1).
The unusual amplitude of the price increases during this boom partly reflects the

Table 2.1 Principal characteristics of major commodity booms
Common features

1915–171950–57

1973–74

2003–08

Rapid global real growth(average annual percent)

—

4.8

4.0

3.5

Major conflict and geopoliticaluncertainty

World War I

Korean War

Yom Kippur War, Iraq conflict
Vietnam War

Inflation

Widespread

LimitedWidespread

Limited second
round effects

Period of significant
infrastructure investment

World War I

Postwar rebuildingin Europe and Japan

Not a period ofsignificant
investment

Rapid buildup of
infrastructure in China

Centered in which majorcommodity groups

Metals,agriculture

Metals, agriculture

Oil, agriculture

Oil, metals,
agriculture

Initial rise observed in prices ofMetals,agriculture

MetalsOil

Oil

Preceded by extended periodof low prices or investment

No

World War II destroyed
much capacity

Low prices and a Extended period
supply shockof low prices

Percent increase in prices(previous trough to peak)

34

47

59

131

Years of rising prices prior to peak

4

3

2

5

Years of declining prices prior to trough

4

11

19

—

Source: World Bank.
—  Not available.

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2 0 0 9Figure 2.2 The real local currency price ofcommodities rose much less than the real
dollar price

Figure 2.3 Oil and metal prices led thisboom, with food prices rising only much
later

Percent change, 2000–07

Real local currency commodity price indexes, CPI-deflated(Jan. 2000 5 100)

220

300
165

Energy

250
200

110

150

Food

55
100
0
EnergyMetalsFood

Nominal price increase (US$)
Real US$ price increase (MUV deflated)
Real price increase in developing countries

Metals and minerals
50
Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan.
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: World Bank.

Source: World Bank.
Note: Real US$ price has been deflated by the unit value of
manufactures (MUV); real price in developing countries represents
a trade-weighted average of local currency price increases deflated
by local consumer prices increases.

fact that the U.S. dollar has been depreciating
during the same period and most primarycommodity prices are quoted in dollars. The
real commodity prices in developing countries(local currency prices deflated by local inflation), have increased by much less than theirdollar counterparts. The real dollar price ofinternationally traded metals and mineralsrose by 158 percent between 2000 and 2007,
but by only 78 percent in developing countries. Similarly, the real dollar price of internationally traded food commodities increased 64
percent compared with a much lower 14 percent in developing countries (figure 2.2).2

The boom covers a wide range ofcommodities and has lasted much longer
than previous ones
This boom also differs from earlier ones inthe breadth of commodities that have seen
their prices rise sharply. The initial acceleration in prices was first visible in the oil market and was quickly followed by developments in the metals and minerals market. The

56

real price of agricultural products wasbroadly stable, especially in developing countries, and began to rise sharply only in early2007 (figure 2.3).
This is very different from the 1950s boom,
when post–World War II rebuilding (and fears
of shortages) increased metals prices and poor
harvests raised agricultural prices, but theprice of oil remained flat. In the 1970s boom,
agricultural and oil prices increased, but metals prices rose initially and then collapsed withthe decline in aggregate demand.
The current price boom is unusually long.
The U.S. dollar price of internationally tradedcommodities has been rising for more than
five years, much longer than the price boomsof the 1950s and 1970s. Only the 1917 boom
saw a sustained increase in commodity prices
over a similarly long period (four years).
Typically a commodity price boom is followed by a bust as demand reacts to highprices by contracting and supply reacts by expanding. For example, the 1970s and 1980s
busts were associated with a sharp slowdown
in world output, which eased demand pressures at the same time as supply was rebounding. Until most recently, the current boom has
been marked by a weak supply response (seebelow) and sustained global growth.

T H EThe roots of the boom incommodity pricesT

his commodity price boom has been supported by strong growth in global demand,
primarily from developing countries. With thepossible exception of a few metals, however,the strong GDP growth of the past five years
does not by itself account for the magnitude or
duration of the current boom (box 2.2). Global
GDP was actually growing faster in the lead-up
to the 1970s boom, with Japan—taking therole China plays today—emerging as a new
economic power with growth in excess of
10 percent (figure 2.4). However, the strengthand duration of this boom owes much to theresilience of developing-country growth, which
continued at high levels for much longer thanduring previous episodes of high commodity
prices. On the one hand, this reflected the surprising facility with which both industrial anddeveloping countries absorbed the initial verylarge hikes in commodity prices—itself a reflection of the very buoyant external conditions,
including notably historically low interest rates,
weak inflation, and ample liquidity (see WorldBank 2007a, 2008).
Other important factors were also at work.
The supply response in extractive industries
has been muted because of the low prices of

Figure 2.4 Global growth lasted longer andwas stronger during the recent commodity
boom than in earlier ones
Annual percent change in global GDP
8
7

1970s
boom

2000s
boom

6
5
4
3
2
1
0
1967

1972

1977

Source: World Bank.

1982

1987

1992

1997

2002

2007

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the late 1980s and 1990s, which reduced incentives to develop new deposits and to invest
in the physical and human capital required to
expand supply. In agriculture, higher oil andfertilizer prices, along with increased demand
from biofuels and a reduction in grain stocks,
have been more important than fast growth
per se.

An extended period of low prices
depressed investment in new capacity
The influence of low prices was perhaps mostmarked in the oil sector, where following theoil shocks of the 1970s and 1980s, conservation efforts and substitution toward othersources of energy depressed demand for oil andoil prices. Indeed, it took 15 years for world oil
demand to regain its 1979 level. Meanwhile, theexpansion of oil production, particularly in the
North Sea, Mexico, and Alaska eliminatedthe market power that the Organization ofPetroleum-Exporting Countries (OPEC) had
exploited to keep prices high even in the face of
rapidly declining demand. By mid-1986, nominal prices had fallen to less than $10 a barrel
and OPEC’s spare production capacity was
equal to 8.7 mb/d—more than 13 percent ofworld demand at that time.3
Global spare capacity was further augmented during the 1990s, when demand for oilin the FSU declined precipitously and more orless permanently. As the prices of primary commodities were allowed to reflect world prices
and many of the energy- (and metals-) intensive industries that had characterized the Soviet
era closed or retooled, demand for energy (andmetals) in these countries declined rapidly.
Overall, oil demand declined by 40 percent between 1987 (its peak) and 1999—or by 5 million barrels a day—the equivalent of 7 percent
of world demand in 2000.
Initially, oil production in the FSU fell by
about as much, so there was an enormous
buildup of dormant capacity. Including
OPEC’s surplus capacity of about 5 mb/d,
total dormant capacity from these countries
equaled around 10 mb/d in 1995 (figure 2.5).457

G L O B A L

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2 0 0 9Box 2.2 Developing-country growth and global
commodity demand in the recent past
minum and 421 tons in the case of coal—so its demand surge contributed relatively little to overall market tightness. Indeed, by mid-2008, the price of aluminum rose by only 74 percent compared with its
average value in the 1990s (versus 200 percent for
metals and minerals in general), and coal rose by 392
percent, about the same as natural gas, but much lessthan oil.
Importantly, despite rapid gains in developingcountry GDP and income growth, grain demand did
not accelerate appreciably for developing countries
considered as a whole or for China alone. In fact,
Chinese consumption of wheat and rice declined,
and China’s contribution to incremental global corn

Box figure 2.2 China was the key global
metals contributor to global demand growth
Percent increase in global commodity demand, 2003–07

e
ic
R

at

l
oi

he
W

ru
de
C

P
D

C
or
n

R
ea
lG

l

pe
r
op

oa
C

Contributions to total from:
OECD

China

Rest ofthe world

Ethanol
production

Source: World Bank.

The buildup of excess capacity meant thatthe real price of oil during the 1990s remained
low, at $16 a barrel, equivalent to half theprice experienced during 1985. It also meantthat there was little incentive to invest in new,higher-cost oil fields. Overall spending bymajor American multinational oil companies
on exploration for new wells and the devel-

58

C

in
um

40
35
30
25
20
15
10
5
0
5
um

he growth surge of developing countries between
2003 and 2007 contributed to strong demandfor commodities. Had output expanded more slowly,
in line with the long-term growth potential of developing countries—estimated to be about 6.4 percent—oil demand would have been lower by only
about 1 million barrels a day, or just under 1.2 percent of world consumption; demand for metals
would have been about 1.5 percent lower anddemand for grains about 1.9 percent lower.
Overall, demand for most commodities at the
global level rose less quickly than world GDP, andfor most commodities, the contribution ofdeveloping countries to the increase in commodity
demand was in line with their GDP growth (boxfigure). Incremental developing-country demand
for some commodities was much stronger than in
high-income countries, both because developingcountry GDP was growing at a faster rate andbecause relatively commodity-intensive manufacturing activities were being transferred from highincome to developing countries in this time period—a factor that by itself should have had no impact on
global commodity demand.
Indeed, despite the acceleration in world GDP,
consumption for most commodities did not rise
rapidly. Coal and certain metals represent notable
exceptions, and here the demand of China has playeda particular role. Between 2003 and 2007, China’s
consumption of aluminum increased by 7.1 million
tons, or 26 percent of world demand. Coal
consumption increased by 458 million (oil equivalent)
tons, or 18 percent of global demand. However,China’s production of these commodities increased byalmost as much—7.0 million tons in the case of alu-AlT

opment of existing wells declined by morethan 50 percent, from $72 billion in 1980 to$30 billion in 1999 (figure 2.6).5 As a result,demand for the inputs required for oil exploration and extraction was weak, and capacity
in these supporting industries declined, as did
the number of new engineers trained to findand extract oil.6

T H E

Figure 2.5 Dormant capacity helped keep oil
prices low in the 1990s
Bbl per day, millions
20

15

Total spare capacity

10
OPEC
spare
capacity5

Former Soviet Union
dormant capacity
0
1980
1985
1990

1995

2000

2005

Source: World Bank, British Petroleum, International Energy
Agency, Petroleum Economics Ltd.

Figure 2.6 Real spending by major American
multinational oil companies declined by 60
percent in the 1980s
US$ 2006, billions

Real price per bbl, US$ 2000
70

100

60

80
Crude oil prices (right axis)

50

60

40

40

30
20

20

10
0

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P R O S P E C T S

With spare and dormant capacity
absorbed, prices surged in 2004
By 2004, the dormant capacity that had beencreated by the decline in demand in the FSU
had been reabsorbed. When demand growth(which had been subdued following the bursting of the Internet bubble) regained strength,
supply was unable to keep pace, in turn resulting in a surge in prices.8
Metal demand also declined sharply as numerous heavy industries in the FSU went outof business. Global demand for metals andminerals eased sharply beginning in 1990
and only returned to trend rates in 1997 (figure 2.7). As was the case in the oil sector, thepickup in metals prices beginning in 2003 did
not reflect unusually strong demand—except
for aluminum—whose price, as it happens,has been relatively stable. Rather, it reflected
low stock levels and depressed capacity.
Indeed, the strong correlation between theprices of metals and minerals on the one handand oil on the other during 2003–06 is
unusual. Historically, the correlation between
the prices of these commodities tends to bemuch less pronounced than between oil andagricultural goods (table 2.2) because high oil
prices tend to cut into industrial production
and demand for metals, while food demand isrelatively inelastic.

89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05

87

B O O M :

19

85

19

83

19

19

19

81

0

C O M M O D I T Y

Exploration (left axis)

Development (left axis)

Source: Energy Information Agency; World Bank.

Figure 2.7 Global metal demand also fellduring the transition
3-year, moving average of the % change in metal demand10

As the transition continued, oil-producing
firms in the region were able to rehabilitate
existing capacity relatively easily and to reorient
expanding output to Western markets, where
demand continued to rise. Between 1995 and2005, world oil demand increased by nearly
14 mb/d, with 8 mb/d of that total being met
by the dormant capacity in the countries of the
FSU and OPEC.7 As a result, underlying capacity grew less than half as fast as demandthroughout the period.

8

NickelAluminium

6
4
2
0
2

Copper

Zinc

4
1985

1990

1995

2000

2005

Source: World Bank, International Monetary Fund.

59

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2 0 0 9

Table 2.2 Comovement among major commodity prices, 1960–2007
Commodity

Maize

Wheat

Rice

CoffeeCottonCopperAluminum

Iron ore

Gold

Wheat
Rice
CoffeeCottonCopperAluminum
Iron oreGold
Crude oil

0.91
0.82
0.70
0.83
0.75
0.70
0.72
0.69
0.72

0.81
0.45
0.80
0.55
0.46
0.49
0.0
0.55

0.63
0.82
0.71
0.63
0.63
0.65
0.65

0.82
0.35
0.37
0.36
0.54
0.58

0.75
0.76
0.76
0.80
0.81

0.41
0.0
0.0
0.0

0.34
0.44
0.48

0.0
0.0

0.83

Source: World Bank.
Note: The numbers are the adjusted R2s of a regression of each price on all other prices (individually), a time trend, and the
MUV, both directions. The residual was tested for stationarity (5% level of significance). If cointegration was confirmed in one
direction, the table reports the respective adjusted R2. If cointegration was found in both directions, the higher adjusted R2 isreported. If no cointegration was found, implying that any correlation would, in fact, be a spurious correlation, the result was notreported, and the respective cell shows 0.0 (e.g., gold with wheat or copper).

Increasing prices sparked a boom ininvestment in the oil, metals, and mineralsmarkets
Global private investment in exploration for
nonferrous metals rose from $2 billion in2002 to $7 billion in 2006 and to an estimated$9 billion in 2007. Overall investment in the
sector more than doubled between 2001 and2005 in a number of mineral-rich countries including Canada, Mexico, the Russian Federation, South Africa, and the United States(UNCTAD 2007). At the same time, investment in the oil sector increased dramatically,
75 percent in the case of the American multinational companies (see figure 2.6).
After years of low investment, the abilityof service sectors to deliver inputs to thecommodity-producing firms had atrophied.
As a result, the surge in demand for investment goods over the last several years has exceeded capacity by a wide margin and costs
have skyrocketed.
In the oil sector, operating costs havemore than doubled, and the cost of inputs to
exploration and extraction have increased
substantially. For example, the day-rate priceof semisubmersible rigs in the Gulf of
Mexico (0–3,000 ft. water depth) increased
from $36,000 in 2000 to $325,000 in March
2008, a ninefold increase. Similar increases
have been observed in other items, such as

60

water jack-up rigs, whose day rates have increased fivefold in West Africa.
Such factors have put upward pressure on
the costs of developing new mines and oilfields. Operating costs for marginal producers
rose by 25 percent for copper and 28 percent
for aluminum between 2002 and 2005 (IMF
2006), and in the case of at least one nickel
project, they rose by 170 percent.9 Higher
costs are reported to have increased the cost of
extracting a barrel of crude from Canada’s oil
sands to $75, while deepwater offshore projects may cost more than $50 a barrel.
Although higher prices are inducing substantial increases in capacity in the input industry, that capacity will not be in place forseveral years. As a result, some delivery times
have more than doubled. For example, in themining sector it currently takes 45 months todeliver a grinding mill, compared with a morenormal 20 months; for rope shovels thedelivery time has gone from 9 months to 24.
Large haul trucks, normally available within
4 months, now take 2 years.10 Other services
may take even longer to come into balance;
the training of technical personnel such asengineers typically takes many years.
As a consequence, it may take some time
before the surge in investment now under way
leads to a surge in the delivery of inputs, andeven more time before delivery of inputs

T H Etranslates into actual increases in oil, metal,
and mineral production. All of this suggeststhat notwithstanding recent declines, supply
will continue to be relatively scarce for several
more years and that prices will remain higher
than in the 1990s for some time.

The boom in agricultural prices reflects
both high costs stemming from oil prices
and increased demand from biofuels
The rise in the price of agricultural commodities occurred much later than it did for either
oil or metals and minerals. Dollar prices wererising as early as 2003, but these increases
mainly reflected exchange rate movements.
Relative to consumer prices in developing
countries, internationally traded food prices
were broadly stable until 2007, when theprices of internationally traded food commodities (such as maize, wheat, and soybeans) rosevery rapidly (figure 2.8).
The timing of the rise in agricultural prices
points strongly to the impact of energy markets(box 2.3) First, agriculture production is fairly
energy intensive. The increase in oil prices
raised the price of fuels to power machineryand irrigation systems; it also raised the price

Figure 2.8 Real food prices were broadly
stable in developing countries until mid-2007
Food price indexes
US$ nominal and domestic CPI-deflated price indexes(Jan. 2000 5 100)
300
250
Nominal US$
200
150
100
Domestic real50
Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan.
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: World Bank.
Note: Individual country data deflated by local consumer priceindex and aggregated by country shares in global imports.

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of fertilizer and other chemicals that are energy
intensive to produce. The impact across different countries is difficult to quantify owing to alack of data. In the United States, fuel, fertilizer, and chemicals accounted for 34 percent ofmaize production costs and 27 percent of
wheat production costs in 2007 (USDA 2008).
Energy, fertilizer, and chemicals would typically make up a smaller share of production
costs in developing countries, because production is less intensive. Nevertheless such costs
can be significant where intensive techniques
are used. Thus, fertilizer is estimated to haveaccounted for 18 percent of variable costs for
irrigated wheat in the Indian Punjab in 2002
and for 34 percent of soybean costs in the
Mato Grosso, Brazil (World Bank 2007b).
Second, high oil prices sparked an increasein biofuel production in the United States andEurope that boosted demand for certain
grains and oilseeds thus contributing to theirrapid price rise in the course of 2007 and early2008 (Mitchell 2008). Overall, two-thirds ofthe increase in world maize production since2004 has gone to meet increased biofuel demand in the United States, thereby reducing
the quantity available for food and feed uses.
Estimates of the impact of increased demandfor biofuels on the rise in nominal maize
prices range from 70 percent (Lipsky 2008),
to 60 percent (Collins 2008), to 47 percent(Rosegrant and others 2008).
The increased demand for crops used forbiofuels contributed to price increases forother food by reducing the land allocated toother crops. For example, in the United Stateshigh prices increased land devoted to maize
production by 22 percent in 2007, with mostof the increase at the expense of soybeans, theproduction of which declined by 16 percent.
Area planted to rapeseed and sunflowers—
used for biodiesel production—increased inEurope and elsewhere at the expense of wheat.
Moreover, rising prices for maize, wheat, andsoybeans redirected consumer demand toward
other food products, aggravating price pressures on other grains. For example, rice pricesrose from $376 a ton in January 2008 to $907

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2 0 0 9Box 2.3 The historical link between crude oil andother commodity prices

Crude oil prices affect the prices of other commodities in a number of ways. On the supply side,
crude oil enters the aggregate production function ofmost primary commodities through the use of various
energy-intensive inputs and, often, transportation overlong distances, an energy-demanding process. Somecommodities, such as aluminum, have to go throughan energy-intensive primary processing stage.
On the demand side, some commodities compete
directly with synthetic products, which are produced
from crude oil (cotton with man-made fibers, natural
rubber with synthetic rubber). The demand for othercommodities (maize, sugar, rapeseed, and other oils)
has increased to produce biofuels. And the price ofenergy commodities such as gas and coal are affected
because of their substitutability with crude oil.
Increases in crude oil prices also increase thedisposable income of oil-exporting countries. Because
these countries are heavy consumers of some commodities (e.g. tea and gold), and demand for theseproducts is sensitive to incomes, high oil prices
sharply increased regional demand for these products.
Finally, crude oil price spikes are often associated with

inflationary pressures. As a result, the demand (andhence the price) of precious metals often rise with oil
prices, because investors and households view these
metals as more secure ways for storing wealth.
Crude oil price increases reduce the disposable
incomes of consumers, which, in turn, may slow
industrial production. In principle, lower disposable
income should have a negative impact on the consumption of food commodities. However, because
the income elasticity for most food commodities issmall, this effect is limited, and the positive impactof crude oil price increases on the prices of foodcommodities—through increased production andtransportation costs—tends to overshadow thenegative impact of reduced global consumption.
In contrast, the negative effect of high energy
prices on industrial production reduces the demand
for metals, thereby putting downward pressure on
their prices. This tends to offset the positive effectfrom higher production and transportation costs.
As a result the correlation between metals and oil
prices is much lower than between oil and foodprices (see table 2.2).

a ton in April, partly in response to the growing concern about the adequacy of global foodsupplies and the 120 percent increase in wheat
prices during the previous six months.
While biofuels have contributed to higher
food crop prices, they also represent an opportunity for profitable production in developing countries (OECD 2007; GTZ 2006).
Additional ethanol production need not imply
reducing food crops production. Brazil, forexample, is a low-cost producer of ethanolfrom sugarcane and has an estimated 180 million hectares of pasture that could be used to
produce additional sugarcane for ethanol—
without reducing the food sugar crop. Many
Sub-Saharan African countries, including
Angola, Mozambique, and Tanzania, also

62

have the potential to produce ethanol profitably from sugarcane on land that is not used
for food crop production. Finally, nonfood
crops such as jatropha can be used to produce
biodiesel in many developing countries.11
In addition to the impact of oil markets,food prices were boosted by a series of poor
wheat harvests, notably in Australia.12 Before
the run-up of prices in 2007, wheat stocks had
fallen to the second lowest level of the past
40 years (figure 2.9).
Reported global stocks of corn and rice declined before 2007, mainly due to a reduction ofvery large government stocks in China. Because
these stocks have been greatly underestimatedfor the past 30 years (figure 2.10), current stocklevels are not that different than what the world

T H E

Figure 2.9 Most of the decline in global grainstocks reflects lower stocks in China
Stock levels as a % of annual production
40
35
30

Global stocks(with newChina data)

25
20
15
10
5

Global stocks(using older data
for China)

Global stocks(excluding China)01960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: World Bank.

Figure 2.10 Outside of China, only wheat
stocks are unusually low
Stock levels as a % of annual production
45

Period of strong
increase inbiofuel production

Wheat

40
35
30
25
20
15
10
5

Rice

Corn

0
1960 1966 1972 1978 1984 1990 1996 2002 2008
Source: World Bank.

thought them to be during the early 1990s. It isthus unclear whether market participants took
the decline in global stocks as a signal of coming scarcity or simply a return to stock levels
that were consistent with relatively low prices adecade ago.

Government policy and investment fundactivity may have exacerbated the increasein commodity prices
The extent of food price rises during thisboom was probably exacerbated by the actions of governments, which impeded market

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forces that otherwise would have helped toattenuate the rise in prices and shorten the duration of the boom. As discussed in chapter 3,
although the various subsidies and price controls that were in place or were introduced
muted the poverty impact of higher prices,
they have also reduced producers’ incentives
to increase output and consumers’ incentives
to substitute less-costly items in their foodbaskets. And export bans limited supplies
available on international markets. For example, India’s ban on rice exports in April 2008
was followed by other rice exporters, which
prompted some countries, notably the Philippines, to increase rice imports to build up
strategic reserves, thus further boosting international prices.
The activities of financial investors may
have contributed to price rises as well. Traditionally, hedgers and speculators have been
the dominant players in futures exchanges,
but over the past few years, investment funds
have become important players as well. Suchfunds may have indirectly influenced commodity prices. Since 2003 index fund investors,
who allocate funds across a basket of commodity futures, have invested almost $250 billion in U.S. commodity markets, about half of
it in energy commodities (Masters 2008).
While such purchases create no real demandfor commodities, they may have influenced
prices because these funds are large comparedwith their physical market counterparts andbecause they have expanded rapidly. Their influence on prices is especially likely, if the rapid
expansion of these markets contributed to expectations of rising prices, thereby exacerbating swings, as argued by Soros (2008).
The empirical evidence on whether suchfunds have contributed to the recent pricesurge is mixed. In the nonferrous metals market (where a similar buildup of financial positions has occurred), Gilbert (2008) found no
direct evidence of the impact of investor activity on the prices of metals but some evidenceof extrapolative price behavior that resulted inprice movements not fully justified by market
fundamentals. He also found strong evidence

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2 0 0 9that futures positions of index providers overthe past two years have affected soybean (butnot maize) prices. Similarly, Plastina (2008)
concluded that between January 2006 andFebruary 2008, investment fund activity
might have pushed cotton prices 14 percent
higher than they would have been otherwise.
On the other hand, two IMF (2006, 2008)
studies failed to find evidence that speculators have had a systematic influence on commodity prices. A similar conclusion wasreached by a series of studies undertaken by
the Commodities Futures Trading Commission, the agency that regulates U.S. futures exchanges (Büyükşahin, Haigh, and Robe 2008;
ITF 2008).
Although evidence that financial investments have contributed to the rapid run-up incommodity prices is limited, it seems likelythat real-side speculation (the decision to holdstocks in anticipation of further price increases
or to order more than needed now for thesame reasons) likely contributed to the rapid
increase in prices during 2007 and 2008.13

Long-term demand prospectsT

he longevity of the current boom and thewide range of commodities that have been
affected have prompted many observers towonder if the global economy is moving into a
new era characterized by relative shortage andpermanently higher (and even permanently rising) commodity prices. This section looks at
demand and supply conditions in commodity
markets over the medium to long term andconcludes that slower population and GDP
growth, changes in the structure of GDP, andtechnological improvements in production
and use of commodities make this scenario
unlikely.
Demand for (and supply of) commodities
over the past 35 years has been rising steadily.
The quantity of energy consumed has increasedby an average of 2.2 percent a year during
1970–2005, that of metals and minerals by
3.1 percent, and that of food by around 2.2 percent. However, demand for these commodities

64

Figure 2.11 Demand for most commodities
has grown less rapidly than GDP but more
rapidly than population
Average annual growth rate, 1975–2006
Lead
Tin
Phosphate rock
Iron ore
CoffeePetroleum
Zinc
Population
Cotton
Sugar
Rice
Wheat
Bananas
Maize
Copper
Logs
Tea
Cocoa
RubberGDP
Aluminum
Soybeans
Palm oil
0

1

2

3

4

5

6

7

8

9

Percent
Source: World Bank.

has grown less quickly than GDP, albeit more
quickly than population (figure 2.11).
Expressed another way, the commodity intensity of GDP has been declining. For oil andfood, this process has been going on continuously since the 1970s. For metals, the same
trend was observed until the mid-1990s when
it began to reverse (figure 2.12)
More generally, growth in the demand forcommodities is influenced by a wide range offactors including several fundamental economic
drivers.

Incomes and population. As per capita
incomes rise, demand for commodities also
tends to increase, but the sensitivity ofdemand to an increase in income differs acrosscommodities and changes as income levels
rise. For example, at low-income levels,
demand for grains rises relatively quickly as
income increases, but as per capita incomesreach about $3,000 dollars, the pace at which
grains demand rises declines, ultimately fallingto close to zero. Thus, a 10 percent increase in

T H E

Figure 2.12 The quantity of most commodities
used per unit of GDP was declining until
recently
1.10
1.00
0.95
0.90
0.85
0.80
0.75

77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04

19

19

74

0.70

EnergyMetals

Metals (excluding China)

Food

Source: World Bank.

L O N G E R - T E R M

P R O S P E C T S

Table 2.4 Modern goods make lessintensive use of commodities(US$)

Iron ore
Steam coal
Wheat
Crude oilStandard steel
Newsprint
Supertanker
Motor car
Dishwasher
TV setSubmarine
Large passenger aircraft
Laptop computer
Mobile telephone
Jet fighter
Windows 2000 Software, CD Rom
Telecom satellite
Banking services

1.05

71

B O O M :Good

Commodity intensity of demand, index (1971 5 1.00)

19

C O M M O D I T Y

Value per kilogram

0.04
0.07
0.27
0.47
0.56
0.89
4.00
33.00
56.00
133.00222.001,334.00
2,224.00
4,448.00
13,344.00
44,480.00
88,960.00⬁

Source: Radetzki 2008a.

incomes is associated with a 6 percent increasein grains demand in low-income countries but
almost no increase in high-income countries(table 2.3). As a result, beyond a certain
income level, grains demand is mainly dictatedby population growth. The sensitivity ofdemand for metals to incomes is much higher
but tends not to change as income levels rise.
Energy is the reverse of grains, with thedemand for energy rising more rapidly thanincomes in high-income countries.

The composition of GDP. Commodity demand depends on more than just GDP. The
composition of demand also plays an important role. Over time, the commodity intensity
of GDP has declined partly because demandhas evolved toward goods and services that
Table 2.3 Impact of a 10 percent increase
in incomes on commodity demand(Percent)
Income group

GrainsEnergyMetalsLow
Lower middle
Upper middle
High

6.0
3.3
1.4
0.0

4.5
7.2
9.2
1.1

10.1
10.1
10.1
10.1

Source: World Bank.

are much less intensive in their use of commodities. This trend is illustrated in table 2.4,
which shows the value per kilogram of a variety of different products. Newer products,
such as computers and mobile telephones,
have a growing share in world GDP and contain very little in the way of commodities(proxied here by their weight).
The same effect can be seen at the sectorallevel. Industrial activity tends to be more commodity intensive than agricultural activity,
which in turn is more commodity intensive
than services. Thus, part of the declining
commodity intensity of demand over the past
35 years reflects the rise of the service sector,
which accounted for 50 percent of world GDP
in 1971 and 69 percent in 2005—a trend thatis shared by both high-income and developing
countries.

Technological change. Increased efficiency
in the use of commodities in production andconsumption has also contributed significantly to the dematerialization of economic
activity. Examples include improvements ingas mileage in automobiles and the substitution of artificial for natural fibers in clothing.

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2 0 0 9

Table 2.5 Fundamental economic factors drive future commodity demand
Average annual growth rate
PeriodPer capita income

Population

GDP

Share of services in GDP(percent)

Share of services in GDP(percent)

1990s
World
High income
Low and middle income
Low income
Middle income

1.2
1.8
2.0
2.3
2.2

1.5
0.7
1.6
2.2
1.2

2.7
2.5
3.6
4.5
3.5

0.99
0.89
1.73
0.96
1.84

64.6
67.8
49.8
44.3
50.8

2000s
World
High income
Low and middle income
Low income
Middle income

1.8
1.7
4.2
4.1
4.6

1.2
0.7
1.3
1.9
0.9

3.1
2.5
5.6
6.1
5.5

0.47
0.51
0.24
1.50
0.04

68.5
71.8
53.8
49.4
54.5

2015–30WorldHigh income
Low and middle income
Low income
Middle income

1.7
1.2
3.9
3.8
4.1

0.8
0.1
0.9
1.5
0.7

2.5
1.3
4.9
5.4
4.8

0.41
0.02
0.07
0.02
0.08

50.3
59.0
35.6
44.0
35.0

0.2
0.5
0.3
0.3
0.5

0.4
0.7
0.4
0.4
0.2

0.6
1.2
0.7
0.7
0.7

0.88
0.49
0.31
1.52
0.12

18.3
12.8
18.2
5.4
19.5

Change (2015–30 vs. 2000s)
World
High-income
Low and middle income
Low income
Middle income

Source: World Bank LINKAGES model.

Long-term projections suggest that themain factors driving commodity demand
will slow
To a significant degree, future demand forcommodities will reflect the combined impactof, GDP growth, changes in the compositionof demand, and technological progress(table 2.5).
• Population growth over the next two
decades is expected to slow significantly
from 1.2 percent during the 2000s toabout 0.8 percent in the period
2015–30, which should help moderatecommodity demand compared with past
demand.
• Per capita income growth is also projected to slow somewhat for the world asa whole, mainly because incomes in thelargest developing countries are expected66

to rise less quickly than they did during
the 1990s. Nevertheless, developingcountry per capita incomes are projected
to triple, rising from $1,550 to $4,650
between 2004 and 2030. This means
that, although global demand for grains
and some metals is likely to decelerate,energy demand is likely to strengthen.
• The composition of GDP is not expected
to continue to move toward services but
to stabilize more or less at current levels.
This suggests that commodity intensities
may decline less rapidly than they havein the past.
• Prospects for technological progress are
the least certain element likely to determine future commodity demand. Should
policy succeed in continuing past gains,then this too should tend to moderatecommodity demand.

T H EThe remainder of this section discusses inmore detail how these factors and technological change are expected to play out in individual commodity markets.

Demand prospects for energy
Rising incomes and technology are expected
to play crucial roles in determining future energy demand. Assuming no improvement inenergy efficiency, given expected increases inincomes and population, demand for energy
would rise by more than 120 percent between
now and 2030, with growth in developing
countries responsible for three-fourths of that
increase. Assuming the composition of energy
demand and supply did not change, that would
imply that demand for oil would more thandouble, from 82 mb/d in 2007 to 174 mb/din 2030.

Efficiency gains and conservation efforts
reduced energy demand by 50 percent
over the past 35 years
Of course, these assumptions are somewhat
simplistic, viewed against the light of recent
history. Energy efficiency over the past 50
years has in fact improved sharply. Since
1960, the efficiency of jet transport has morethan tripled (Lee and others 2001) while fuelefficiency in cars has also increased significantly. Overall, between 1970 and 2004, technological change lowered energy demand 56
percent from what it would have been otherwise (IEA 2007). Much of the improvement
resulted from substitution and conservation
prompted by higher prices. Ongoing technological change and increased efficiency inChina (Lin and others 2006) and the FSU
countries (see earlier discussion) also played
important roles.14
Looking forward, similar improvements inenergy efficiency are possible if supported by
an appropriate policy mix. Of particular importance will be efficiency in the transport sector, which is expected to account for some
75 percent of the increase in future oil use,largely because of rising incomes and car ownership in developing countries (IEA 2007).

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A number of technologies currently available
as prototypes or in early stages of commercialization could help more than double fuel efficiency over the next several decades. In 2005,
about 8 liters of fuel were needed to drive 100
kilometers; by 2050, fewer than 3 liters may beneeded (IEA 2008a). Even more optimistic scenarios project that by 2050, 90 percent of thevehicles in the high-income world and 75 percent in the developing world will be powered byalternative fuels, such as plug-in hybrids (hybridcars with large batteries that can be plugged
into the main electrical network), electric, andhydrogen-powered cars. Such a shift would
reduce considerably private transportation’s
dependence on liquid fuels. Indeed, prototype
and soon-to-be-released electric and hydrogenpowered cars already exist (box 2.4).

Strong growth in developing countries is
expected to dominate future energy
demandAssuming that energy efficiency continues toimprove at about the same rate as in the past,
total demand for energy is projected to rise by
55 percent between now and 2030, with 80
percent of that emanating from fast-growing
developing countries (table 2.6). Overall,
weaker population growth and technologicalchange are likely to outweigh the impact ofrising developing-country incomes and theirincreased weight in overall demand. Hence therate of growth of energy demand is expectedto ease over time, declining from an average of
1.8 percent during the past 15 years to about
1.3 percent in the period 2015–30.
In the baseline scenario, climatic and environmental concerns are expected to contributeto a modest shift away from petroleum products toward less carbon-intensive fuel sources,
such as natural gas, and renewable fuels, suchas wind, solar, and geothermal. Oil’s share in
overall energy consumption is expected to
decline, with demand rising more slowly.
Demand growth is projected to fall from
1.7 percent a year in 2005–15 to 1.1 percent in 2015–30, reaching between 112 and118 million barrels a day by 2030.

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2 0 0 9Box 2.4 Alternative fuels for transportationH

ydrogen and electricity are emerging fuels fortransportation; fully ethanol-powered and flexfuel cars are already well-established commercial
successes in Brazil and increasingly in the UnitedStates and Europe. Existing hybrid cars offer a
50 percent improvement in fuel efficiency for citydriving, while plug-in hybrid cars have the potentialof reducing reliance on gasoline even more.
Hydrogen-fuel-cell and all-electric cars could reducethat dependence to zero, but considerable progressneeds to be made in increasing the efficiency ofbattery technology and in the production andconversion of hydrogen into electricity before thesevehicles will be competitive.
Currently, most major car manufacturers haveprototype versions of all such cars. General Motors
has announced its intention to sell commercially assoon as 2010 an extended-range electric vehicle (the“Volt”), which is a battery-powered electric car thatuses a small flex-fuel engine to extend its range forhighway driving. The Volt is expected to be able torun up to 40 miles a day (more than the average
daily driving distance of 75 percent of Americans) on
batteries alone and 250 miles using its flex-fuel generator. The car is expected to have an EPA rating of
100 miles a gallon (Connor 2008), and its operating
costs could be 0.02 cents a mile or one-sixth the costof a vehicle powered with gasoline at $3.80 a gallon(Padget 2008).

Meanwhile, Honda is already leasing a limited
number of hydrogen-fuel-cell-powered cars to thegeneral public in southern California. While costs ofoperation are similar to gas-powered cars, the cars
themselves are extremely expensive and the leases
being offered imply a substantial subsidy. The cost of
fuel-cell stack systems (the mechanism that converts
hydrogen into power and that uses platinum) will
have to decline tenfold before these vehicles become
economically viable.
For both plug-in hybrids and electric cars, themajor stumbling block is the size, weight, and cost of
the battery required to power them. With current
technology, the battery needed to power an electriccar 500 kilometers weighs five times as much as theequivalent amount of gasoline and would cost
$50,000. Over the next several decades, technological progress achieved through the commercializationof hybrid cars is expected to raise battery efficiency
and reduce costs, so that plug-in hybrids will be
widely available by 2020.
Prospects for all-electric cars are less clear, mainly
because of the time that it takes to recharge batteries, a factor that makes them much less attractive
than gas-powered vehicles. Here hydrogen-fuel-cellpowered cars could have an advantage if the costs
associated with the fuel stack can be resolved.
Source: IEA 2008a.

Another important feature of the composition of energy demand is the importance ofcoal, which currently accounts for more thana quarter of global energy consumption. Coalis primarily used by developing countries(62 percent), with China accounting for morethan 40 percent of global consumption. The
baseline simulations indicate a slight increasein coal’s share, from 25.3 percent in 2005 to
27.8 percent in 2015. However, the projection
is subject to two risks: on the upside, if newclean coal technologies (including carbon sequestration) come on board, coal’s share inglobal energy consumption is likely to bemuch higher. However, if such technologies

68

do not materialize, coal use is likely to be subjected to significant environmental regulationthat could significantly reduce its economic
attractiveness.

The future path and mix of energy
demand will depend on policy
Simulations suggest that a more aggressive
stance toward reducing carbon emissions
could generate a further moderation in energy
demand and in fossil-fuel use. For example, a$21 tax per ton of carbon dioxide could be expected to reduce demand for energy by 33 percent (see the simulations at the end of thechapter). Because of its high carbon content,

T H E

Table 2.6 Energy demand is projected toslow in the baseline scenario
Contributions to annual average global growth in energy
demand (percentage points)

World
High-income countries
Developing countries
Middle-income countries
Low-income countries

1990–2005

2005–15

2015–30

1.4
0.7
2.2
0.1
4.1

1.1
0.4
3.4
2.4
3.9

0.6
0.3
2.0
1.5
2.2

Shares in total energy demand (percent of total)

Coal
Oil
Gas
Nuclear
Hydro
Biomass, waste
Other renewables

1970

1990

2005

2015

2030

26.0
44.0
16.0
1.0
2.0
11.0
—

25.3
36.7
19.1
6.0
2.1
10.3
0.4

25.3
35.0
20.6
6.3
2.2
10.1
0.5

27.8
32.9
21.2
5.6
2.3
9.3
1.0

28.2
31.5
22.3
4.8
2.3
9.1
1.7

Source: World Bank ENVISAGE model (forecast);
IEA (historical data).
—  Not available.

demand for coal would decline most sharply
under such a scenario, with natural gas andother low-carbon energies increasing theirshare in total demand.
An even more aggressive set of policies,
including a significant policy initiative to increase energy efficiency and reduce carbon
emissions to below their 2005 levels, could see
energy demand fall even further (table 2.7).

Demand prospects for metals
and minerals
Demand for metals and minerals is also
closely related to GDP and the mix of GDP—
with manufacturing and investment activitiesC O M M O D I T Y

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associated with relatively high commodity
intensities. Like oil, the evolution of metals
intensities reflects technological change, thegrowing importance of services in the economies of high-income countries, and otherstructural changes in demand.

After falling for years, metals intensities indeveloping countries are rising, especiallyin China
The reversal of the trend decline in metals intensities that began in the mid-1990s (see figure 2.10) reflects very different trends in highincome countries, most developing countries,
and China (figure 2.13). The trend decline observed for all three groups between 1970 and1990 has continued among high-income countries, apace with the continued transfer ofcommodity-intensive manufacturing activities
to developing countries. In developing countries excluding China, the same process has
driven a slight rise in metal intensities beginning in 1992, after their fall attributable to theefficiency improvements associated with theend of the FSU.
China stands out as the country where intensities have increased the most. After declining for years, they began to rise gradually toward the beginning of the 1990s and thensharply accelerated around 1998, reflecting a
rapid increase in manufacturing activity and a

Figure 2.13 Metal intensities have declined
steadily in high-income countries but havereversed in China since 1993
Quantity of metals used per unit of GDP, index (1971  1.00)
1.6

Table 2.7 Energy demand could decline
further under more aggressive climatechange policies
Energy source

1.4

China

1.2
OECD
1.0

Baseline
Stable emissions
Aggressive(percent change in energy consumption)

0.8

15
10
68
144

0.4

0.6
Rest of the world

Coal
Oil
Gas
Biomass, waste

198
57
96
48

22
29
25
214

0.2
1970

1975

1980

1985

1990

1995

2000

2005

Source: World Bank.

Source: IEA 2008a.

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2 0 0 9Box 2.5 Understanding the rise in Chinese metal
intensities

C

hina’s accession to the World Trade Organization and the boom in manufacturing activity thataccession generated certainly played a role in increasing metals demand. However, the long-term investments in new capacity and infrastructure that beganat the same time as WTO accession were likely justas important. Overall investment in China increased
from 36 percent of GDP in the early 1990s toaround 45 percent currently, a result both of increased manufacturing and rapid urbanization (overthe same period, the share of the population living incities increased from 30 to 40 percent). Similarly,
part of the increase in China’s energy demand was
associated with an acceleration in steel and cement
production (Lin and others 2006). These structuralchanges entailed substantial investments in infrastructure and were associated with a rapid increase in automobile production—all heavy consumers of metals.
As of 2007, more than 50 percent of Chinese
steel and 44 percent of copper demand was used inconstruction and infrastructure. While China’s
specialization in manufacturing is likely to persist,investment rates are projected to decline over time(the average life span of infrastructure investments
exceeds 50 years) so China’s metal intensity is expected to stabilize and then decline, as did the metal
intensities of other Asian countries, such as Japanand the Republic of Korea, that followed a manufacturing- and export-intensive development path
(Mitchell, Tan, and Timmer 2007).

sharp uptick in investment. The increase in the
Chinese investment ratio came partly from theneed to create capacity to meet the manufacturing boom, but the increase also reflects significant investment in support of infrastructure in response to increased urbanization(box 2.5).
Except for a few export- and manufacturing-intensive Asian economies, other developing countries, including those at much higher
levels of income than China, have not seen
metal intensities rise in this way. Metal intensities in Brazil, India, and South Africa, for example, remained flat or continued to decline
during the same period.15 As a consequence,the strong acceleration in metal demand observed in China is not expected to be repeatedin other developing countries.
Not only have Chinese metal intensities
been rising, they are also as much as 7.5 times
as high as in high-income countries and 4
times as high as in other developing countries(figure 2.14). While some of the same factors(high investment rate, large manufacturingsector) that explain the increase in Chinese intensities likely explain these differences, the70

Figure 2.14 Metal intensities in China aremuch higher than elsewhere
Metal intensity indexes, 2000–06 averages (high-income
countries  1)
10
8
6
4
2
0
Copper Aluminum

Zinc

Tin

Lead

NickelHigh-income countries
Developing countries (excluding China)
China
Source: World Bank.

fact that the former Soviet Union also had
similarly high intensities before its economictransition suggests that perhaps nonmarket
factors continue to influence allocation ofthese resources in a way not seen elsewhere.

Over the next quarter of a century, metal intensities in developing countries are likely tostabilize and begin declining once again. Several factors should contribute to the reassertion of the earlier downward trend.
A slowing in the pace at which global manufacturing capacity is transferred to the developing world is projected to result in a levelingoff and eventual decline in manufactures’ sharein Chinese GDP, from about 40 percent in2005 to around 33 percent in 2030. This slowing in turn should be reflected in a decline inmetals intensities. Less-rapid growth in manufacturing and the gradual completion of investment projects are expected to cause the shareof investment in GDP to decline considerably,
which should also serve to lower Chinese metal
intensities. Finally, the rising influence of market forces in determining allocation decisionsin China should also cause a drop in the quantity of metal used per unit of output.
In the rest of the developing world, similar
forces should be at work, which, coupled withrising incomes and increased service-sector
demand, is expected to reduce the metals
intensity of demand.16
Nevertheless, growth in China and developing countries more generally is expected tocontinue to outpace growth in the rest of theworld throughout the projection period.
Given China’s high metal intensities, developing-country growth should keep global metal
intensities from falling, at least initially. However, the beginning of the decline in Chinese
metal intensities should be reflected in a significant weakening in the rate of growth ofmetals demand during the period 2015–30.
Overall, global demand for metals is expected
to continue to grow somewhat more quickly
than global GDP, at about 4.0 percent
through 2015, before slowing to around 2.5
percent in the period 2015–30, a pace significantly slower than that of projected GDP
growth itself.

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Demand for food and otheragricultural products
The weaker growth in population and GDP
expected over the next few decades (see table2.4) should cause global demand for food togrow less quickly over the next 25 years.
Overall, the global population growth rate
is projected to decline from an annual averageof 1.6 percent between 1970 and 2005 toabout 1.0 percent over the following 25 years.
While most of the slowdown is expected totake place in high-income countries, population growth rates in every developing region
are expected to decline between 0.4 and 0.8
percentage points (figure 2.15).
Rising incomes in developing countries
imply that per capita food consumption will
increase in most of these countries, but the
impact on overall demand is expected to besmall. As the earlier analysis suggested, a
10 percent increase in per capita income will
increase grain demand by 6 percent in poor
countries (those with per capita incomes
below $2,000), but only by 2 percent in middle-income countries.17 Most of the heavily
populated developing regions have alreadyFigure 2.15 Weaker population growth
should slow demand for food
Average annual % change in population
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5

H
ig
hin
co WO
id
m
dl
R
e
eco LDin
Lo com unt
riew-in e c
ou s
co
nt
m
ri
e
co es
un
tri
es
Af
ric
a
As
ia
La Eur
op
tin
Am e
N
or
er
th
ic
Am a
er
ic
a
O
ce
an
ia

Slowing global growth and a decline
in Chinese metals intensity should see
demand growth for metals slow over the
next 25 years

C O M M O D I T Y

M

T H E

Population growth, 1970–2005
Population growth projections, 2005–30
Source: UN 2006.

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2 0 0 9Figure 2.16 Per capita grain demand tends
to stop rising when income reaches around$5,000

Table 2.8 Developing countries willaccount for most of the projected demandfor various foods, 2000–30

Grain consumption per capita (kg)(Log scale)
1,000

WORLD
Developed
Transition
Developing
Sub-Saharan Africa
Middle East andNorth Africa
Latin America andthe Caribbean
South Asia
East Asia and Pacific

China Brazil
RussianFederation

367

135

India

45

18
0.4

1.1

2.9

8.1

22.0

59.8

GDP per capita (1,000 PPP $)All
agriculture

CerealEdible
oils

Meats

1.5
0.7
0.5
2.0
2.8
2.2

1.2
0.9
0.8
1.4
2.5
2.1

2.3
2.0
1.7
2.5
2.9
2.3

1.7
—
—
2.4
3.3
3.3

1.8

1.2

2.6

2.0

2.3
1.7

1.6
1.2

2.7
2.4

4.0
2.1

Source: FAO (2006, pp. 33, 39–42, 47).
—  Not available.

Source: World Bank.
Note: Curve fitted on a log scale.

Slower population growth will dampen
demand for agricultural products

achieved incomes associated with income elasticities close to 0.2 (figure 2.16).18
Demand for meat and dairy products (andfeed grains) will likely expand more rapidly
because these products tend to be more income elastic than basic food stuffs.19 For example, in Asia, demand growth for meat andedible oils outstripped population growth by awide margin over the past 15 years, even rising somewhat faster than GDP in the case of
edible oils (figure 2.17).

Figure 2.17 Demand for edible oils grewmuch faster than population in Asia

Overall demand for food should slow over the
next few decades, despite income gains. The
Food and Agriculture Organization (FAO)
estimates global food demand will increase by
about 1.5 percent a year between now and2030, with cereals, edible oils, and meats growing at 1.2, 2.3, and 1.7 percent, respectively—
somewhat slower than they did between 1990
and 2006 (table 2.8). Developing countries
have higher income elasticities, faster income
and population growth, and relatively large
populations, compared with high-income
countries. Thus, three-quarters of the additional global demand for food between now
and 2030 will emanate from developing
countries.

Average annual % growth, 1990–2005
10

The implications of biofuels demand for
agricultural prices

8

6

Asia

2

World

4

0
Population

GDP

Source: World Bank.

72

Cereals

Edible oils

Meats

The production of biofuels in Brazil, theUnited States, and the European Union (which
together account for more than 90 percent
of global output) has increased by 18 percent
a year since 2000. Biofuels now use 16 percent
of global sugarcane production, 9 percent of
global vegetable oils production, and 13 percent of global maize production, and havebeen the key contributor to the rise in foodcrop prices in recent years (Mitchell 2008).

T H EThe rapid expansion of production capacity in the United States and Europe wasprompted by generous subsidies and use mandates, but high energy prices have made continued production without subsidies profitablein many cases. As a result, demand for biofuels may mean that in the future prices forcrops used to produce biofuels will be higher,
and more volatile, than if these crops wereused only for food.
Indeed, when oil prices exceed the threshold of roughly $50 a barrel, a strong correlation can be observed between the price of
crude oil and crop prices that does not exist
when prices are below $50 a barrel (figure 2.18). At oil prices below $50 a barrel,
ethanol production is not very profitable.
However, at $50 a barrel, a 1 percent increasein oil prices results more or less in a 0.9 percent increase in maize prices, because every
dollar increase in the price of oil increases the
profitability of ethanol and hence biofuel demand for maize.20 Since the oil market ismuch larger than the market for maize (if all
the maize currently produced in the world
were converted into ethanol, it would equal
only 8 percent of global gasoline supplies), theprice of maize is now effectively determinedby the price of oil.
The impact of biofuels is not limited to thecrops used for biofuel production. As more
cropland shifts to produce the now-moreprofitable biofuel crops, then the supply ofother crops declines (or less productive land isbrought under cultivation), thus raising foodprices in general. As a consequence, the priceof wheat and soybeans have also become moresensitive to oil prices in excess of $50.
The future impact of the oil market on the
demand for food crops and their prices is uncertain. Technological improvements may
lower the cost of producing ethanol, in turnlowering the threshold oil price above whichcrops used for biofuels become sensitive to oil
prices. But technological change may also giverise to other nonfood sources (such as cellulose)
for biofuel production or to other energy alternatives such as solar, wind, and hydrogen-based

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Figure 2.18 Food crop prices have become
sensitive to oil prices
Oil price per barrel versus food price per ton
a. Maize vs. Crude Oil Prices
Maize ($/ton)
350
300
250
200
150
100
50
0
0

20

40

60

80

100

120

140

100

120

140

100

120

140

Crude oil ($/bbl)
b. Wheat vs. Crude Oil Prices
Wheat ($/ton)
500

400

300

200

100

0
0

20

40

60

80

Crude oil ($/bbl)
c. Soybeans vs. Crude Oil Prices
Soybeans ($/ton)
700
600
500
400
300
200
100
0
0

20

40

60

80

Crude oil ($/bbl)
Source: World Bank.

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2 0 0 9systems. Should this occur, demand for biofuel
food crops would drop off and food prices
with it.

Long-term supply prospectsT

he slowing of growth should bring commodity prices down by roughly 25 percent
in 2009 (see chapter 1). But over the medium
to long term, they are not expected to decline
to the levels observed in the 1990s. How far
they come down, and their future trajectory,
will depend not only on the demand factors
already discussed but also on the pace at which
finite resources are exhausted; improvementsin the efficiency with which commodities arefound, extracted, and grown; and the policies
that are put into place to promote long-term
supply.

Energy and metals supply
Supply prospects for both oil and metals depend on the competing forces of resource exhaustion and the declining quality of newsources, on the one hand, and the pace of new
discoveries and improvements in the technology with which commodities are discoveredand extracted, on the other.

The world is unlikely to run out of oil,metals, and minerals in the foreseeable
futureDespite ultimately finite quantities of oil, metals, and minerals in the earth’s crust, there islittle likelihood that the world will run out of
natural resources (or food) in coming decades.
The existence of ample (and growing) reserves, and a history of significant improvements in the technology with which resources
are found and extracted, suggests that supply
will continue to rise in pace with demand.
True resource exhaustion is unlikely not least
because, as resources become scarcer, theirprices rise, consumption declines, and alternatives that once may have been uneconomic are
substituted for the scarce (and expensive)commodity.

74

Indeed, over the past 50 years these forces
have enabled global production of most commodities to rise despite falling, or at best stable, real prices. Production of aluminum, forexample, increased fivefold between 1965 and2007, while that of crude oil, copper, andwheat increased 2.6, 3.2, and 2.8 times, respectively (figure 2.19).

Technological change has kept extraction
costs in check even as the quality of mines
and wells declined
Although the quality of newly discovered
mines and oil wells (and the ease with which
they can be exploited) tends to be lower on
average than older ones, technological improvements have reduced the cost of producing most commodities over the past 50 years,
allowing effective supply to keep pace withdemand (box 2.6).
In the case of oil, declining yields from onshore wells pushed exploration into offshore
fields that are much more difficult and expensive to exploit. Improved technologies allowed these sources to be exploited profitably even at low prices and even though
they are much more challenging to drill thanexisting wells. As a result, nearly all of theadditional increase in global oil production
since 1978 has come from offshore wells(figure 2.20).21

Figure 2.19 Output of virtually all commodities has increased since 1965
Output volumes, 1965–2007, index (1965 100)
550
500
Aluminum

450
400
350
300
250

Wheat

200
150

CopperCrude oil100
1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: World Bank.

T H EC O M M O D I T Y

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P R O S P E C T S

Box 2.6 Declining costs of resource extraction

Rising costs for producing a unit of output represent a good a priori indicator of increasing
scarcity. The fact that the prices of most commodities have remained stable or declined for most of thepast 100 years is therefore a good indicator that atleast until 2003 the world was not running out ofthem (Radetzki 2008a).
Production costs—especially for the marginal
producer—are an even better indicator. For the median producer, the real cost of producing a ton of
metal between 1985 and 2002 declined by 28 percent for aluminum and copper and by 21 percent for
nickel (IMF 2006). For high-cost producers, thedecline was the same for aluminum but was only
18 percent for copper and nickel. Those numberssuggest that while new projects to extract copperand nickel were more expensive than preexisting

Figure 2.20 Almost all of the additional oil
supply since the 1970s has come from
nontraditional sources
World oil production, millions of barrels per day
90
75
60
45

ones, technological change had nevertheless reduced
the costs of production by more than the lower
quality of the underlying vein or its remoteness hadraised them.
Similarly, the average cost of bringing a new oilfield into production declined from $29 a barrel in1981 to $9 in 1999 (IEA 2001). These cost reductions would be all the more marked if the numbers
were expressed in real terms. And although not allof this cost decline can be attributed to technologicalchange, much can (Bohi 1999). Indeed, improvements in extractive technology allowed copper prices
to decline more or less continuously between 1890
and 1970 even as the average grade of copper ore in
the United States fell from 6 percent to less than
2 percent between 1890 and 1920 and to less than
1 percent by 1960 (Lowell 1970).

ore beds or wells has meant that known reserves of most extractive commodities have increased over time—despite rising production.
Such technological improvements help explain the substantial rise in estimates of reserves over past decades. Two authoritative
sources of such data for oil are the Oil and
Gas Journal, which reports annual estimatesof proven reserves (figure 2.21), and the30
15

Figure 2.21 Rather than declining, known oil
reserves keep rising0World crude oil reserves, billions of barrels

1970 1974 1978 1982 1986 1990 1994 1998 2002

1,400

Offshore

OnshoreSource: Sandrea and Sandrea 2007.

1,200
1,000
800
600

Technology has also helped maintainsurprisingly stable ratios of reserves
to output
Advances in the technology with which newreserves are discovered and in the efficiency
with which the final product is extracted from

400
200
0
1950

1958

1966

1974

1982

1990

1998

2006

Source: Oil and Gas Journal.

75

G L O B A L

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2 0 0 9

Table 2.9 Historically, estimates of oil
reserves have kept pace with production

Figure 2.22 Gas reserves are almost as large
as oil reserves

Date of assessment
Billions of barrels (equivalent)
Category

1981

1985

1990

1993

1996

2,500
Reserve
growth(billions of barrels)
2,000

Cumulative
production

445

524

629

699

710

Known reserves

724

795

1,053

1,103

891

Undiscovered
conventional
resources

550

425

489

471

732

Expected reserve
growth

—

—

—

—

688

Estimated total
resources

1,719

1,744

2,171

2,273

3,021

Total resources
still in ground(percent)

74

70

71

69

76

1,000
Known
reserves
500

0Source: U.S. Geological Survey, World Bank calculations.
Note: Estimated total resources is the sum of the first threerows. Total resources still in ground is one minus the ratio of
cumulative production over total resources.
—  Data are not available (the concept of reserve growth
was first introduced in 1996).

United States Geological Survey (USGS),
which attempts to quantify the resource baseof the world’s major basins by including assessments of known reserves, undiscovered resources, and reserve growth (table 2.9).22
Estimates from the Oil and Gas Journal,
which include unconventional sources of hydrocarbon fuels such as Canadian oil sands
and oil shale, show known reserves risingfrom just over 600 billion barrels in 1980 to
1.3 trillion barrels by 2008. Furthermore, thereserve estimates for a number of major producers in the Middle East have not changed
for years, reflecting both their current size
compared with production levels (nationalreserve-to-production levels imply adequate
reserves for 82 years of production for the
Middle East–producing countries) and the factthat for decades these countries have not felt
an incentive to explore in more depth thepotential for additional reserves nor to verify
existing reserve estimates.
On the other hand, according to the USGS estimates (which include undiscovered resources),

76

Undiscoveredresources

1,500

Oil

Gas

Source: U.S. Geological Survey.

total resources increased from 1.7 trillion barrels in 1981 to 3.0 trillion barrels in 1996, so theamount of known oil still in the ground remained stable, at around 70 percent of the totalof oil ever found (see table 2.9).
Reserves of natural gas estimates are equallyhigh. According to the USGS, they were at 2.3
trillion barrels of oil equivalent in 2003, almost
as large as crude oil reserves (figure 2.22).
Yet, among the key hydrocarbon sources ofenergy, coal is perhaps the most abundant. As
of 2007, the reserves-to-production ratio wasestimated at 133 years, according to BP. However, as mentioned earlier, the use of coal will
depend on the degree to which new technological advances will be able to ameliorate theenvironmental concerns.
Finally, expansion of nuclear energy (andother renewable fuel) supplies could lessen therelative importance of hydrocarbon-based
fuels. For example, in addition to the existence of abundant feed stocks (at current consumption rates, known uranium reserves are
expected to last almost a century), current
modern nuclear technologies not only produce
much less nuclear waste but also have lower
likelihood of accidents compared with nuclear
power plants in the past.

T H EC O M M O D I T Y

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P R O S P E C T SLong before the world begins to run out of oil,however, prices would begin to rise and consumption growth would slow. As a result, alternatives such as natural gas, nuclear power,
and renewable energy sources would increase
their output share (see earlier discussion on
long-term demand). Reserves of crude oilwould not decline as rapidly as they would
have had prices not increased, and its use
would be reserved for those products (plastics,
chemicals, and polymers) where few alternatives exist.

Reserves of metals and minerals have alsotended to rise with output
The story for metals and minerals is somewhat
more nuanced. Reserves expressed as a shareof production for a number of metals did
decline during the 1980s and 1990s. In part
this reflected their relative abundance (reserves exceeded more than 40 years for bauxite, copper, iron ore, and nickel), continued
rising production levels, declining prices, andunderinvestment. It also reflected the fact that
reserves are really a measure of the inventory
that producers have readily available for future delivery, rather than a measure of thephysical quantity remaining of a commodity.
With demand and prices weak, and inventories (reserves) ample, firms had little incentive
to invest in additional inventory.
Since 2003, when metal prices began risingand production accelerated, exploration
expenditures have picked up (see earlier discussion). For some metals, the reserve-toproduction ratios have increased as a result(table 2.10).

Overall, high prices will encourageincreased supply and substitution ofalternative sources
As indicated earlier, the supply of crude oil is
expected to continue to expand over the next
few decades, reaching about 112 mb/d by
2030. The supply of other energy sources is
expected to increase more rapidly than thatfor oil, with coal and natural gas projected toincrease their shares in total energy supply
from 46 percent in 2005 to 51 percent in
2030. Renewable energy sources are projected
to see their share in total energy supply risefrom about 0.45 percent to about 1.7 percent
over the same period (table 2.11).
Biofuels are a source of renewable energy
whose share of global liquids production has

Increasing scarcity is unlikely to result inresource exhaustion
Although the history of reserves data suggeststhat much more oil is likely to be discovered,ultimately the quantity of available oil is finite.

Table 2.10 Increased investment has stabilized reserve-to-production ratios for somecommodities
Year

Oil

Coal

BauxiteIron ore

CopperLead

Nickel

Tin

Zinc

55
49
58
67

10
8
7
6

162
147
190
180

77
53
46
40

42
37
29
20

26
21
22
17

Proven reserves
billions ofbarrels
1980
1990
2000
2007

667
1,003
1,104
1,238

(Millions of metric tons)——
984,211
847,488

25,00022,00024,00025,000250,000
150,000
140,000
150,000

493
350
340
490

127
70
64
79

Reserves/production ratio(Years of production equivalent)
1980
1990
2000
2007

29
42
40
42

—
—
230
133

280
193
178
132

280
178
132
79

64
41
26
31

36
20
21
22

Source: Radetzki (2008a, 2008b), British Petroleum, U.S. Geological Survey.

77

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2 0 0 9

Table 2.11 Oil’s share in global energy
supply is projected to decline
Average annual growth rate(%)
Energy source

1990–2005

2005–15

2015–30

Coal
Oil
Gas
Nuclear
Hydro
Biomass & Waste
Other renewables

1.8
1.5
2.3
2.1
2.1
1.6
3.8

3.3
1.7
2.6
1.1
2.7
1.5
9.0

1.5
1.1
1.7
0.4
1.6
1.3
5.2

Total

1.8

2.3

1.4

Share in total energy supply (percent)
1990

2005

2015

2030

Coal
Oil
Gas
Nuclear
Hydro
Biomass, waste
Other renewables

25.3
36.7
19.1
6.0
2.1
10.3
0.4

25.3
35.0
20.6
6.3
2.2
10.1
0.5

27.8
32.9
21.2
5.6
2.3
9.3
1.0

28.2
31.5
22.3
4.8
2.3
9.1
1.7

Total

100

100

100

100

Source: IEA 2008a.

reached 1.6 percent, largely because of government encouragement (box 2.7). Recent projections suggest that biofuel production will reachthe equivalent of 1.95 mb/d of oil by 2013 (a45 percent increase over 2008), corresponding
to 2.1 percent of the projected global oil demand (IEA 2008b; FAPRI 2008).23 While popular, biofuels are controversial, in part because
energy is required to produce energy, so the net
addition to the global energy supply fromcorn-based ethanol is relatively small (Kojima,
Mitchell, and Ward 2006), and in part because
biofuels yield only limited environmental benefits (Searchinger and others 2008; Fargione
and others 2008).
Long-term projections for metals and minerals supplies are optimistic, with expectations
that production will increase by a further 3.0
percent a year between now and 2030. At thesame time, the trend toward substitution of alternative metal products is likely to continue.
For example, copper initially displaced lead inplumbing applications, only to be displaced by78

plastics most recently and by sand (fiber optics) in telecommunications applications. And
the rapid expansion in demand for aluminum,
shown in figure 2.19, partly reflects its increasing use as a lightweight alternative for steel.
Another element of growing importance inthe metals markets is the role of recycling,which currently ranges from 55 percent of
final demand in the case of lead to about
5 percent in the case of zinc. In developed
economies, the proportion of metal available
from scrap is higher because of greater inventories embodied in old cars and infrastructurethat can be recycled. Future increases inscrap’s share of the metal supply in emerging
economies will slow the rate of growth of demand for mined metal.24

Actual results will depend on policy
choices and technological progress
Supply of both energy and metals over thelong term depends critically on policies andthe pace of technological change. Rising concerns about the environmental consequencesof economic activity, notably but not exclusively those associated with climate change,
may alter the regulatory environment in important ways.
Emissions abatement policies may restrict
the use of hydrocarbons, either through mandates or tax policy that alters the economics
of both demand and supply—potentially extending reserve-to-production ratios significantly. Environmental concerns may also restrict the use of extraction and production
techniques in other primary sectors in waysthat reduce supply or significantly raise production costs. In the IEA’s aggressive emissions
abatement scenarios, global oil demand falls
by 29 percent.
How successful alternative fuels andimproved extraction technologies will be inenabling the kind of substitution and increased supply that has been observed in thepast will depend on how successful policy is insupporting the creation and diffusion of newtechnologies. Particularly important for poor
countries will be efforts to create affordable

T H EC O M M O D I T Y

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P R O S P E C T S

Box 2.7 The rise of biofuel productionWhile biofuels have been used since the earlydays of the automobile (Henry Ford’s 1908
Model T car was designed to run on maize-based
ethanol), limited supplies and the availability ofcheaper and more efficient petroleum products
diminished the use of biofuels (except for a brief
revival during the petroleum shortages of WorldWar II).
In the United States, various amendments to the1970 Clean Air Act and the 1992 Energy Policy Act
were instituted that favored the use of biofuels, especially maize-based ethanol. More recently, the 2007
Energy Independence and Security Act called for a
fourfold increase in biofuel production by 2022. As
a result, an estimated 25 percent of U.S. maize output in 2007–08 was diverted to ethanol production.
In 2007, the United States produced 6.6 billion gallons of ethanol, roughly equivalent to 4.5 percent of
its gasoline consumption.
The European Union began instituting mandatory
use of biodiesel (mostly from rapeseed oil) as early as
1992. During 2008, its biofuel output was expected
to reach 225,000 barrels a day of oil equivalent, representing about 1.5 percent of its crude oil consumption. The European Union has a target 5.75 percent

and durable solar cells, whereas at the global
level efforts to reduce dependence on liquids
for transportation—such as a breakthrough inbattery technologies or hydrogen generation—
will be key.25
The structure of energy markets, including the market power and supply decisions
made by OPEC may also play a role. The
concentration of oil reserves in the hands ofa few countries could limit the increase in
exploration and production anticipated in response to high prices (box 2.8). OPEC controls three-quarters of the world’s oil reserves
and dominates export markets.26 Moreover, anumber of producers have made their reserves
and fields off limits to private investors; twoof these countries (Mexico and Saudi Arabia)
officially prohibit the participation of foreignof biofuel use by 2010, whereas a 2008 European
Commission directive proposed a 10 percent use
mandate by 2020.
In the 1970s, Brazil offered incentives to bothsugarcane producers and its car industry to encourage biofuels, and by the mid-1980s, Brazil was producing 3 billion gallons of sugarcane-based ethanola year, while 90 percent of Brazilian-made cars were
designed to run on ethanol. The biofuel program
almost collapsed during the 1990s when the price ofoil was low, offshore oil discoveries weakened political support for biofuels, and high sugar prices
strained the subsidy program and diverted sugarcane
to the world market. However, the recent crude oil
price spike along with the introduction of “flex-fuel”
cars that can use any combination of gas and ethanol
has encouraged reliance on ethanol.
In Brazil, the government no longer provides
subsidies to either the car or the sugar industry, andthe cost of producing ethanol is $1.40 a gallon (verylow compared with maize-based ethanol or edibleoil–based biodiesel), making the industry competitive
even if crude oil prices decline to $40 a barrel(Kojima and Johnson 2005).

companies, even in a consultancy capacity. In
the baseline scenario, more than 75 percent of
the increase in global production is expected
to come from OPEC member countries.
Should they decide to restrict supply, oil prices
could be sharply higher in the medium term,and demand much lower. Although such an
episode would likely be very painful, ultimately it would speed the switch into alternative energy sources (much as it did in the
1980s) and result in a significant decline in thelong-term demand for oil.

Agricultural supply
Increases in cultivated land and yields arelikely to result in strong growth in agricultural
production and declines in prices from theircurrent high levels, as has occurred during the79

G L O B A L

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2 0 0 9Box 2.8 State-owned firms and output efficiencyT

he rising share of oil reserves and global production controlled by state-owned firms has
prompted concerns about future supply. The
concerns are about:• Cartel-like behavior• The efficiency and responsiveness of state-owned
firms to economic incentives• The denial of access to multinational firms, whichhave historically been among the most efficientState-owned firms need not be less responsive or
less efficient than privately owned ones. To maximize
productivity, however, policy makers need to ensurethat government-owned or -controlled firms are notoverburdened with very high effective tax rates(including profit remittances to the state andobligations to sell oil at below-market prices) or social
mandates that limit the extent to which they are able
to invest in new technologies, infrastructure, and fields.
In some countries, such responsibilities have been
associated with disappointing results. For example,
oil production in República Bolivariana de Venezuela
has declined 19 percent since 2000, while it has beenstagnant and is now declining in Mexico; both arecountries with restrictive legislation or practice.
This contrasts with the 45 percent increase inproduction and 49 percent increase in reserves (notincluding the new Tupi field) recorded by Brazil’s
state-owned Petrobras, which has been encouraged toreinvest profits and hire foreign experts when needed.

past 50 years. However, supply growth willremain sensitive to public policy as well as toinvestments in infrastructure and research.
Furthermore, prospects are subject to significant risks, both upside (rapid technologicalchange) and downside (impacts of environment and climate change and links to oil
prices through inputs and biofuels demand).

Rising productivity and land undercultivation have boosted agricultural
production
The past half century has witnessed a steadyincrease in agricultural output, both in absolute and per capita terms. Total factor
productivity in the agricultural sector has increased by between 2.1 and 2.5 percent eachyear (Coelli and Rao 2005; Martin and Mitra
2001) over the past 20 years, with the largest
productivity gains recorded in Asia and North
America (figure 2.23).
Reflecting this strong productivity growth,most of the increase in agricultural output overthe past 40 years is attributable to increased
yields rather than to increases in the quantityof cropped land (figure 2.24). Similar gains
were observed in the livestock sector, with thequantity of meat produced per animal rising by

80

Figure 2.23 Agricultural productivity has
been rising rapidly over the past 20 years
Average, annual percentage change in agricultural TFP,
1980–2000
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
AfricaSouth
America

Asia

North
EuropeAmerica

Australasia

Source: Coelli and Rao 2005.

1.7 percent for chicken and 3.5 percent forpork between 1980 and 2005 (FAO 2006).
Growth in productivity was responsible forhalf of the increase in output since 1960 in
China and India and between 30 and 40 percent of the increase in other East Asian countries (World Bank 2008). These productivity
improvements enabled a decline in the share oflabor force employed in agriculture (even as

T H EC O M M O D I T Y

B O O M :L O N G E R - T E R M

Figure 2.24 For key crops, most of theincrease in output was due to increased
yield, not increased area planted

Figure 2.25 Yield growth has decelerated
recently

Contribution to average annual increase in output, 1965–2008

4.0

5.0

Annual % change in yields, 1965–99, 2000–08

3.5

4.0

3.0

Area growth

1965–1999

2.5
3.0

P R O S P E C T S

Yield growth

2000–2008

2.0
1.5

2.0

1.0
1.0

0.5
0.0

0.0

Wheat

Rice

Maize

Soybeans

CottonSource: World Bank calculations based on U.S. Department ofAgriculture data.

production and population increased) and a
25 percent increase in the average caloric per
capita consumption in developing countries
during the past 30 years.27
Among developing countries, crop productivity increases (which control for increases in
inputs such as capital and labor) have been
driven mainly by the expansion of irrigation,
improved seed varieties, and increased use offertilizer. Worldwide, the area devoted to improved varieties has been expanding continuously. In 2000, high-yielding grain varieties
were used on 90 percent of planted area inSouth and East Asia, up from 10 percent in1970 (World Bank 2007b). The use of improved varieties is expanding in all regions, including Sub-Saharan Africa, where it now represents almost one-quarter of cropped land.
Fertilizer use is also up. In developing
countries it has risen from only 10 percent of
global use in the 1960s to 77 percent now(FAO 2008). However, fertilizer use in subSaharan Africa is minimal, accounting for lessthan 3 percent of global use versus a 40 percent share in East Asia.
Most recently, yield growth has declined
for some commodities, notably wheat, rice,and soybeans (figure 2.25). While such weakening in yield gains has been attributed to

Wheat

Rice

Maize

Soybeans

CottonSource: World Bank calculations based on U.S. Department ofAgriculture data.

exhaustion of the gains that came from the introduction of green revolution technologies,
persistently low commodity prices have also
played a role. Yields gains in other commodities have accelerated because of greater use ofgenetically modified varieties, which boosted
yields in cotton in China and India by 19 and26 percent, respectively (World Bank 2007b).
In addition, maize yields have benefited fromthe more extensive use of techniques madeeconomically profitable by high prices.
The recent slowing of productivity gains
and the spike in food prices have raised concerns about long-term output trends. Fears of afood shortage over the long term are unwarranted, however, given the enormous potential
for increasing agricultural output through cultivating unused land and increases in yields.
Although much of the best agriculturalland is already in use, significant opportunities
for increasing output remain simply by increasing the amount of land under cultivation.
About 12 percent of arable land worldwide
that is not currently forested could be brought
into agricultural production relatively easily(Thompson 2008). Considerable amounts ofarable and unforested land in Africa could be
brought into production assuming appropriate infrastructure were put into place, while in81

P R O S P E C T S

2 0 0 9Brazil about 180 million arable hectares thatare currently used as pasture could eventually
be brought into food crops. Sizable amounts
of unused or underutilized land also exist in
Ukraine and Russia.28
Another source of additional farmland is
the 18 million hectares in the United States andEurope that have been set aside to reduce supply and keep producer prices high (Normila,
Effland, and Young 2004). Recent changes to
the Common Agricultural Policy have authorized European farmers to use about half ofthat land, which could see the amount of land
applied to agriculture in Europe rise by 3.5
percent this year. Similarly, the United States
recently released 1.5 million acres of the land
fallowed by its conservation program.
However, the new land is less productive
than existing land and will be more costly to
exploit, especially in an environment of highprices for energy and equipment. Furthermore, the expansion of new land (especially in
Africa) will require large investments in infrastructure and likely will take decades to expand significantly.
These calculations do not include land thatis currently forested but that is suitable forrainfed crop production. Such lands exceed by
one and one-half times the total currently used
for agriculture (figure 2.26). Bringing all of
this land into crop production is probably neither desirable nor likely, but its existencemeans that the agricultural supply potential of
the planet is far from exhausted.

Figure 2.26 The stock of unused but potentially arable land is enormous
Millions of hectares of arable rain-fed cropland
1,200

1,000
Currently unused
800

600

400
Already in use
200

0

ig
h
co -inco
Ea unt me
st riesAsia
Pa an
Eu cific d
C ro
en p
tra e
a
L lA nan ati sia dd nAC mM arib eriiddl bea ca
N eE n
or as
th t
Af an
ric d
So a
ut
Su
h
bAs
Sa
ia
ha
ra
n
Af
ric
a

E C O N O M I CH

G L O B A L

Source: Food and Agriculture Organization.

for extending the same kind of gains to otherregions, particularly Sub-Saharan Africa andmany countries in Europe and Central Asia,
that have adopted these techniques less extensively (table 2.13).29 However, such expansion
will require policies to encourage research andTable 2.12 Potential gains from extending
the green revolution remain large
Potential
gain

RegionTechnological gains are likely to drive
continued increases in yields
Much of the increase in agricultural productivity over the past 50 years came about throughoften scientifically simple improvements inagricultural technique, including increased useof irrigation, fertilizers, and commercially
optimized seeds. The adoption of these techniques in the developing world is most advanced in Asia, and its impact on yields is evident in the very strong productivity growth
enjoyed by the region over the past half century (table 2.12). Considerable potential exists

82

Actualproduction

Potential Poential
production
gain(Millions of metric tons)

High income
East Asia andthe Pacific
Europe andCentral Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-SaharanAfricaTotal
Source: World Bank.

(Percentofcurrent
production)

423

440

17

3.9

501

508

7

1.4

130

191

60

46.5

140

161

21

15.0

50
250

57
259

7
9

14.3
3.7

56
1,551

81
1,697

25
146

43.9
9.4

T H E

Table 2.13 With some exceptions, yield
growth for key agricultural commodities
has been highest in South and East Asia
Category

Wheat

Rice

Maize

Soybeans

Cotton(Annual percent change in yields, 1965–2006)

World
Income level
High income
Middle income
Low income
RegionEast Asia andthe Pacific
Europe andCentral Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa

2.0

1.7

1.8

1.5

1.7

1.6
2.0
2.6

0.9
1.9
2.0

1.6
2.6
1.1

1.3
2.8
1.4

1.6
2.3
3.1

3.8

1.8

2.9

1.9

2.7

0.1

0.0

0.8

0.1

0.7

2.0

2.5

2.6

1.3

2.1

2.5
2.6
2.2

1.2
2.1
0.7

2.7
1.6
0.7

3.0
1.5
3.2

1.2
3.1
1.6

Source: World Bank calculations based on U.S. Departmentof Agriculture data.

development (R&D) and extension directedparticularly at small-holders. If these countries
were to adopt more intensive techniques likethose used in Asia and elsewhere, global production of cereals could be increased by asmuch as 9.4 percent, enough to meet several
years’ worth of increasing global demand.
Based on similar observations, the FAO in
its most recent long-term forecasting exercise
expects global agricultural production to riseby 1.5 percent a year for the next three
decades, somewhat slower than over the past
50 years but still significantly faster than projected population growth.

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productivity gains and to ensuring that suchgains benefit the poor. About 95 percent ofdeveloping-country R&D expenditures in agriculture is publicly funded. As a result, thisR&D is mainly dependent on administrativedecisions, which may or may not respond tomarket conditions. Therefore, it is imperativethat efforts to increase food production in
low-income countries should be part of acomprehensive effort that includes investment
in R&D as well as dissemination efforts.30
Notwithstanding the swings in the prices ofagricultural products, agricultural R&D has
remained remarkably stable as a share of agricultural value added, at about 0.85 percent between 1981 and 2000. Moreover, developing
countries are spending much less on R&D
than are high-income countries, both in absolute terms and as a share of agricultural GDP(figure 2.27).
Recent advances in biotechnology may offer
developing countries additional improvements
in yields through the introduction of new plantvarieties with heightened resistance to drought,
rain, diseases, and pestilence—characteristics

Figure 2.27 Developing countries spend lesson agricultural R&D than high-income
countries
R&D spending as a share of agricultural GDP
2.5

2.0

1.5

Of course, the long-term supply prospects for
agricultural commodities are far from certain.
Past productivity gains are an imperfect indicator of what might be expected in the future.
Moreover, a number of looming issues in the
global economy could affect supply conditionsin important ways.
Public investment in infrastructure and
R&D will be critical to realizing potential

1.0

1991
1981

2000

0.5

0.0

W
Su
or
ld
bSa
ha
Af ra
As
ric n
ia
a
an
d
Pa
W
ci
es
fic
t
N Afr
or ic
th a
a
L A n
an ati fric dd nA a
C m
ar e
ib ri
b ca
D ean
ev
co eloun pint
H ries g
ig
hi
co nc
un om
tri e
es

Prospects will depend on a number of
uncertain factors

Source: Pardey, Alston, and Jones 2008.

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2 0 0 9Box 2.9 Genetically modified crops—the next green
revolution?

The most important recent technological breakthrough in agriculture has been the developmentof genetically modified (GM) crops. These crops tend
to be more disease resistant than traditional varieties
and lower cost because of increased yields and theneed for fewer pesticides.
Originally developed in the United States, they
have spread to many countries, including many inthe developing world. In 2006, farmers in 22 countries planted GM seeds on 100 million hectares,
corresponding to about 8 percent of global crop area
(World Bank 2007b). Although GM crops
were initially taken up by commercial farming,
increasingly small farmers are now using thetechnology.
Yet GM crops have not been adopted widely indeveloping countries despite considerable potential incrops, such as bananas, that suffer large losses from
disease. This lack of uptake results partly from concerns over environmental and food safety risks andpartly from private producers of these seeds thatare unwilling to allow them to be distributed incountries where they are unable to enforce theirproperty rights.
Some countries (such as China) have gotten aroundthis problem by developing their own varieties in public research agencies that they make available to smallholders. Other countries (such as Burkina Faso) haveentered into agreements with private companies thatallow them to develop GM seeds to be used by smallholders under a general licensing agreement.
The current generation of GM technology hasconcentrated on internalizing resistance to diseases
and pests. Research in the pipeline, however,focuses on developing varieties with other characteristics such as increased tolerance to drought,
wetness, and temperature, as well as slowing
product deterioration. As a result, whereas thefirst generation of GM crops was tailored to theagriculture of the developed world, the second
generation may be better suited to resolving thekinds of problems found in the production systems

that might be especially desirable during a period of climate change. However, like the chemical-based pesticides and fertilizers that helped
generate substantial improvements to yields
during the green revolution, they may also
carry with them hidden risks such as crossplant genetic contamination and potential
health impacts because of unexpected interactions with human biology. Transparent andcost-effective regulatory systems that inspire
public confidence will be needed to evaluate
risks and benefits on a case-by-case basis.
Moreover, the diffusion of these innovations into developing countries has been uneven, partly because of the high cost of theseseeds and their incompatibility with traditional
agricultural methods and partly because of theunwillingness of seed companies to market
them into countries with weak regulatory
frameworks and intellectual property regimes(box 2.9).

84

In the long term, climate change andwater scarcity could have significant
impacts on yields
Global temperatures are expected to rise by
0.4 degrees Celsius between now and 2030.
This could lead to an overall decline in agricultural productivity of between 1 and 10 percent by 2030 (compared with a counterfactual
where average global temperatures remained
stable), with India, Sub-Saharan Africa, andparts of Latin America being most affected(see next section).
Over the longer term, the impacts of climate change could be much more serious,with agricultural productivity in many developing regions, notably Africa, potentiallydeclining by as much as 25 percent as compared with a baseline of temperatures remaining stable at their 2030 levels (Cline 2007).
Sustainable water supply forms anotherlonger-term risk facing future agricultural

T H E

supply. About 85 percent of water use indeveloping countries goes to agriculture, withless than one-fifth of the cultivated area in developing countries producing two-fifths of thevalue of agricultural output (World Bank
2007b). Already 15–35 percent of water withdrawals worldwide are not sustainable, in thesense that the amount being withdrawn fromaquifers or rivers exceeds the rate at which thesource is naturally resupplied. Perhaps themost notable example of unsustainable use
was the rapid expansion of cotton productionin the Aral Sea basin, which has resulted in thedisappearance of 90 percent of the sea’s surface area and a broadly based environmental
disaster. Improving water management will require countries to take more responsibility forshared water resources, ensuring that they are
priced appropriately and that adequate water
management institutions are put in place toprevent a recurrence.

ProjectionsAs anyone following commodity markets
over the recent past can attest, forecasting
future demand, supply, and prices in commodity markets is—at best—a hazardous undertaking. While some commodities, especiallyextracted commodities such as oil and metals,
may become more scarce in coming decades,
there is little likelihood of a serious shortfall in
supply. Nevertheless, the overall balance between demand and supply is very uncertain.
It will depend on a wide range of factors,
including climate change, productivity developments in commodity supply and commodity
demand markets, GDP and population growth,and the policy environment. The remainder ofthis chapter attempts to quantify the range ofpossible outcomes in commodity markets.

Agricultural prices are likely to decline
over the long term
As discussed in chapter 1, agricultural prices
are forecast to decline over the next two years
but remain well above the levels of the first halfof this decade. While the long-term outlook for

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agricultural prices is particularly uncertain, thisdecline is expected to continue through theforecast period.
As outlined earlier, the growth in demand
for agricultural products is expected to be
somewhat weaker in the next several decades
because of slower population growth and thelimited impact of higher incomes on fooddemand. On the supply side, the availabilityof additional land and further productivity
improvements should enable production tokeep pace with demand even as the agricultural sector continues to release labor to workin other parts of the global economy.
Based on long-term forecasts of populationand incomes and a continuation of the historical experience of rising productivity, annual demand and supply are projected to grow by
about 1.7 percent on average between 2008 and
2030. This would imply a continued decline in
agricultural prices of about 0.7 percent a year
relative to manufacturing prices and the share of
the unskilled labor force working in agriculture
declines by 6 percentage points (table 2.14).
One particularly difficult issue in the longterm forecasts for agricultural production andprices concerns the impact of climate change.
Human-induced global warming has begun tochange growing conditions around the world,
particularly in developing countries. In many
countries, and for many crops, ideal growing
temperatures have been surpassed, stressing the
growth of plants. Perhaps more significantly,
more-extreme water-related events are occurring, including more periods of persistent
droughts, drier soils from higher temperatures,changing patterns of rainfall (for example themonsoon arriving earlier or later), and more severe rainfall falling in shorter periods. These climate events can reduce immediate production
and impair agricultural development, as poor
farmers faced with drought may be forced tosell or eat animals, while severe storms damage
other types of capital such as irrigation canals.
Forecasts of the rise in temperature and theimpact on agriculture over the next two
decades are extremely uncertain. Lobell andothers (2008) anticipate that southern Africa,

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2 0 0 9

Table 2.14 Agricultural sector simulation results, 2005–30
Results in 2030 by scenario

Baseline

Total factor productivitya
Developing countries
High-income countries
Outputa
Pricesa
Employment (unskilled in develoing countries)a
Change in real incomeb

2.1
2.1
1.7
0.7
6.0

I.
Globalproductivity slowdown

II.
Developingcountry slowdown

III.
Strong demandfor biofuels

1.2
1.2
1.9
0.3
4.8
3.4

1.2
2.1
1.9
0.1
5.3
2.3

2.1
2.1
2.4
0.5
5.4
1.8

Source: World Bank ENVISAGE model.
a. Change in share of total employment between 2005 and 2030.
b. Percent of base income.

South Asia, and parts of Latin America will
rank among the hardest-hit areas, with maize
production in southern Africa, for example,
potentially falling as much as 30 percent
below what it would have been without climate change by 2030.
Our base case in table 2.14 assumes significant damage from climate change over thelong run. However, over the projection period
2030, the impacts are relatively modest. To
date, global temperatures have risen 0.8° C
since 1900 and are projected to rise a further
0.4° C by 2030 (Cline 2007). Scaling Cline’s
2080 estimates of damage to agriculture by
the estimated temperature change in 2030
leads to an overall decline in agricultural productivity of between 1 and 10 percent by 2030
(compared with a future where average global
temperatures remain stable), with Canada andEurope least affected and India, Sub-SaharanAfrica, and parts of Latin America most affected.31 Were there to be no climate change
between now and 2030, global agricultural
productivity would be nearly 4 percent higher,
and the world price of food 5.3 percent lower.
These projections are subject to other important uncertainties. In particular, the projected productivity gains are contingent onpolicies being put in place that permit productivity gains to continue rising as they have inthe recent past. The policies include the removal of trade distortions, progress to limit
the increase in carbon emissions, construction

86

of infrastructure, and R&D investments in developing countries with lagging productivity.
As shown in Scenario I, should global agricultural productivity rise by only 1.2 percent a
year on average instead of the 2.1 percent projected in the baseline, then prices, rather thandeclining, can be expected to rise by as much as
0.3 percent a year relative to manufactures—reversing the trend decline of the past 100 years.
Reduced productivity includes increasing thequantity of cereal required to produce meat
and as a result total agricultural output rises,
even though final consumption declines by
0.3 percent per annum. Final demand does notdecline by more, because lower productivity ispartially compensated for by increased inputs,
including a 1.2 percentage point increase in theshare of agricultural workers in the labor force
compared with the base case. Overall, by theend of the projection period, real incomes in developing countries would be lower by about
3.4 percent compared with the baseline.
Consistent with Scenario II, should theweaker productivity be limited to developing
countries, in part because climate change is expected to affect them more adversely and perhaps because policy fails to step up infrastructure, R&D, and dissemination of investments,
the overall impact in markets would be attenuated somewhat. Prices would fall by only
0.17 percent a year (compared with a declineof 0.7 percent a year in the base case), andagricultural sector employment would rise

T H Eslightly compared with the baseline. But developing countries, especially those whose populations continue to grow relatively rapidly
would become much more dependent on highincome countries for their food supply.
Scenario III examines the potential impactof biofuels production on food prices. Whilebiofuels have made a major contribution to
the rise in food prices over the past two years,
their impact in the future is difficult to estimate. The decline in oil prices has already contributed to the decline in food prices via its influence on biofuel demand for food crops.
Should oil prices remain moderate as projected (see below), the influence of biofuels onfood prices should also stabilize. If technological progress improves the attractiveness of
nonfood biofuels inputs, the link between oil
and food prices may be broken. Alternatively,
biofuels could have a significant impact onfood prices if oil prices remain high or the costof biofuels production declines.
The simulation reported in table 2.14 explores the implications of a permanent increasein the rate of growth of demand for food products as source material for biofuels. Under thisC O M M O D I T Y

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scenario, global demand is expected to growtwice as fast as it does in the baseline. In thisinstance, agricultural employment increases by
0.6 percent of the labor force, output of othergrains (including maize) rises by 350 percent,but food prices increase by much less, due tosubstitution away from these products.

Over the long run oil prices are expected
to stabilize (in real terms) at around $75
As described in chapter 1, despite rather recent
volatility, oil prices are not expected to fallmuch below $60 in the medium term. Oil demand should pick up as the global economy recovers, but supply conditions should also haverecovered, enabling the real price of oil to rise
gradually to around the $75 range. This forecast assumes that, in the absence of policychanges, demand for energy will continue torise faster than GDP. The actual rate ofincrease of demand and how it is met will
depend critically on policies, technologicalchange, and the level of reserves.
The simulations presented in table 2.15 illustrate the potential impacts of four alternative scenarios.

Table 2.15 Energy sector simulation results, 2005–30
Results in 2030 by scenario

2004

Energy demand (average annual percent growth)
Coal
Oil
Natural gas (excluding distribution)
Total

BaselineI.
High
demandII.
Carbontax

III.
Alternative
energyIV.
Weak oil
supply

4.9
1.6
1.3
3.0

5.7
1.8
1.8
3.5

2.2
1.6
1.0
1.7

2.5
1.4
0.2
1.6

5.4
0.2
1.3
2.9

Prices ($ per ton of oil equivalent)
Coal
Crude oil
Natural gas

59
256
157

60
428
288

62
475
306

55
420
281

54
219
231

60
760
296

Production level
Coal (metric tons)
Crude oil (mbd)
Natural gas (1e12 BTU)

5,680
75
59,435

18,312
113
82,951

21,907
117
93,105

10,184
112
76,020

10,185
78
56,15619,99378
84,356

Share in total energy supply (percent)Coal
OilNatural gas

33.4
47.3
19.3

53.9
33.5
12.5

57.2
30.5
12.3

37.7
46.2
16.1

42.3
45.6
12.1

63.1
23.8
13.0

Source: World Bank ENVISAGE model.

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2 0 0 9In Scenario I, energy demand rises 0.5 percent faster (3.5 percent versus 3.0 percent) thanin the baseline each year because energy-saving
technologies and conservation measures fail tocome onstream as rapidly as anticipated.32 This
results in higher prices for all forms of energy.
The higher price of energy means that global
GDP grows somewhat more slowly, with the
cumulative impact on the level of output, compared with the base case, equal to 2.7 percent
in 2030. Most of the increase in demand is concentrated in the use of coal (in absolute andpercentage terms). Relatively higher supply
elasticities for coal and gas lead to higher volume shifts for these two fuels, whereas thetighter supply of the oil markets leads to a concomitantly higher price rise for oil and a relative shift away from oil consumption.
Scenario II examines the impact of a moreconcerted effort to limit carbon emissions. In
this scenario, it is assumed that policies are put
into place beginning in 2011 that are consistent
with achieving a target concentration of 500
parts per million of carbon dioxide in the atmosphere by 2050. This implies a shadow
price of carbon of $21 per ton of CO2 in 2030
and a stock of emissions of around 11 gigatonsof carbon in 2030, a reduction of 32 percent
from the base-case level.33
Such a carbon price would lead to a significant drop in energy demand, with coal taking
the largest hit (from 4.9 percent to 2.2 percent). Coal would be most affected because it
releases the most carbon emissions per unit ofequivalent energy. But a more significant factor is the large wedge in the price of coal (perunit of energy) compared with oil and gas. In
other words, the uniform price of carbon has
a much larger percentage increase on the priceof coal than on oil and natural gas. As a corollary, the countries with the greatest coal consumption experience the largest decline inenergy demand.
Scenario III illustrates a situation where a
combination of policies to promote conservation, increase fuel efficiency, and invest in alternative sources of energy such as solar andwind power succeeds in reducing the demand88

for traditional fossil fuels. In this scenario, theglobal energy demand is lower by about thesame amount as in the carbon tax scenario, but
prices of crude oil and natural gas are much
lower. By the end of the period, coal consumption is down by 45 percent from the base case(from 4.9 percent to 2.5 percent), while natural gas and crude oil are 30 percent lower
than they are in the carbon tax scenario.
The price of various forms of energy in thelong run is little different from the baseline
scenario because the additional carbon tax induces sufficient reductions in energy demand
to lower the final price by almost as much as
the tax itself.
Finally, under Scenario IV, oil reserves deplete more quickly than in the baseline scenario,
either because current estimates of reserves
prove too optimistic or because additional technology improvements do not materialize. In this
scenario, oil supply, instead of growing at about
1 percent a year, is broadly stable, with production of about 78 mb/d in 2030. Oil prices
are about 80 percent higher and demand 32
percent lower than in the baseline, with thedifference being made up by about a 9 percent
stronger growth in consumption of coal.
The price of oil in this scenario rises toabout $122 a barrel but not higher because ofincreased supply from alternative energy
sources induced by the higher prices.
Overall, the impact on global growth in
Scenario IV would be limited. By 2030 global
GDP would be only 1.4 percentage points
below the level in the base case. The bulk ofthis decline would be felt by the middleincome developing countries, where energy
intensities are highest.
Taken together, these scenarios illustrate
the considerable uncertainty surrounding theassumptions of the base case. Nevertheless,even the pessimistic scenarios have a limited
impact on global welfare. Over the long run,economies have considerable potential to adjust to higher oil prices through switching toother energy sources and conservation, thus
moderating the impact of higher oil prices on
growth and poverty reduction.

T H E

Conclusions

The almost unprecedented duration andsize of the recent commodity price boom
gave the impression, at least as can be judged
by the popular press, that the world is runningout of natural resources. This is not true. A
combination of circumstances have shaped thisboom: an unusually long period of abovepotential growth among developing countries;
a long period of low oil and metals prices thateroded supply capacity, in part driven by the
expansion of net oil exports from the transition economies of Eastern Europe once domestic prices increased to world levels; the depreciation of the dollar; the increase in subsidies forbiofuels that diverted resources from growing
crops for food; declines in grain stocks; increasing demand from developing-country consumersof oil and raw materials; and continued global
economic expansion in the face of rising commodity prices. As the rapid decline of commodity prices since mid-2008 attests, the current
boom is best understood as yet another cycle ina long history of commodity price cycles.
This does not mean that commodity prices
are necessarily going to fall all the way back to
the levels of the 1990s, nor are they likely toreturn to recent heights when demand recovers. In the oil and metals markets, it will taketime to build the machines and train the engineers required to find and exploit new resources, and this kind of exploration will require that oil prices be maintained at around$75 a barrel in real terms.
However, in the long run, it will be difficult
to sustain very high oil prices (in excess of$100 a barrel) for a lengthy period, because alternative sources of oil (such as Canadian oilsands and more-expensive offshore sources)
and substitutes for oil (such as solar, wind, andbiofuels) would become profitable, while thepotential for reductions in demand from conservation remain large. On average, the weakening of global demand and increased supply
have caused metal prices to fall by more than
40 percent from their recent peaks. Nevertheless, they remain 2.5 times higher than they
were in the 1990s and even though they are

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projected to decline a further 20-odd percent(see chapter 1) in 2009, these prices are highenough to ensure that sufficient further supply
will be forthcoming over the medium term. In
the longer run, metals demand should slow as
Chinese metal intensities first stabilize andthen fall, both because of lower investment
rates and because of a higher share of services
in Chinese GDP.
In agriculture, slower population growth
should slow demand for food, while productivity growth should be sufficient to ensure future
supply at the global level. However, prospects
for individual countries are less clear. Yields
have been declining among many of the countries that had the strongest gains from theGreen Revolution, unless they step up investments in infrastructure and R&D and remain
open to new technologies, agricultural productivity growth in developing countries may
decline. Moreover, for those countries withrelatively high population growth, many ofwhich are in Africa, failure to make investments to boost agricultural productivity may
see them cease to be self-sufficient and forced
to import increasingly expensive food fromhigh-income countries where agricultural productivity continues to rise much faster thanthe population.
Central to these forecasts, and particularly
uncertain, are the prospects for technologicalprogress. Technology will determine the availability of oil reserves and the costs of extraction, the price levels at which different oil substitutes become profitable, the potential for
economizing on scarce oil and metals, and thelikelihood of rapid increases in crop yields.
Making assumptions for technologicalprogress 25 years in the future is a perilous undertaking. Most likely to be missed are technological surprises that enable rapid increases
in productivity. So in a sense these forecasts areconservative. But even without counting ontechnological miracles, under reasonable assumptions the supply of commodities is likely
to increase rapidly enough over the long run tomeet anticipated increases in demand at pricesthat are lower than the current levels.

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2 0 0 9Notes
1. The 1916–17 boom was associated with theFirst World War. Similarly, all three booms since 1945
have been associated with a major, though geographically confined, military conflict (Korea, Vietnam, andIraq) and heightened geopolitical uncertainty, whichtranslated into market fears about the availability ofsupplies.
2. However, real prices of domestic food commodities in developing countries increased by an additional
28 percent during the first three quarters of 2008.
3. This capacity was partly and temporarily utilized
during the time of the first Gulf war, when 5 mb/d ofcapacity was shut in Iraq and Kuwait.
4. OPEC surplus capacity typically refers to capacity that can be brought onstream within 90 days. Here,OPEC’s surplus is conservatively estimated as thatlying dormant from previously higher (though notpeak) levels.
5. Although less important than in the past, thesefirms still account for almost 50 percent of global upstream spending.
6. Upstream expenditures and the price of crude oil
are highly correlated; the correlation coefficient between
spending per barrel of oil and the price of oil is 0.95.
7. The balance of supply was made up from OPEC
natural gas liquids (1.8 mb/d); non-OPEC, non-FSU
production growth (3.1 mb/d); and rising OPEC capacity.
8. The pickup in oil demand was led by China,
where demand for electricity had outstripped supply
from public sector utilities, resulting in a spike in theprivate use of diesel oil for electrical generators.
9. Private communication with David Humphreys,
chief economist at Norilsk Nickel.
10. The contrast between inputs in metal and inputs in the agricultural sectors is noteworthy. In agriculture, the same type of machinery can be used for virtually all crops in all countries of the world. However,machinery in metals is custom-made for each mine.
11. Jatropha curcus L. is a bush or small tree used
as a hedge by farmers in developing countries because
it is not browsed by animals. It produces a fruit withhigh oil content, suitable for biodiesel production.
12. The poor harvests in Australia come against a
backdrop of an unprecedented, decade-long period of
unusually low rainfall and record-high temperatures,
which are at least partly a result of climate change.
These events have severely stressed water supplies inthe east and southwest of the country (http://www.bom.gov.au/climate/drought/drought.shtml).
13. When hoarding and real-side speculation occur
in response to expectations of a future shortfall, stocks(and prices) tend to increase in the short run (relative toa baseline where the behavior did not occur). In turn,90

this ensures that future stocks are higher and future
prices lower than they would have been otherwise. At
the same time it encourages producers to increase output, thereby accelerating a return to more normal prices.
14. In member countries of the Organisation for
Economic Co-operation and Development, high prices
induced a substantial switch away from oil and toward
coal, natural gas, and nuclear power for electricalgeneration.
15. Exceptions include nickel, which has been rising in Brazil; copper, which has been rising in India;
and aluminum, which has been rising in South Africa.
16. Although developing countries now account foralmost half of the world’s metal consumption, it should
be noted that their average per capita use of metals is
only a fraction of that in the developed economies.
17. These income levels correspond roughly to the
midpoint in the World Bank’s official range forlower-middle-income countries and close to theupper range for upper-middle-income countries.
18. At incomes of less than $1 a day (or annual per
capita income of less than $350), consumption of basic
staples such as maize, wheat, and rice tends to increase
along with income. At higher incomes, per capita
consumption of staples tends to remain stable, so thegrowth of staples consumption falls below income
growth.
19. The income elasticity for meat products exceeds
3.0 for per capita incomes below $4,500 and declines
to 2.6 for countries with incomes in excess of $25,000.
20. When oil costs $120 a barrel (as it did in early2008), wholesale gas prices would be around $3.25 agallon in the United States, and the fuel-equivalentethanol price would be $2.44 a gallon. At that price,ethanol production from maize is profitable as long as
maize prices do not exceed $245 a ton, which wasmore or less the price of maize at that time.
21. Global production from onshore sources in2004 was 54 mb/day, almost identical to the 1973 level.
22. Reserve growth refers to the increase in the estimated sizes of fields that occurs as oil and gas fields
are developed. In the United States, the world’s mostintensely explored country, reserve growth is a major
component of remaining oil and gas resources. It is hypothesized that reserve growth can occur worldwide insimilar proportions as exploration of new fields matures. Undiscovered resources, on the other hand, areresources postulated from geologic information andtheory to exist outside of known oil and gas fields(Kleitt and others 2000).
23. If all announced projects materialize, potential
capacity could reach 3.3 mb/d.
24. Concerns over the environment are likely to beanother constraint in future mining activities.

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25. Like electric cars, hydrogen-powered vehicles
allow the consumption of the power and the consumption of the propellant to be geographically separated.
For electric cars, the energy source (be it coal, nuclear,or solar) that powers the car is consumed at the powerproducing plant, whereas for hydrogen-powered cars
(as distinct from hydrogen fuel-cell cars), it is expended
in the plant that separates the hydrogen from water.
Thus a hydrogen-powered car can be considered justanother form of battery-powered car.
26. If OPEC is considered as a single producer, thenboth oil-export and oil-reserve markets are highly
concentrated (Herfindahl index of 0.53 and to 0.57,
respectively). However, if the member countries
were to act independently, the market would not be
particularly concentrated (Herfindahl index of 0.07
and 0.09, respectively).
27. Specifically, average caloric consumption in developing countries rose from 2,110 kilocalories perperson per day to 2,650 (FAO 2006, p. 3).
28. Much of the underutilized land in the former
Soviet bloc was cultivated in the Soviet era but was left
to fallow when price signals rather than command andcontrol began to determine land use decisions.
29. The potential gains in the table reflect estimatesof the increase in production that could be expected if
fertilizer production in countries in each of these regions were brought up to the 75th percentile level—roughly the level in Pakistan. In contrast with the calculations of Coelli and Rao (2005), which yieldbroadly similar results, these control for climatic conditions, income per capita, and soil conditions.
30. Investment expenditures in extractive industries
are highly correlated with the respective prices. For
example, when crude oil prices declined by 50 percent
from 1980 to 2000, investment expenditures followed
suit.
31. These estimates do not include the carbon fertilization effect (on which scientific evidence is mixed),
whereby increases in atmospheric carbon concentration enhance plant growth The simulations may beoverestimating the negative impacts. The Cline estimates have been scaled assuming linearity, but someevidence suggests that the actual damage functions are
nonlinear. These simulations may therefore overestimate damages in the short run and underestimate themin the long run.
32. The baseline scenario incorporates an increasein efficiency of energy use of 1 percent a year. This represents the culmination of new scientific advances (forexample, the use of carbon fiber materials instead of
metals); the replacement of old, more-energy-intensive
capital with new capital; and changes in behavior(for example, switching from large vehicles to smallerones).

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33. The questions regarding who should bear theburden on reducing carbon emissions are criticallyimportant but are set aside in this simulation to investigate the impact on overall demand and prices. The revenues generated by the price of carbon are assumed tobe recycled domestically with no international transfers.

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93

3
Dealing with Changing
Commodity PricesAs discussed in chapter 2, the rise in primary commodity prices between 2003
and mid-2008 was much larger and more sustained than those of earlier decades. Althoughcommodity prices have fallen sharply fromtheir recent highs, they remain well above theirlevels in the early 2000s and are projected toremain high relative to their levels in the 1990s
for a significant period of time.
The boom in commodity prices has generated dramatic transfers of income within andamong countries. While high commodity
prices have imposed a severe burden on many
consumers, they have also created significant
opportunities for producers. The short-term
macroeconomic, balance of payment, inflationary, and growth implications of thesehigher prices were discussed in chapter 1,
while long-term prospects for commodity
markets were discussed in chapter 2.
This chapter focuses on the challenges
that prolonged periods of high and then low
commodity prices pose for developing countries. In particular, it evaluates the policies
adopted by both commodity-producing
and -consuming countries during this boom,
as well as the potential role of the international community in managing the commodity
price boom to maximize the development impact and protect the most vulnerable.
The main messages arising from this analysis are:Commodity dependence need not hurt longterm growth. Indeed, high commodity prices
provide a development opportunity but only
if the proceeds are not squandered and if theright policies are adopted.
• Although commodity-dependent economies have, on average, grown more slowly
than more diversified economies, for mosteconomies dependence on commodities is
the result of slow growth, not the cause.
Several countries have achieved rapid development based on the exploitation ofnatural resources.
• To achieve the growth potentially inherent
in commodity riches, countries need to implement policies that minimize the potential disruptive effects of volatile export revenues, exchange rate appreciation that canerode the competitiveness of manufacturing, and incentives for rent seeking andcorruption.
Higher food prices, while damaging to urban
consumers, may help lower poverty in thelong run.
• Higher agricultural prices provide additional income in the rural economy, wheremore than 75 percent of the world’s poor
live. Some of this income will go directly to95

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2 0 0 9farmers, potentially helping them move beyond precarious forms of subsistence agriculture. Another part will go to raise incomes of farm workers and increasedemand for related services such as transportation, inputs, and processing.
• For these potential gains to be realized government will need to pursue policies thatinvest in infrastructure, including roads
and marketing institutions to move farm
products to markets and inputs to farmers.
Resource-dependent developing countries
have done a better job than in the past of
managing the macroeconomic consequencesof rapidly rising foreign currency earnings.
• Government spending in most countries
has responded more prudently to increased
commodity revenues than in the past. Instead of spending temporary windfall reserves, many governments have accumulated foreign reserves, and created andaugmented sovereign wealth funds. As a result, real effective exchange rates in mostresource-rich countries have appreciated byless than in the past. Finally, resourcedependent countries are less corrupt andmore transparent when compared withmore diversified economies than in thepast.
• As a result, the nonresource sectors of thesecountries are more likely to have avoided alarge deterioration in international competitiveness, and a strong procyclical cut inspending is less likely to accompany the recent decline in commodity prices. Improvements in governance may also have contributed to these developments and haveincreased the chances that revenues arebeing allocated toward projects that enhance the long-term development potentialof countries.
• Although in aggregate the story is encouraging, some countries are experiencing
strong inflationary pressures that may reduce their competitiveness and the sustain-

96

ability of growth. Others that lack a long
history of oil or mineral development havepursued less prudent policies that may havesewn the seeds of future difficulties.
High food and oil prices may have increased
the number of people living in extreme
poverty by between 130 and 150 million.
• High food and fuel prices have implied
enormous transfers in incomes between
producers and consumers. High fuel prices
have reduced real incomes in oil-importing
developing countries by some $162 billion
dollars but increased them by some $400
billion in oil exporters. With the exceptionof a few import-dependent countries, foodis mainly consumed in the same country
where it is produced. As a result, the redistributive impact of high food prices ismainly between domestic producers andamounted to some $277 billion between
January 2007 and August 2008.
• Within countries, the largest poverty impacts have been among urban populations,which have not benefited from increased
earnings to the same degree as the rural
population. Impacts were also larger incountries with fewer domestic alternatives
to internationally traded grains, whose
prices rose the most (maize, wheat, andrice).
To mitigate the poverty impacts of higher foodprices in a fiscally responsible way, countries
need to respond with targeted measures. The
record so far is mixed at best.
• Strict targeting of assistance programs is essential to reach those most affected while
limiting the strain on fiscal accounts. The
costs of fully compensating people in developing countries for higher food and fuelprices would be prohibitive both to countries and to the aid community. Costs range
between 6 and 27 percent of the GDP of individual countries.

D E A L I N G• Many policies imposed by countries so far(lower taxes, export restrictions, and pricesubsidies) have been costly and have impeded adjustment. Increased fiscal outlays
have exceeded 2 percent of GDP in many
countries. Moreover, policies designed tokeep domestic prices low have exacerbatedand prolonged high market prices by reducing incentives to increase production
and reduce consumption.
• Countries should seek to expand or create
more-targeted safety net programs. Foodsubsidy programs, fuel subsides, and tax
exemptions tend to be regressive, withmost of the benefits accruing to the nonpoor. In contrast, well-targeted schemes,
involving some form of means testing or
selection mechanisms such as geographic
targeting or a work requirement, are mostsuccessful in reducing costs and concentrating benefits among the poor.
Some modest steps have been taken, but theinternational community can do much more
to mitigate the impact of high prices and reduce the likelihood of further spikes and newcommodity booms.
• Given the magnitude of the problem, international efforts to assist the poor need tofocus on the most vulnerable. One approach would be to direct aid to assisting
the extreme poor in IDA-eligible countries(countries whose poverty and lack of accessto market-based finance make them eligible
for concessional lending and grants fromthe World Bank Group). The cost of compensating the poor in these countries forthe rise in food prices between January2005 and December 2007 would be about$2.4 billion.
• International agreement is needed to place
more effective restrictions on the use of export bans, which have become too common. These bans have increased global
food price volatility and reduced confidence in the reliability of world food mar-W I T HC H A N G I N G

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P R I C E S

kets, with potentially long-term impacts onfood policies.
• Efforts to improve information about andcoordination of global grain stocks could
reduce the probability of another food crisis. Similarly, the effectiveness of humanitarian aid would be enhanced if the World
Food Programme (WFP) were provided
with a stable source of financing and a lineof credit that would allow it to respondrapidly to emergencies.
• Biofuels policies that subsidize production,
impose high tariffs, and mandate consumption need to be reconsidered in light of theirimpact on food prices and their tradedistorting effects. Such policies have led to
rapid expansion of biofuels production
from food crops, such as maize and vegetable oils, and have contributed to higher
food prices as well as to environmental
degradation. These policies have also reduced opportunities for lower-cost developing-country producers to expand production and exports.
• A successful conclusion to the World Trade
Organization’s Doha Round will not reduce food prices in the near term, but it
does offer the prospect of greater disciplinein agriculture and more-rapid income
growth in developing countries.
The remainder of this chapter is organized asfollows. The next section considers the perspective of commodity-producing countries, evaluating the extent to which their policies have succeeded in coping with volatility from
commodity prices, thus avoiding some of thepitfalls that have typically caused such countries
to grow less quickly than resource-dependent
countries. The following sections examine theboom from the perspective of consumers, focusing on the impact of high prices on the poor andthe effectiveness of the antipoverty measures
imposed and their impact on long-term adjustment. The chapter then considers the international response to the rise in food prices and setsout some concluding remarks.

97

2 0 0 9

Commodity dependence andgrowthE

conomic dependence on primary commodities has been long associated withslow growth in development.1 While commodity booms are often associated with a pickup in
growth, countries heavily dependent on the exports of commodities have slower growth overthe long term than those with more diversified
exports (the so-called resource curse). This section argues that this relationship should not beinterpreted as causal and is, in fact, far from
inevitable. Provided the right policies are
adopted, the resource-rich developing countries have much to benefit from a period ofhigh commodity prices.
The idea that there exists a resource curse
derives from the observation that countries
dependent on primary commodities for theirexport revenues have tended, on average, togrow more slowly than more-diversified exporters (figure 3.1). Developing countries,
which in 1980 derived more than 70 percentof their export revenues from nonfuel primarycommodities, increased their per capita GDP
by only 0.4 percent a year between 1980 and

1.2
1.0

0.6
0.4
0.2
0.0
Excluding conflict countries

Source: World Bank.
Note: Diversified exporters include countries that depend on
fuel and nonfuel primary commodities as well exports ofmanufactures.

98

50
40
30
20
10
0
Low-income
countries

Lower-middleincome countries

Upper-middleincome countries

Source: World Bank.

Resource dependency reflects low GDP,not resource wealth0.8

All countries

60

Nonfuelprimarycommodity
exporters

Diversified exporters

1.4

70

Fuel
exporters

Average growth rate, %1.6% share of merchandise export revenues, 2006

2006, and countries that mainly exported
fuels raised their per capita GDP by 1.1 percent a year (figure 3.2). By contrast, morediversified exporters achieved per capita
growth of 1.6 percent a year. The same relationship holds if countries severely affected byconflict are excluded, although the nonfuelprimary commodity exporters fare somewhat
better in this case.
Moreover, low-income countries tend to
be more dependent on nonfuel commodity
exports than high-income countries (see figure 3.2). More than 60 percent of the exportsof low-income countries derives from nonfuelcommodities compared with about 33 percent
for high-income countries.

Figure 3.1 More-diversified developing
countries grew more rapidly from1980 to 2006
1.8

Figure 3.2 Poorer countries are more
dependent on nonfuel primary commodities

Other

P R O S P E C T S

Nonfuel commodities

E C O N O M I C

Fuels

G L O B A L

However, resource dependence is not the sameas resource richness. Most countries that are
resource dependent (measured as the share of
non-oil primary commodities in exports) actually have relatively poor resource endowments(measured as per capita income derived from
non-oil primary commodities). Conversely,
many countries that are rich in resources have
low resource dependencies because, in addition to having ample resources and large

D E A L I N GTable 3.1 Non-oil or resource-richcountries have higher per capita incomesthan resource-dependent countries, 2006

Real GDPper capita(US$)

Share ofnonfuelprimarycommodities
in exports(percent)

Net nonfuelprimarycommodity
exports
per capita(US$)

Top countries dependent on non-oil primary commodities
1 Gambia, The
2 Uganda
3 Cuba4 Ethiopia
5 Niger
6 Malawi
7 Jamaica
8 Rwanda
9 Chile10 Burundi

320
275
—
146
168
145
3,357
262
5,896
102

97
91
85
84
83
82
81
80
79
79

⫺81
17
49
6
3
24
276
⫺4
2,596
⫺4

Top countries rich in non-oil primary commodities
1 New Zealand
2 Chile3 Australia
4 Netherlands
5 Norway
6 Ireland
7 Denmark8 Canada
9 Estonia
10 Kazakhstan

15,1995,896
23,262
25,67841,44630,73632,48425,894
6,938
2,166

62
79
48
16
14
10
23
17
26
28

2,597
2,596
2,389
1,447
1,436
1,265
1,142
1,082
675
533

Source: World Bank.
Note: — ⫽ Not available.

resource sectors, they also have thriving industrial and service sectors. Oil-exporting
countries are excluded from this comparison
because most of them are both resource richand resource dependent.
Resource dependency primarily reflects low
levels of GDP, not resource richness. While
the top 20 non-oil resource-dependent countries have an average annual per capita incomeof just $1,099, the annual income of the top
20 resource-rich countries is 11 times higher(table 3.1). These trends are reflected more
broadly. Even when oil exporters are includedin the mix, low-income countries have thehighest dependence on primary commodities,
but the lowest level of primary commodity exports per capita, and the inverse is true forrich countries (figure 3.3).
Considerable efforts have been made to determine if, after controlling for other determi-

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P R I C E S

Figure 3.3 On average, poor countries are
dependent on commodities but relatively
resource poor
Value of per capita primarycommodities in exports(US$ thousands)

Share of primarycommodities in total
merchandise exports (%)

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0
Primary exports per capita(left axis)

Primary exports/exports(right axis)

Low-income
countries

Lower-middle-income
countries

High-income
countries

Upper-middle-income
countries

Source: World Bank.

nants of growth, dependence on primary commodities is associated with slower growth.
Several authors have found a negative relationship in cross-section regressions between
natural resource abundance and growth.2
Others find that natural resource abundance is
not responsible for the slow growth of resource-rich developing countries (Manzano
and Rigobon 2007), and that there is a positive relationship between resource abundanceand both short-term (Collier and Goderis2007) and long-term growth (Lederman andMaloney 2007) after accounting for othergrowth determinants.

Commodity dependence may, but neednot, result in slower growth
While the causality behind these correlations
remains unresolved in the literature, there isconsensus about the channels through which
commodity dependence could contribute to
weaker growth. These include:• A tendency for significant fluctuations inexport revenues, often exacerbated by99

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2 0 0 9Box 3.1 The impact of severe shocks on economic
progressAs discussed in chapter 2, at the national level therevenues from commodities tend to be much
more volatile year to year than at the global level,
and they are more volatile than manufactures. As aresult, countries for whom primary commodities represent a large share of exports experience higher levels of GDP volatility than countries with more diversified exports.a Indeed, export revenues, the realexchange rate, and per capita output were all morevolatile over the past 25 years among those developing countries where primary commodity exports
represented more than 70 percent of total exports(box figure).b
High volatility in these annual data reflects
pronounced economic cycles that can have adverse
implications for growth and development.c Sharpbooms and busts can lead to unemployment and underutilized capital during downswings and to bottlenecks during upswings. High levels of uncertainty
concerning future prices and demand can depress

Box figure 3.1 The impact of severe shocks
on economic progress
Economies dependent on primary commodities experience
more volatility
Standard deviation of percentage change
40
Fuel exporters
35
30
Nonfuel primary exporters
25
Diversified exporters
20
15
10
5
0
Export revenues

Real exchangerate

GDP per capita

Source: World Bank.
Note: Volatility is defined as the standard deviation of percentagechanges over time (annual data). Commodity concentration
measured in 1980. Excludes countries with population ofless than 1 million.

100

the average level of investment over the cycle. Higher
risks may bias lenders toward shorter maturities,
further raising the risks of investment. And volatilityof consumption reduces welfare directly if mostconsumers are risk averse.
For countries with the same level of primary commodity dependence, less-developed economies tend
to be more sensitive to such swings because they lackthe means of coping with volatility. In countries with
more-developed financial systems, individuals canborrow to smooth consumption over the cycle, firms
can borrow to sustain operations in bad times, andgovernments can run countercyclical fiscal policy to
reduce the macroeconomic implications of adverse
shocks. By contrast, in less-developed countries with
underdeveloped domestic financial systems and weak
access to international finance, these adjustment
mechanisms tend to function poorly. As a result, theimpact of volatility on long-term growth and welfare
is more severe.
Moreover, poor households suffer most from adverse shocks, because they tend to have lower levelsof savings, have limited access to credit (and interest
rates from informal lenders tend to be high), andmust therefore respond to negative shocks by cutting
into already low levels of consumption. In addition,
if workers lose labor experience and connections andchildren leave school, these permanent losses inhuman capital may increase long-term poverty(Ocampo 2003).
Whether month-to-month or day-to-day volatility
has similarly deleterious economic impacts is lessclear. High-frequency volatility tends to increasetransaction costs and reduce activity levels, but it isless likely to cause the kind of cycles in investment
behavior and economic activity described above.
Moreover, high-frequency volatility is easier to overcome through traditional financing mechanisms,
such as short-term credit and inventory adjustments.
An illustration of the difference between economic cycles and measured volatility based on more
frequent data is provided by the recent boom incommodity prices. While this was the longest andlargest commodity price boom in the past 100 years(see chapter 2), price volatility, as measured bychanges in monthly data, increased only modestlyD E A L I N G

until 2008. Indeed, only some of the commodities
that have experienced a sharp rise in price experienced greater volatility during the price rise thanthey did previously (box table). Volatility did
increase for almost all of the principal commodities
in 2008, reflecting the rise in prices earlier in theyear and their subsequent decline.
Price volatility has not increased
systematicallyAverage absolute monthly percent price change

2000–03
2004–072008

2000–06
2007
2008

Crude oil

CopperAluminum

Coal

8.4
6.9
7.6

3.4
6.2
6.3

3.1
4.6
6.5

4.0
5.7
15.0

Wheat

Corn

Rice

4.5
7.9
9.5

5.0
6.1
9.4

2.9
1.8
18.3

Source: World Bank.
Note: Volatility is defined as the average of the absolute valueof the month-to-month percentage change in detrended prices.

procyclical government spending, to accentuate economic cycles, tending to depress
growth over the medium term (box 3.1);• A tendency for exchange rate appreciations
associated with commodity booms to
weaken the competitiveness of the noncommodity sectors of the economy (theso-called Dutch disease); and• A tendency for high commodity revenues
to incite individuals to attempt to appropriate the wealth generated by the resource
without investing in productivity or valueenhancing activities (rent-seeking behavior)or, in the worst cases, to engage in outright
corruption.
Of course, abundant commodity wealth, ora large rise in the value of commodities stemming from higher prices, can also contributeto a country’s development, if the implied income generated is fruitfully invested—for example, in infrastructure, education, and healthor in additional productive capacity when the

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a. See Turnovsky and Chattopadhyay (1998) and Van der Ploeg
and Poelhekke (2007) among many others. Cashin, Cespedes,
and Sahay (2002) show that volatile commodity prices increased the volatility of real exchange rates for 58 countries
over 1980–2002.
b. The more diversified exporters include countries that dependon both fuel and nonfuel primary commodities, as well as exporters of manufactures.
c. In cross-country regressions, Aghion and others (2005) findthat real exchange rate volatility lowered growth performancein developing countries over 1960–2000. Fatas and Mihov(2005) find that variability in inflation and government spending were related to lower growth in a cross-section of 91 countries. Aizenman and Marion (1996) find a negative relationshipbetween volatility and private (but not total) investment, andBleaney (1996) and Ramey and Ramey (1995) find a negative
relationship between volatility and growth but not between
volatility and investment. Empirically, there is a relatively robust negative relationship between high volatility of growth
rates and the level of development (Koren and Tenreyro 2003).
However, the direction of causation is unclear. Rather than suggesting that volatility causes underdevelopment, the greater dependence of poorer countries on relatively volatile primarycommodities may explain the correlation.

rents accrue to the private sector. Althoughmore easily said than done, when government
controls the resource rents, care must be exercised to avoid forcing the economy down an
artificial capital-intensive path instead ofusing the commodity rents to exploit the economy’s comparative advantage, which could bebased on a combination of commodities, commodity-intensive sectors, and labor-intensive
services.
What determines whether resource wealthgenerates wider development is the extent towhich the proceeds are consumed (appropriate for a permanent increase in income) or
saved (appropriate for a temporary increase);
whether they are invested in high- or lowreturn enterprises; the extent to which rents
accrue to the population at large or arechanneled through the government; andwhether they are deployed responsibly andtransparently by governments, or used tofund a bloated civil service or are even stolen
outright.

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2 0 0 9Overall, an abundance of natural resources
does not necessarily impair development andcan in fact promote it, but it does present
particular challenges that require appropriate
policies to overcome.

Managing primary commodity
booms

W

hile dependence on primary commodities does not condemn a country to slow
growth, it does require careful management ofmacroeconomic policy to reduce the impact ofvolatile export revenues (see box 3.1).
In past decades, the governments of several developing countries failed to react
appropriately to commodity price booms,
increasing public expenditures on inefficient,
import-intensive investment projects (Cashin,
Cespedes, and Sahay 2002) and borrowing
excessively—expecting export revenues to remain high for longer than was the case.3 As aresult, many of them faced severe economic
difficulties when prices declined. For example,
the seeds for the Latin American debt crisis of
the 1980s were sown by the accumulation ofdebts by countries during a period of highcommodity prices. The payments for theseloans proved to be unsustainable when interest rates rose and commodity prices declined,
resulting in years of slow growth or economic
stagnation (Manzano and Rigobon 2007).

Commodity revenues
and fiscal spending
The tendency for a temporary rise in revenues
to be reflected in an unsustainable rise in government spending has historically been an important explanation for the poor long-term
growth performance of commodity-dependent
developing countries. Countries that are dependent on point resources—oil and metals—are
particularly vulnerable because the governmentis the direct recipient of a large share of boom
revenues, either through ownership of the resource or through taxing the rents accruing toa limited number of private firms. By contrast,

102

government revenues are less sensitive tobooms in agriculture prices because agricultural export crops are produced in many
locations by many producers, so production
expands to the point where, in normal times,
there are no rents for governments to appropriate and no special tax regimes (Collier 2007).
Although the evidence is not conclusive,
the tendency for government spending to risewith windfall revenues, while still present during the current commodity boom, is less pronounced than in the past. This in turn suggeststhat perhaps the strong growth that has been
associated with higher commodity prices thistime may prove more sustained than in pastbooms.4

Resource-rich developing countries haveshown greater fiscal restraint during thecurrent boom
During this boom, resource-rich developing
countries appear to have shown greater fiscal
restraint than they did during earlier booms,
thereby reducing the risk of a procyclical cut
in government spending now that commodity
prices are declining.5 The average general government budget surplus of oil-exporting countries improved from 0.6 percent of GDP in
2001 to 7.7 percent in 2007. Among developing-country exporters of oil, minerals, andagricultural products, public consumption has
increased more slowly than private consumption, external debt has risen more slowly thanduring past booms, and government borrowing has increased more slowly than private
borrowing (IMF 2008b).
While fiscal policy responses have been extremely diverse,6 government expenditures ofprimary commodity exporters have increased
less strongly than during the 1980s, a period
like the current boom when the export revenues of resource-dependent developing countries increased by about 7 percent of GDP(figure 3.4).7
In the 1980s, government spending
tended to increase procyclically—rising in linewith the boom in GDP caused by windfall
commodity revenues. As a result, the ratio ofD E A L I N G

Figure 3.4 Government spending by primarycommodity exporters responded less toexport booms in this decade than in the
1980s
Percentage change of the share of GDP
8
Change inexports/GDP

6
4
2
0
⫺2
⫺4

Change in government
expenditures/GDP

⫺6
1980s

2000s

Source: World Bank.
Note: The country sample includes developing countries where
primary commodities account for more than 70 percent ofmerchandise exports. The figures represent the percentage pointchange in merchandise exports divided by GDP, and government
expenditures divided by GDP, during the boom.

government expenditure to GDP was broadly
stable. On a cyclically adjusted basis, however,
government spending rose. Because much of
the additional money went to government
spending and transfer programs of a quasipermanent nature, the increased spending
proved hard to reverse when GDP slowed andcommodity prices reversed. Governments
were either obliged to cut spending procyclically as commodity prices fell, which exacerbated the cycle, or allow the deficit and debt
to build up, increasing their macroeconomic
vulnerability
Most recently, governments have reacted
much more prudently. As a consequence,
while government expenditure has increased
in real terms, it has declined as a share of GDP
by almost 5 percentage points. Government
expenditure among nonfuel exporters has declined the most, perhaps reflecting concernthat nonfuel commodity prices would remainhigh only temporarily and the tendency forgovernments to absorb a smaller share of
windfall revenues from high prices for nonfuelcommodities than from those for hydrocarbon
resources.8 Fuels (and minerals) exporters

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have also taken steps to increase the share of
the windfall revenues that accrue to the state,although care must be taken to avoid harming
incentives for production (box 3.2).
Much of the difference between the two
periods reflects more prudent behavior by
governments in Sub-Saharan Africa. During
the 1980s boom, government expenditures incountries dependent on primary commodities
in Sub-Saharan Africa rose even more quickly
than GDP. In this decade, the ratio of government expenditures to GDP has declined by almost 8 percentage points (figure 3.5). This
trend contrasts with the spending pattern in
Latin America and the Caribbean and the
Middle East and North Africa (other regions
have too few observations to report useful

Figure 3.5 Public expenditures in SubSaharan Africa grew much less quickly in the
2000s than in the 1980s
a. 1980s
Percentage change of the share of GDP
25
20
15
10
5
0
⫺5
Latin America
and Caribbean

Middle East andNorth Africa

Sub-SaharanAfricaSource: World Bank.
b. 2000s
Percentage change of the share of GDP
15
10
5
0
⫺5
⫺10
Latin America
and Caribbean

Middle East andNorth Africa

Sub-SaharanAfricaChange in exports/GDP
Change in government expenditures/GDP
Source: World Bank.

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2 0 0 9Box 3.2 Efforts to capture a larger share of windfall
commodity revenuesAs commodity prices increased, a number ofcountries sought to increase the share of thewindfall that accrues to the state. Several energy
producers (including Argentina, Bolivia, Colombia,
Ecuador, and República Bolivariana de Venezuela)
have increased, or are considering increases in, therates for royalties or taxes. A few countries haveforced the renegotiation of contracts or nationalized
exploitation rights, which has had a chilling effect on
investors’ willingness to participate in some markets.
Developed-country governments (for example,
Alaska in the United States and Alberta in Canada)also are increasing their revenue share.
The governments of several metal-producing
countries also have attempted to increase their shareof the rising profits in recent years (UNCTAD 2006).
For example, Mongolia instituted increased rights
for the government to acquire equities in new
ventures. The Democratic Republic of Congo isreviewing contracts for mineral extraction signed
since 1995 with the purpose of increasing thegovernment’s stake. Governments, including Chile,
Mongolia, Peru, South Africa, and Zambia, havetaken steps or are considering proposals to raisemineral taxes or royalty fees.
Countries that contract with private (often international) firms to exploit nonrenewable resources
have revised contracts to reflect higher prices. The
danger here is that arbitrary changes in their share ofrevenues will reduce the companies’ incentive to invest and lower confidence in the broader investment
climate. An alternative approach, which is now being
considered by several countries, is to base the government’s revenue share on the price. For example,
Colombia has proposed imposing an additional
5 percent tax on every $30 increase in the price of abarrel of oil, thereby raising the tax rate to 75 percent when oil exceeds $140 a barrel. This kind of
arrangement holds some promise of creating a stable
framework so that firms can evaluate investments
accurately and governments can capture a fair shareof windfall revenues when price increases.
It is understandable that countries wish to capture
a rising share of revenues from nonrenewable resources as prices increase. However, such efforts
need to be carefully calibrated to maintain appropriate incentives for making new investments and maximizing current output. Countries with state-owned
companies that control resource extraction have toensure that incentives facing these companies encourage efficiency. For example, whereas some stateowned energy firms (for example Brazil’s Petrobras)
continue to enjoy very positive relations with serviceproviding firms and are efficiently managed, others(such as in Mexico and República Bolivariana deVenezuela) face very high effective tax rates thathave resulted in chronic underinvestment, declining
output, and poor efficiency.

averages), where government spending has
been more procyclical—rising at about thesame rate as GDP as during the 1980s.

Surprisingly the extent to whichgovernments are saving from increased oilrevenues is only loosely correlated withthe size of their reserves
For countries dependent on nonrenewable resources, the optimal fiscal response to primarycommodity price booms in part depends on
the importance and expected life span of theresource.9 Some countries, such as República

104

Bolivariana de Venezuela, could continue to
produce oil at current rates until almost theend of this century before exhausting all of
the oil deposits detected under their soil
(table 3.2). However, other countries that areheavily dependent on deposits of oil or mineral
resources could exhaust their reserves (as currently estimated) within one or two decades.10
If resources are viewed as a national assetof both current and future generations, thencountries with low reserves should be saving
a much larger proportion of permanent (andwindfall) revenues—investing them in eitherD E A L I N GTable 3.2 Ratios of reserves to production
vary greatly among oil exporters(Percent)
Countries

Share of oil inmerchandise exports

Ratio of oil reserves
to current production

95.7
92.0
85.1
83.8
71.1
89.8
88.1
52.8
98.7
95.6
85.2
92.1
74.8
58.3
81.0
80.5
80.9

16.8
17.6
29.3
13.8
25.3
86.7
157.6
76.5
61.9
40.3
20.5
19.9
44.2
19.7
9.2
77.6
20.0

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P R I C E S

Figure 3.6 Oil-exporting countries with large
reserves spent a smaller portion of theirrevenue from the recent boom in oil prices,
2000–06
Percentage point change of the ratio

Algeria
AngolaAzerbaijan
Equatorial Guinea
Gabon
Iran, Islamic Rep. of
Iraq
Kazakhstan
Libya
Nigeria
Oman
Congo, Rep. of
Sudan
Syria, Arab Rep. of
Turkmenistan
Venezuela, R. B. de
Yemen, Rep. of

Source: World Bank, British Petroleum.

productive potential or financial assets thatwill continue to generate an income even as
the original resource is depleted.11 To a degree, this is what countries are doing. The
share of government spending in total GDP
among countries with low reserves has declined, whereas those with high reserves havebeen more procyclical (figure 3.6).12
Countries like Algeria, Angola, the Republic of Congo, Turkmenistan, and the Republicof Yemen, all of which have less than 20 years
worth of reserves and rely upon hydrocarbon
exports for 80 or more of their merchandise
exports, face serious challenges. Unless theirsavings from oil revenues are high, associatedexpenditures are likely to lead to exchange
rate appreciation, with serious negative impacts on the non-oil sectors of their economies(see below).

Private sector saving from
commodity revenues
While governments appear to be saving moreof the windfall than they did in the 1980s,
private sector spending is rising rapidly—
especially among non-oil primary commodity

20
15
Exports/GDP

10

Government
expenditures/GDP

50⫺5High reserves

Low reserves

Source: OPEC Secretariat, World Oil, Oil and Gas Journal,
World Bank staff calculations.
Note: Includes countries where oil accounts for more than 70
percent of merchandise export revenues and data on oil reserves,
oil production, and government expenditures are available(Angola, Republic of Congo, Equatorial Guinea, Islamic Republicof Iran, Kazakhstan, Libya, Nigeria, Oman, Syrian Arab Republic,
Turkmenistan, República Bolivariana de Venezuela, and Republicof Yemen).

exporters. However, much of the demand isgoing to investment goods. Investment demand in commodity-dependent economies increased 7.5 percentage points faster during
this boom than during the 1980s. As a result,the current private sector boom should be
increasing domestic productive capacity thatwill help countries sustain the high growth ofthe past several years.
Reflecting the large share of commodity
revenues that accrue to the government in oilexporting countries and the relative prudence
that these governments have displayed, imports in these countries have increased lessrapidly than GDP, and current account surpluses have improved significantly as a shareof GDP during the recent oil price rise. Thispattern is similar to, but more pronounced
than, that prevailing during the 1980s boom
(figure 3.7).
In part because the benefits of high agricultural prices accrue to a much wider segmentof the population, the private sector in nonoil-commodity exporters appears to have increased spending sharply during the recent
boom, with much of the increased demand105

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2 0 0 9Figure 3.7 Imports and current accountpositions suggest more savings from
commodity revenues by oil exporters than by
nonfuel commodity exporters
a. Oil exporters
Percentage change of the share of GDP
30
25
20
15
10
5
0
⫺5
⫺10
⫺15
⫺20

Most resource-rich countries are showing
fewer signs of real effective exchange
rate appreciation

1980s

2000s

b. Non-fuel exporters
Percentage change of the share of GDP
7
6
5
4
3
2
1
0
⫺1
⫺2
1980s
Imports/GDP

2000s
Current account/GDP

Source: World Bank.

having been met through imports. The ratioof imports to GDP increased by 6 percentage
points, and the current account balance hasremained roughly stable despite a 23 percent
rise in export revenues.

Real currency appreciation
The rapid increase in imports and the stabilityof the current account in the face of rising export revenues and domestic demand is potentially disturbing, because it suggests that thedomestic supply response in these countries
has been relatively weak. This situation is especially problematic if the increased imports
are consumption goods, and if they are associated with a real effective appreciation of thecurrency that has impaired the competitive-

106

ness of the noncommodity sectors of the economy. To the extent that the imports reflect investment, they are less worrisome if they are
creating the future productive potential thatwill allow these countries to continue growing
strongly when commodity prices and incomes
weaken.

The relationship between export revenues andthe exchange rate is complex. While a real exchange rate appreciation is the appropriate response to a long-term improvement in theterms of trade, it may have a deleterious impact on the economy if the appreciation
proves short-lived. Potential negative effects
include adjustment costs, such as increased
unemployment or the bankrupting of marginal firms, and reductions in potential positive externalities in tradable goods sectors,
such as• More-rapid technological progress throughlearning by doing in industries characterized by firm-specific knowledge• Demonstration effects, where the gains inefficiency of one firm are easily copied byothers• Increased incentives for accumulation ofhuman capital• More-stable and faster-growing markets in
manufactures than primary commodities13
During the most recent boom, there is someevidence that developing countries have succeeded in limiting the appreciation of their currencies, thus reducing potential adjustment
costs as prices decline (figure 3.8). On average,
the currencies of non-oil primary commodity
exporters have actually depreciated by a modest
4 percent in real effective terms, while the currencies of developing-country oil exporters haveappreciated only 8 percent in real effective
terms—although most recently domestic inflation has risen to more than 10 percent in
Angola, the Islamic Republic of Iran, República

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Figure 3.8 Primary commodity exporters
limited the real appreciation of theircurrencies during the recent boom

Table 3.3 Assets in sovereign wealthfunds grow in commodity-exporting
countries($US billions)

Percentage change in trade-weighted real effective
exchange rate

CountryP R I C E S

As of mid-2008

10
5
0
⫺5

Recent boom

⫺10
1980s boom

⫺15
⫺20
Non-oil exporters

Oil exporters

Source: IMF data. World Bank staff calculations.

Figure 3.9 Many oil exporters are sufferingsignificantly higher inflation
Annual % increase in CPI, 2007
20

Algeria
Azerbaijan
Botswana
Chile
Equatorial Guinea
Iran, Islamic Republic of
Kazakhstan
Libya
MexicoNigeria
Russian Federation
Timor-Leste
Trinidad and Tobago
Venezuela, R. B. de
Total

47.0
5.0
6.9
15.5
2.9
12.9
21.5
50.0
5.0
11.0
162.5
3.0
2.0
22.0
367.2

Source: Sovereign Wealth Fund Institute(www.swfinstitute.org).
Note: Latest available information as of June 2008, but all
estimates may not refer to 2008. Excludes funds with assets
under $1 billion. Data for Equatorial Guinea as of 2005.

15
10
5
0
⫺5

C
on
go Ch
, R ad
ep
.
Al of
ge
G ria
ab
N on
ig
er
O ia
m
an
Ye
Li
m
by
en
,R S aep udaKa ubli nza c o
kh f
st
An an
Az g
er ola
Ve
ba
ne
ija
zu
n
el
a,
Ira
R
.B n
.d
e

⫺10

Source: World Bank data.

Bolivariana de Venezuela, and the Republic of
Yemen (see chapter 1 for a discussion of inflation and commodity prices) (figure 3.9).14
The limited currency appreciation in response to the commodity price boom is in part
attributable to the fiscal restraint discussed
earlier. Government expenditures fall mostheavily on nontraded goods. As a result, increasing government expenditures tend toraise the price of nontraded goods relative totraded goods, which causes the real exchange
rate to appreciate.
Commodity-dependent countries also
avoided real appreciations by sterilizing the
inflows of foreign currency by convertingthem into foreign-denominated assets. Oilexporting developing countries doubled theirofficial foreign reserves from $36 billion in2000 to $70 billion by mid-2008, or fromabout four months of import cover to aroundeight months in 2008. At the same time, someof these countries created new sovereign
wealth funds (Algeria, Kazakhstan, and Libya)
or greatly expanded preexisting sovereign
wealth funds (Azerbaijan, Russian Federation,
and República Bolivariana de Venezuela)(Griffith-Jones and Ocampo 2008). The assets
of developing-country exporters of oil andminerals in such funds reached $367 billion by
mid-2008 (table 3.3).

New entrants into oil production may be
exceptions to these welcome trends
Several resource-rich developing countries areenjoying the fruits of newly found natural
wealth or are experiencing their first commodity boom as an independent state, notably
the oil-producing countries of central Asia
that were formerly part of the Soviet Union.
These countries have less experience in107

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2 0 0 9managing a resource boom than countries thathave been producing substantial amounts ofoil for many years.
Perhaps because of this lack of experience,
many of these countries show signs of experiencing the same kind of macroeconomic
volatility that characterized developing, resource-rich countries in the 1980s. Their currencies have appreciated in real terms (against
the U.S. dollar) by 43 percent from 2001 to
2007, their inflation rates are higher, and government expenditures have been rising in linewith GDP (figure 3.10).
While these developments may be consistent
with prudent management of newfound wealthand a careful investment strategy designed toenhance future production capacity, they mirror, disconcertingly, those of the 1980s among
more established producers. New producers
Figure 3.10 New oil exporters are experiencing more macroeconomic volatility thanestablished producers% change60
50

New producers

40
30

Established producers

20
10
0

must therefore pay particular attention tomacroeconomic management going forward toensure that the current downturn in primarycommodity prices does not lead to a sharp reversal of economic progress.
Another troublesome aspect of the current
boom, especially given the financial crisis, is the
rapid increase in bank lending to commoditydependent economies in Sub-Saharan Africa,
in part to finance investments in oil and mineral projects. Despite enjoying substantial increases in their export revenues, many of these
economies remain poor and need to be particularly careful in incurring foreign currency
liabilities on market terms. Commercial bankcommitments to these economies rose from anaverage of just under $2 billion a year in
1995–2000 to more than $5 billion a year in
2004–06, and to $11 billion in 2007 (figure 3.11). These countries’ total stock of privatesource external debt has not increased significantly above the $35 billion level reached in2000 and has fallen as a share of GDP. The
downturn in commodity prices could result in
disappointing returns to these projects anddifficulties in servicing this debt on the part offirms, especially as existing loans come due inthe current environment of much tighter credit
conditions and higher risk premiums fordeveloping countries. Should companies have

⫺10
Real exchange
rate with US$

Percentagechange in
CPI, 2008

Change ingovernment
expenditure/GDP, 2001–07

Figure 3.11 Commercial bank lending tocommodity-dependent economies in
Sub-Saharan Africa is rising

Source: World Bank and IMF data.

Gross commitments, US$ millions

Note: New producers are defined as countries dependent on oilthat began production after 1985 or were established as a country
after 1985, including Azerbaijan, Chad, Equatorial Guinea,
Kazakhstan, Sudan, and the Republic of Yemen (Turkmenistan
lacks data for inflation and the real exchange rate). The
established producers include Algeria, Angola, Republic of Congo,
Gabon, Islamic Republic of Iran, Libya, Nigeria, Oman, andRepública Bolivariana de Venezuela. We use the real exchange
rate with the United States (rather than the trade-weighted realexchange rate as in figure 3.5), to include sufficient countries fora useful comparison between the two groups.

12,00010,000
8,000
6,000
4,000
2,000

b. Percentage change in consumer price index in 2008.
c. Change in ratio of government expenditure to GDP from2001 to 2007.

108

07
20

06

05

20

20

04

03

20

02

Source: Loanware 2008.

20

20

20

01

0

19
95
av –20
er 00
ag ,
e

a. Real exchange rate with the U.S. dollar, where increaseindicates appreciation. Data for Equatorial Guinea are for
2001–04.

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P R I C E S

Box 3.3 Combating the corrupting influence of highcommodity revenues

A

were supporting the initiative.a These developments
could be strengthened if the home countries of multinational companies were to require these firms to account more explicitly for the funds they disburse to
local governments.b

recent example of efforts to reduce the scope forcorruption in commodity-rich countries is theExtractive Industries Transparency Initiative.
Launched in 2002, it aims to increase the accountability of governments in resource-rich countries
through the publication of company payments andgovernment revenues from oil, gas, and mining. As
of July 2008, 23 countries were in the process of
meeting the conditions for transparency supportedby the initiative, and 17 of 42 major oil companies

Resource riches can yield disappointing
growth outcomes by creating incentives andopportunities for corruption, mismanagement, and political instability. Resource
wealth has been a source of political conflictsin Africa (Gelb 1998) that have been enormously destructive of wealth, while in countries with weak governance and institutions,the concentrated wealth deriving from point
resources too often lends itself to corrupt
practices by politicians and civil servants
charged with overseeing the firms exploiting
them.15 Indeed, some econometric analyses
have found that dependence on oil, metals,
and minerals, where the government plays acentral role in determining the allocation ofrents, lowers the quality of institutions.16
Partly reflecting the influence of these incentives, countries dependent on nonrenewable resources (equal to more than 70 percent
of merchandise exports) tended in 1996 to be
more corrupt than those dependent on agricultural commodities and more diversified exports(figure 3.12).17 More recently, corruption levelsin the oil, metals, and mineral exporters havedrawn much closer to the developing-country

Figure 3.12 Corruption is highest among
fuel exporters, although the difference has
narrowed
Index
BetterGovernance and transparency

b. Statement by Michel Roy, from the French NGO Secours
Catholique, published in a press release from Publish What You
Pay (www.publishwhatyoupay.org).

average. These are relative rankings and thus
cannot indicate absolute improvements in individual countries. Nevertheless, this progress
may reflect the reforms instituted over the past
10 years to counter the corrupting influence ofhigh resource rents and may also indicate that
resource wealth is being more effectively deployed in promoting the overall developmentof these economies (box 3.3).

0.0
⫺0.2
⫺0.4
⫺0.6

Diversified exporters
Agricultural exporters

⫺0.8
Worse

difficulty refinancing, this could transfer into asovereign risk—–especially in those cases
where the debtor firms are state-owned.

a. See the Transparency International Web site, transparency.org.

Oil and mineral exporters

⫺1.0
1996

2006

Source: Kaufmann and others 2007; World Bank data.
Note: The lower the value of the index, the worse the level ofcorruption relative to other countries. Countries are classified asoil or mineral, or agricultural exporters if they earn more than 70
percent of merchandise export revenues from these sources.
Diversified exporters are all other developing countries.
Classification is based on shares in 2000.

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2 0 0 9Box 3.4 Successful sovereign wealth fundsFor a sovereign wealth fund to be successful, transparent procedures must be established for managing the allocation of resources to the fund and the investment of these resources. For example, clear rules
for forecasting prices (necessary for the calculationof permanent income that underlies allocation decisions) and, where available, reliance on independent
forecasts can help insulate allocation decisions frompolitical pressures. National revenue funds in Norway and Botswana benefited from stable and democratic political systems that encouraged decision making based on long-term considerations (Eifert, Gelb,
and Tallroth 2002).
Rules for the allocation of a share of resource revenues to a wealth fund must not be too rigid. Several
countries have changed, bypassed, or eliminated suchrules when conflicts arose (IMF 2007). Such changes,
although often needed, can limit the impact of thefund if they occur too frequently as has happened in
Oman (UNCTAD 2006).
Transparency in the procedures governing thefund must be matched by overall strong governanceto ensure that fiscal policy is consistent with the allocation of resources to the fund. For example, insome instances governments have effectively circumvented the goals of a sovereign wealth fund by borrowing (using the fund as collateral). In República
Bolivariana de Venezuela, for example, resourceswere deposited in the national revenue fund according to the rules, but at the same time the government
borrowed heavily to finance procyclical expenditures(Fasano 2000).

Sovereign wealth funds
The increased prevalence of sovereign wealthfunds among resource-rich countries is anotherrecent innovation aimed at increasing the development impact derived from mineral
wealth, both by increasing the returns thatcountries receive on their savings from resource
revenues and by insulating those savings fromprocyclical spending and corrupt practices.
The success of these funds in managing natural resource revenue and reducing procyclicalspending has been mixed (Asfaha 2007). In
general, countries with sovereign wealth funds
have tended to experience less-procyclical fiscal policies and less-volatile macroeconomic
outcomes.18 However, the commodity here isunclear. Such funds tend to be most successful
in countries that are already fiscally prudent
and are most likely to be established in countries with strong institutions. As such, sovereign wealth funds are no substitute for strong
fiscal institutions (box 3.4).19

Dealing with revenue volatility
The volatility of commodity prices and output
means that revenues also tend to be volatile

110(see chapter 2). At the macroeconomic level,
this manifests itself as greater GDP, exchange
rate, and export volatility (see box 3.1). For
individual producers, this volatility increases
the riskiness and quantity of investment, especially in developing countries where financial
systems that could provide temporary financing to bridge shortfalls are underdeveloped.
As a result, the overall production potential of
the sector rises less quickly, which may be reflected in poor growth outcomes. Perhaps
more importantly, for the poor who aredependent on farm-related incomes (close to
75 percent of all poor; see below) and living
close to the subsistence level, the impacts canbe particularly devastating.
Traditionally, developing (and developed)
countries have sought to offset this kind ofvolatility with price stabilization schemes,marketing boards, and the like (box 3.5).
However, the track record of these schemes
has not been good and they have fallen into
disfavor. More recently, countries are entering
into more market-based mechanisms such as
long-term contracting arrangements andmarket-based conditional contracts.

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Box 3.5 National and international marketing strategies

M

arketing boards in developing countries typically got their start during colonial times as away to facilitate the export of agricultural commodities to Europe and to stabilize prices for food crops.
Newly independent governments generally retained
marketing boards because they provided a convenient way for the governments to maintain control
over the distribution of strategic commodities suchas food staples and export crops.
Marketing boards are state-controlled or statesanctioned entities legally granted control over thepurchase or sale of agricultural commodities (Barrett
and Mutambatsere 2008). They flourished in the20th century in both developed and developing
countries but have declined in number under pressure for domestic liberalization and international
trade rules. Where reforms have been widespreadand successful, marketing boards have vanished or
retreated to providing public goods, such as strategicLong-term contracting provides large-scale
producers with some protection from
output volatility
Over the past decade or so, a number of resource-dependent developing countries haveentered into long-term contracts with client
countries that guarantee sales volumes and insome cases prices. These contracts cover an
extended period, sometimes with specific escalator clauses that ensure that prices, whilemore stable than market prices, do not vary
too far from market norms, causing one partner or the other to renege on the deal.
Russia and oil-producing countries in Europe and Central Asia have engaged in suchcontracts with Hungary, the Czech Republic,
Poland, and Ukraine as well as with several
high-income countries. Because these contracts specify prices over the duration of thecontract, these consuming countries have notobserved as large a swing in energy costs asother countries (and supplier countries havenot experienced as large a boom).

grain reserves or insurance against extraordinary
price fluctuations. Where reforms have been lesssuccessful, the weakness of private agricultural
marketing channels has been revealed by the rollbackof marketing boards, often leading to calls for reinstatement of the powerful boards.
Similar efforts to minimize volatility have been
tried at the global level as well. These included theInternational Sugar Agreement of 1954 and international agreements for tin (1956), coffee (1962),
natural rubber (1980), and cocoa (1981). These
agreements used some combination of supply
control, buffer stocks, and export controls to limit
price changes. All of these commodity agreements
broke down or lapsed in the 1980s and 1990s either
because of their ineffectiveness or because of difficulties in coordinating production among members(Gilbert 2005).

Such contracts are sometimes entered into
in the context of a foreign direct investment
deal by either the resource-exporting country
or, increasingly, a resource-importing country
hoping to gain security of future supply.20 Several African countries have entered into such
relationships with Brazil, China, India, andMalaysia, among others, in exchange for astable demand-supply relationship and accessto foreign capital (most often in the form of
foreign direct investment) to develop domestic
resources.
China, or Chinese state-owned firms, havetaken equity positions in oil ventures in Africa
equal to some $13.5 billion as of early 2007.
Investments have been made in Angola, Chad,
Côte d’Ivoire, Equatorial Guinea, Kenya,
Mauritania, Niger, Nigeria, São Tomé andPrincipe, Somalia, and Sudan, but the bulkof production is currently concentrated inAngola, Nigeria, and Sudan (Downs 2007).
Chinese companies also have invested in thedevelopment of minerals, such as copper and111

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2 0 0 9other resources in Zambia, and cobalt and copper in the Republic of Congo (Lyman 2005).
Chinese companies also have invested in Latin
America, with the bulk of this investment related to the production of primary commodities, such as oil in Ecuador (Caspary 2008).

Market-based conditional contracts offer
protection from both price and volume
volatility for large-scale market
participantsSome countries are attempting to reduce theimpact of volatile commodity prices throughmarket-based derivative instruments. Unfortunately, developing-country producers, andparticularly agricultural small-holders, havelittle access to the market-based risk management instruments now available, because of alack of knowledge; lack of collateral for margins; the small scale of their operations; andthe complexities of executing, monitoring,
and administering hedging transactions.
These hurdles can be overcome through alarge domestic entity that pools price risk
from many small producers and hedges themin international markets. In Mexico, the government organization, ASERCA, does this tohedge price risks for cotton farmers. Through
ASERCA, the government offers farmers the
chance to participate in a program to guarantee a minimum cotton price for a fixed fee.
ASERCA then hedges its price risk by using
the fee to purchase a “put” option in international financial markets, which pays if theinternational price of cotton falls below thespecified price. This payoff is in turn paid out
to farmers, effectively providing them withmarket-based insurance against the cotton
price falling below the specified minimum thatis demand driven and inexpensive to administer (Larson, Varangis, and Yabuki 1998).
The over-the-counter market is very active
for oil (over-the-counter risk management instruments are highly liquid and can extend as
far as seven years in the future) and precious
metals (contracts are considered competitive
over the three-to-five-year time horizon).
Exchange-traded instruments also exist for

112

highly traded tropical products such as coffee
and cocoa, and for maize, soybeans, andwheat, which are produced and exported by
the United States. However, the over-thecounter market is more limited for the basemetals exported by many developing countries.21 Moreover, many agricultural products
produced and consumed by developing countries are difficult to hedge efficiently.
In any event, small-holders in developing
countries have little access to these instruments. The provision of agricultural risk insurance to small-holders also has proven difficult.
State-managed insurance schemes have been
largely ineffective and unsustainable without
subsidies to cover premiums. One hopefuldevelopment is the advent of index-based
weather insurance. These schemes, which provide for a different way of underwriting, andtransferring, weather risk to the market, arenow being scaled up by private initiatives inIndia and elsewhere. In addition to the direct
benefits these contracts provide to producers,
by reducing overall revenue volatility, they
reduce the risk by potential lenders and can
improve farmers’ access to credit.
So far these efforts have been limited tolarge-scale farms. To bring similar benefits
to small-scale producers, more direct government involvement may be required to ensurethat supply-chain actors, who are the only actors large enough to enter into such contracts,
have the incentives to share their benefits withsmall-holders.

Food markets are more complicatedpolitically
Food markets present a particularly difficult
risk management challenge, because the requirements (objectives) of consumers and producers are often in conflict. Historically, government interventions in food markets have
had significant adverse effects on the supply
side, creating strong disincentives for private
sector storage, finance, and trade. All too
often, the ensuing shortfall in private sector
investment in these markets—and the correspondingly weak development of local andD E A L I N G

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Box 3.6 Malawi government hedging of maize priceand supply risks, 2005–08

I

n 2005–06, southern Africa experienced a severe
drought-related food shortage. Affected countries
included Malawi, Mozambique, Zambia, andZimbabwe. Initial estimates suggested that as muchas 2 million metric tons of maize imports might berequired.
The government of Malawi, with assistance fromthe World Bank and the British government, usedcall options from the South Africa Exchange Market(SAFEX) to help cap the cost of managing the foodshortage. The government was concerned about both
high price increases and its ability to secure additional grain on world markets. As a result, a customized call option for 60,000 metric tons of whitemaize with a total value of approximately $17 million and a premium payment of $1.53 million was
written. To ensure that the maize was delivered (ifneeded), the contract was written on a deliveredbasis, thus combining the price for white maize on
the SAFEX exchange with the transport costs to
Malawi.
In the event, with spot prices rising and the foodshortage growing more severe in November andDecember 2005, the government exercised the call
option, elected physical settlement, and allocated theregional trade—exacerbate the price and supply volatility that the interventions were attempting to mitigate in the first place.
More recently, governments have used customized price and supply risk management
contracts to help reduce volatility and ensure
security of supply in a way that strengthensrather than weakens private sector trade.
Trading companies and banks in southern
Africa are now offering contingent purchaseagreements that use “call” options as a basis
for physical supply contracts (box 3.6). Risk
management can also be enhanced by moreopen borders and private trade, as in the successful management of flood-induced rice
shortages in Bangladesh in 1998.

majority of the maize to humanitarian operations.
During the delivery period, spot prices for a metricton of white maize rose $50–$90 above the ceiling
price of the contract following increases in the
SAFEX white maize price and transport costs over
the October-January period. The maize purchased
through the option contract had a better delivery
performance than most other procurement
procedures.
Since then the government, facing a projectedmaize surplus, worked with the World Bank to structure contingent export contracts. These were put options structured to ensure foreign markets would
take up any surplus grain and provide a price floor
in the case that maize prices fell. Although the contracts were not taken up, they did demonstrate how
contingent contracting could be used to help manage
risk associated with surpluses. In May of 2008, theMalawi government issued a request for proposals
for a repurchase option, which will be based on a
trade finance structure for grain held in the country
combined with a call option. The objective of thisapproach is to set up a second layer of grain reserves
that operates financially through the private sector(Dana, Gilbert, and Shim 2006; Dana 2008).

Poverty impacts of higher
commodity prices

While resource-rich countries have faced
challenges in capitalizing on the rise incommodity prices, poor consumers confront
severe difficulties in coping with the substantial decline in real incomes. The rise in realcommodity prices in developing countries wasmuch less marked than in the United States(see chapter 1); nevertheless, the increases were
substantial and imply severe consequences forthe poor in developing countries.
The rise in food prices presents the greater
challenge for the poor, most of whom spend
more than half of their incomes on food. The

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2 0 0 9urban poor are most directly affected, bothbecause they consume more commercially
produced foods and because they are muchless likely than the rural population to benefit
from increased revenues from food sales or
improved employment opportunities arisingfrom higher food prices. The poor are less affected by rising fuel prices because they spend
less of their incomes on fuel; however, highfuel prices are still a burden to the poor, especially those in colder climates.
The remainder of this section explores inmore detail the impacts that higher prices have
had on the poor in developing countries.

Higher oil prices and poverty
As discussed previously, oil price increases
since 2003 pushed up consumer spending in
oil-producing developing countries by some$400 billion in 2008, while the annual increase in the food bill due to the price increases between January 2007 and May
2008 was some $240 billion—assuming inboth cases that international prices were
fully passed through to consumers. Of
course not all of these price increases havebeen passed through. In these cases, the costs
are either being borne by governments as increased expenditures or by firms in the formof forgone revenues when price increases arecontrolled.
Most estimates suggest that the poverty impact of higher oil prices was smaller than theimpact of higher food prices, mainly because
in most developing countries, the poor spend
only about 10 percent of total householdspending on energy, compared with 50 percent
for food (Grosh, del Ninno, and Tesliuc2008). For example, the poorest 20 percent of
Bolivians, Malians, and Sri Lankans spend
more than 40 percent of their income on food,but only 3 percent on energy (World Bank
2008a). Moreover, when energy costs rise, theextremely poor tend to turn to alternative
sources of energy (principally biomass). Even
where the poor receive subsidized fuel forcooking, consumption tends to be low, in part
because they resell it on the black market.22

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At the same time, the direct cost of higher
energy prices may well underestimate their
total cost. While direct energy consumption
may be low, higher energy prices increase theprices of energy-intensive goods and services
consumed by the poor. For example, surveys
of poor communities in China, India, Indonesia, and the Lao People’s Democratic Republic
indicate that households have reacted toenergy-induced increases in the prices of electricity and transportation by reducing lighting
and increasing their isolation (UNDP 2007).
Moreover, the switch to lower-cost biomassenergy sources carries with it hidden costsin the form of increased indoor pollution, increased incidence of respiratory disease, blindness, heart disease, and obstetrical problems
such as stillbirth and low birth weight (IEA
2002).
Many efforts to measure the poverty impact of higher oil prices have taken an indirectroute because few household expenditure surveys have enough detail on the consumptionof petroleum or petroleum products to estimate poverty impacts directly.23 Some country
studies have relied on input-output tables
combined with household surveys, or on computable general equilibrium models, to estimate the impact of an oil price rise on poverty.
The results are mixed, with most studies concluding that a 20 percent rise in oil prices
could impose a 1–3 percent reduction in theincomes of poor households (table 3.4).
Global studies of the impact of oil prices onpoverty have first estimated the impact ofhigher fuel prices on GDP and then the impactof lower GDP on poverty. For example,
Herrera and others (2005) estimate that a $10
increase in the price of a barrel of oil would
reduce GDP in the short run by about 0.8 percent in developing-country oil importers. They
calculate that poverty rates would increase in
the more severely affected countries by a rangeof 1.4–1.5 percentage points.
A simplistic extrapolation of these results(which are based on an everything-else-equalassumption) to the $110 increase in crude
prices between 2003 and mid-2008, wouldD E A L I N G

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P R I C E STable 3.4 Country studies suggest that high oil prices have large poverty impacts
StudyCountry

Impact on poor of 20 percent increase in oil price (unless otherwise specified)

Coady and Newhouse (2005)

Ghana

Poor incomes decline by 3.6 percent

World Bank (2003)

Iran

Cost of living of rural poor rises by 3.1 percent

ESMAP Report done in 2001a

Pakistan

Cost of living of poor rises by 1.15 percent

McDonald and van Schoor (2005)

South Africa

Rural households suffer drop in income of 0.76 percent, versus
0.83 percent for urban households, with poor households lessaffected than rich households

Clements, Hong-Sang, and Gupta (2003)

Indonesia

25 percent rise in oil prices reduces average real consumption by
2.5 percent, with high-income groups slightly more affected than
low-income groups

ESMAP (2005)

Yemen

Increasing fuels to import parity (62 percent) increases household
expenditures by 14.4 percent for poorest decile

Kpodar (2006)

Mali

Household expenditures of poor rise by 1.8 percent

Source: Kpodar 2006.
a. As cited in Kpodar (2006).

lead to the conclusion that the GDP in developing-country oil importers would havedeclined by more than 8 percent and that theincidence of extreme poverty in developing
countries would have increased by some
15 percentage points. However, everythingelse was not equal and for most of the period
during which oil prices were rising, GDP in
oil-importing developing countries was expanding by more than 6 percent a year (muchfaster than in the past). At least for the initial
increases in oil prices between 2003 and mid2006, such a simplistic calculation substantially overstates the impact of higher oil prices
on GDP and poverty.
That said, the most recent oil-price hikes
occurred under very different conditions than
the initial ones. Global capacity was constrained, inflation was rising, and the initialcushions that allowed the first oil price hikes
to be absorbed were exhausted (see chapter 1).
Partly as a consequence, global growth in oilimporting developing countries slowed by
1.7 percentage points between 2007 and2008. Although not all of that slowdown canbe attributed to oil prices, if it were, applying
the poverty elasticities used by Herrera andPang (2006) would lead to a conclusion thatthe most recent hike in oil prices may have increased headcount poverty rates by as much as
1.7 or 2.0 percentage points.

The rise in the food bill is attributable tohigher prices
The balance of payments implications of therise in food prices are important for a few
countries, including some oil or metals exporters, a few countries beset by civil conflicts,
and several small island states that sell services
and import most of their needs, including
food. However, with the exception of a few
foods such as palm oil and a few countries, including several island states and some Middle
Eastern countries, the bulk of food products
are consumed in the same country where they
are produced.
Nevertheless, the increased food bill facing
consumers has been extremely large, equaling
on average about 2.4 percent of gross national
income in developing countries, or 8.0 percent
of government expenditures. For some countries, the costs rise as high as 20 percent ofgross national income, equal to the total ofgovernment expenditures (figure 3.13).
The magnitude of these costs would makeit impossible for most governments (or the international community) to completely financethe rise in expenditures on grains required tomaintain consumption at 2006 levels. As a result, the greater part of the adjustment must
be borne by consumers, while government interventions need to focus on programs thatstrictly target the poor.

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2 0 0 9Figure 3.13 The increased grain bill could
exceed 5 percent of GDP in more than
20 countries
Estimated change in grain expenditures, % of GNI
25

20

15

10

5

0
Countries
Source: World Bank.

Higher food prices and poverty
Although estimating the direct poverty effects
of high oil prices is difficult, a more direct approach is possible for analyzing the poverty effect of higher food prices, because household
expenditure surveys tend to provide more detail on the consumption of food.
Changes in food prices can affect poverty
through consumption and income channels.
On the consumption side, as food prices rise,the cost of a given basket of food increases
and consumer welfare declines. However, forthe segment of the population whose income
depends directly or indirectly on agriculture(that is, farmers, wage workers in agriculture,and rural landowners), higher food prices represent an increase in income. Thus, for eachhousehold, the net welfare effect of an increase in food prices depends on the combination of a loss of purchasing power (consumption effect) and, for some households, a gain
in income (income effect). At the country
level, the poverty effect of higher food prices
depends on• The initial incidence and depth of poverty• The proportion of the poor that have little
or no direct income from agriculture, suchas the urban poor

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• The importance of food in the budgets ofthe poor• Households’ ability to substitute between
food items
A rise in the price of food relative to othergoods and services tends to raise poverty inthe short term. The recent increase in internationally traded food prices (mostly grains andoilseeds) is estimated to have increased
poverty in eight of nine developing countries
studied by Ivanic and Martin (2008). Thisfinding reflects the fact that most of the poor
in developing countries (including those inrural areas) are net food buyers, as demonstrated by a number of studies based on detailed household surveys (Christiaensen and
Demery 2007; Seshan and Umali-Deininger
2007; Byerlee, Meyers, and Jayne 2006).
Analyzing the poverty impact of higher
food prices is complicated, however, because
net sellers are disproportionately poor (Aksoy
and Isik-Dikmelik 2008). As a consequence,high food prices can transfer income fromricher to poorer households. Moreover, overthe longer run, higher food prices that boost
farm income may also increase other rural
incomes by boosting employment and wages
among the landless rural poor. Thus the impact of rising food prices on poverty can differ
substantially between urban and rural areas.

Higher food prices increase urban poverty
unambiguously
The overall impact of higher prices on poverty
may be complicated to sort out, but there isbroad consensus that higher food prices increase urban poverty, mainly because most of
the urban poor have no offsetting income effects. The upper panel of table 3.5 reports theestimated effects on urban poverty levels inthe six World Bank regions of a hypothetical
10 percent increase in food prices. The estimates are calculated using the Bank’s modelfor Global Income Distribution Dynamics(GIDD) (see box 3.7 for a discussion of theassumptions underlying this and other modeling exercises reported here).24

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P R I C E STable 3.5 Higher food prices raise poverty more in urban areas than in rural areas
Estimated change in poverty from a 10 percent increase in food prices
InitialChangePoverty headcount(percent)

Income gap ratio(percent)

Poverty headcount(percentage point)

Income gap ratio(percentage point)

Urban population
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

13.2
2.5
3.7
2.7
32.3
34.1

20.3
8.7
37.6
17.8
25.0
38.1

2.9
0.6
0.3
0.6
4.4
2.8

1.2
2.5
0.0
1.1
1.5
0.5

Developing world

15.3

27.1

2.2

0.8

Rural population
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

31.9
8.2
18.6
15.4
43.3
54.9

23.2
6.6
43.9
22.9
24.0
41.5

1.8
0.3
⫺0.2
0.3
1.7
⫺0.2

0.3
1.0
0.2
0.2
0.5
⫺0.3

Developing world

37.1

28.2

1.2

0.1

RegionSource: Computations using data from the World Bank’s GIDD.
Note: The poverty line is set at 1.25 international dollars (2005) a day per capita. The ratio of food in total consumption among
the poor is computed as described in De Hoyos and Lessem 2008. East Asia excludes China. The Middle East comprises only
Jordan, Morocco, and the Republic of Yemen.

The largest impacts, both in the increasein the proportion of individuals in the urban
population living in absolute poverty (theheadcount poverty rate) and in the extent towhich the average income of the poor falls
below the poverty line (the income gap ratio),are observed in East Asia, South Asia, and
Sub-Saharan Africa and are attributable to theheavy weight that food plays in the household
consumption basket in these regions and tothe high initial poverty headcounts in these regions (see table 3.5). The increase in headcount poverty in Sub-Saharan Africa is somewhat lower than in South Asia because food
represents a smaller share of the urban poor’s
overall budget.25 Low food shares in Latin
America and the Caribbean and very low initial poverty levels in Europe and Central Asia
mean that the urban poverty effects of higher
food prices in those regions are close to zero.
In a similar exercise, Dessus, Herrera, andDe Hoyos (2008) estimated that the increasein financial resources needed to alleviate

urban poverty arising from the recent increasein food prices is less than 1 percent of GDP for
the majority of countries, rising to 3 percent
of GDP among those most affected.26 The authors find that around 90 percent of the increase in costs derives from a reduction in thereal incomes of households that were poor before the price shock and that the rest is attributable to an increase in the number of poorcaused by higher prices.

Higher food prices also tend to raisepoverty in rural areas, but by less
Most households under the extreme poverty
line live in rural areas. In 2000, 7 out of every
10 poor individuals lived in a household where
agricultural activities represented the main
occupation of the head, with lower average incomes among these households being a constant pattern across all regions and countries(Bussolo, De Hoyos, and Medvedev 2008).27
The lower panel of table 3.5 reports theeffect on rural poverty of the same uniform

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2 0 0 9Box 3.7 Critical assumptions underlying theestimation of the poverty impact of food price increasesThe poverty analysis reported in this chapter isbased on microsimulations using the WorldBank’s model for Global Income Distribution Dynamics (GIDD). The GIDD comprises householdlevel data for 73 countries covering around 60 percent of the developing world population.
In the reported simulations a number of simplifying assumptions had to be made.
1. All households within a country face the same increase in the real price of food, measured as therise in the price of food deflated by the rise in the
average price of all nonfood items. Data are takenfrom national consumer price indexes.
2. The income generated by the rise in food prices isredistributed to rural households in proportion totheir agricultural-generated incomes. Informationon the share of rural household income fromagricultural activities is taken from the “Rural
Income Generating Activities” (RIGA), a projectof the Food and Agriculture Organization (FAO)and World Bank based on 17 Living Standards
Measurement Surveys. This information isextended to the remaining 56 countries in the
GIDD by estimating a simple polynomial relationship between the share of agricultural-related
income and the level of income (at the centile
level) across the 17 RIGA countries and thenapplying the estimated coefficients to theremaining countries in the GIDD.
3. One issue is whether self-employed workers andwage earners are likely to share in the rise in in-come from higher food prices. Because it is notpossible to identify which households are selfemployed and which are wage earners, the additional income attributable to high food prices is
distributed equally among them. This approach isequivalent to assuming that all of the income goesto the self-employed (i.e., assuming that agricultural wages and employment are constant) andthat all of the agricultural wage earners in a given
centile work for a self-employed farmer from thesame centile.
4. Household-level information on food consumption is available for only 21 countries in the
GIDD. Engel curves, relating food shares tohousehold per capita income (or consumption)and other household characteristics (see De
Hoyos and Lessem 2008) are estimated, and estimated parameters plus a randomly drawn residual
are used to impute food shares in countries that
do not report this information.
5. The simulations show the instantaneous impactof the rise in food prices, assuming no substitution or conservation on the part of consumers(or producers).
The technical annex to this chapter reports thesensitivity of the poverty estimates to variation inassumptions made concerning the size of the priceshock and the distribution of resources within both
the rural and urban sectors.

10 percent increase in food prices. It assumes
that farm-related incomes of rural households
also rise by 10 percent. This could be an underestimate, because total spending on foodincludes retailing and transportation margins.
Assuming that all of the real increase in foodprices was attributable to increased food commodity prices, then the percentage increase infarmgate prices would have been proportion-

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ately larger than that of retail prices (see technical appendix).
In every region, the deterioration in therural poverty indicators is milder than it is forurban poverty, primarily because of the effectof increased prices on the incomes of farmers.
Rural poverty actually declines somewhat in
Latin America and Sub-Saharan Africa,
whereas it increases a fair amount in East Asia

D E A L I N GTable 3.6 Observed real price shocks andfood shares of consumption vary acrossdeveloping regions(Percent)
RegionPrice ShockFood shareamong the poor

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P R I C E S

Figure 3.14 Real food prices in developing
countries rose less than prices of internationally traded foods
Distribution of cumulative increases in relative food prices(Local currency unit, January 2005–December 2007)
Percentage of developing countries

Rural population
East Asia and the Pacific
Europe and Central Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa
Developing world
Urban population
East Asia and the Pacific
Europe and Central Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa
Developing world

20

12.4
⫺0.2

71.5
63.4

6.9

51.2

25.9
5.0
9.6

64.5
65.3
68.0

6.7

66.1

13.8
⫺0.5

67.45
57.87

Source: World Bank.

1.6

44.06

Note: Real local currency price increase of internationally tradedfood commodities is shown by vertical line.

12.5
4.8
4.9

57.14
64.41
52.99

4.1

60.43

15

10

Source: World Bank.

and South Asia, reflecting the greater importance of nonfarm incomes within the overall
incomes of the rural poor in those regions andthe large share of food in consumption (see thesecond column of table 3.6).

The actual extent of food price increases
varies widely across countries
The analysis so far has assumed that all foodprices increased by a uniform 10 percent. In
fact, observed changes have been very different. As discussed in chapters 1 and 2, while
prices of internationally traded commodities
denominated in U.S. dollars increased by asmuch as 74 percent between January 2005
and December 2007, the real increase observed in individual developing countries wasmuch smaller. Indeed, among the 73 countries
for which distinct monthly consumer priceindex and household survey data are available, the majority had real food price increasesof 12 percent or less (figure 3.14).28 Only four
countries saw real food prices rise by as much

5

0
⫺20

0

20

40

Percentage change in real food prices

or more than the average increase of real internationally traded food prices. The difference between domestic and international
prices arises because internationally tradedfoods represent only a small share of total
food consumption in most developing countries. Moreover, different foods have very different weights across developing countries,
and many developing countries have policies
that have prevented local prices from fully reflecting changes in international prices.
Table 3.7 reports the result of simulationsof the poverty impacts of the observed increase in real food prices. Like the earlier simulations, it assumes that the farm incomes inrural households rise in line with the real increase in national food prices.29
As with the uniform shock, all regions except Europe and Central Asia and Latin America and the Caribbean experience a significant
increase in the incidence and depth of poverty.
At the global level, the headcount ratio increases by 1.3 percentage points, representing
an additional 130 million individuals falling
below the poverty line.30
The largest increases in the absolute number of poor are in Asia and Sub-Saharan

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2 0 0 9

Table 3.7 Poverty effects of the changes
in relative food prices
January 2005–December 2007
Initial levels:

RegionPoverty
Incomeheadcount gap ratio(percent)

Urban population
East Asia andthe Pacific
Europe andCentral Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa
Developing world
Rural population
East Asia andthe Pacific
Europe andCentral Asia
Latin America andthe Caribbean
Middle East andNorth Africa
South Asia
Sub-Saharan Africa
Developing world

Change in:Povertyheadcount

Incomegap ratio(percentage point)

13.2

20.3

6.3

2.7

2.5

8.7

0.0

0.2

3.7

37.6

0.1

⫺0.7

2.7
32.3
34.1

17.8
25.0
38.1

2.4
2.0
1.7

5.7
0.5
0.3

15.3

27.1

2.9

0.5

31.9

23.2

4.9

0.7

8.2

6.6

0.0

0.0

18.6

43.9

0.1

0.1

15.4
43.3
54.9

22.9
24.0
41.5

0.7
0.8
0.3

0.9
0.3
0.0

37.1

28.2

2.1

0.1

Source: World Bank.
Note: Computations using data from the GIDD. Poverty lineof 1.25 international 2005 dollars per day. The ratio of foodin total consumption among the poor is computed as described in De Hoyos and Lessem 2008. East Asia excludes
China. The Middle East comprises Jordan, Morocco, and theRepublic of Yemen.

Africa, reflecting the large number of people
in each of these regions living just above thepoverty line. The share of the urban population in extreme poverty is estimated to double from 2.7 to 5.2 percent in the Middle
East and North Africa and to increase by almost 50 percent in the East Asia and Pacificregion.
Some caution should be exercised in interpreting the figure for East Asia because the
GIDD data set does not include China, by far
the largest country in the region. As a result,the GIDD model reports an initial poverty

120

headcount ratio of 24 percent for urban andrural populations combined, a figure substantially higher than the 18 percent reported in
Chen and Ravallion (2008), which includes
China. The impact that this discrepancy hason the global poverty estimates depends onthe difference between the poverty effects ofhigher food prices in China and those effects
in the average East Asian country. In the absence of household-level information for
China, the underlying assumption is that thepoverty impacts there (that is, the change inthe headcount ratio and the income gap ratio)
will be equal to the average poverty effects forthe region.
Overall, the rise in food prices increases theglobal poverty deficit (the amount that a perfectly targeted poverty alleviation program
would need to spend to bring all of those living on less than $1 a day up to the povertyline) from 8.2 to 13.4 percent of developingcountry GDP, or an increase of $37 billion.
The income gap ratio (the average difference
between the incomes of poor people and thepoverty line, expressed as a percent of thepoverty line) rises by much more in urban
than in rural areas, reflecting increased earnings in rural areas when food prices rise. The
difference is particularly dramatic in East Asiaand the Middle East, where the increase in theincome gap ratio in urban areas is more than
4 times larger than it is in rural areas.
The results presented in table 3.7 hide important heterogeneities across countries. Indeed, the increase in the poverty headcountand the deficit resulting from the rise in foodprices is less than one-fifth of a percentage
point for almost half of the countries analyzed. In around 40 percent of the countries
analyzed, higher food prices raise the headcount ratio by at least 0.2 percentage point;
and in 6 countries, the change in relative
prices reduces the incidence of poverty by atleast 0.2 percentage point. In some countries,
the measured impact of higher food prices
on poverty is small, or even negative, because
nonfood prices rose more quickly than foodprices during the period in question.31

D E A L I N GOver the long term, higher food prices willraise incomes in the agricultural sector
In most developing countries, higher foodprices raise the number of poor and lower incomes of the existing poor in the short term.
Over time, however, the impact on poverty
becomes less clear. The increased incomes offood sellers will raise incomes in rural areas(where the majority of poor live). The simulations summarized here do not reflect the multiplier effects of higher food prices on incomesin the agricultural sector nor any long-term
dynamic effects that may arise because agriculture has strong links to the rest of the economy. These include backward links, when
farmers purchase inputs such as chemicals,
fertilizers, and farm equipment for agriculture, and forward links, when agricultural
production provides raw materials to foodand fiber processing in the nonfarm sector.
Moreover, increases in agricultural incomesare usually spent on locally produced goods
and services, which generate local employment. In many African countries, for example,
on average for every $1 of additional farmincome, an additional $1.47 in net income
is generated in the wider economy, some ofwhich accrues to the poor (Delgado, Hopkins,
and Kelly 1998).
The long-term impacts of higher agricultural prices are difficult to measure because
they are lengthy and complex (World Bank
2007). They depend in part on public investments in roads, markets, irrigation, infrastructure, education, and health as well as on investments in the main factors of agricultural
production—land, labor, and capital—all ofwhich take a long time to adjust. Over time,increases in agricultural prices relative toother sectors slow migration out of agriculture
and increase capital investment, which results
in increased agricultural output.32
To the extent that agricultural sectors dosustain more rapid growth because of higher
food prices, rural poverty will be reduced, especially where the concentration of land ownership is low and labor-intensive technologies areused (Gaiha 1993; Datt and Ravillion 1998).

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Dealing with high foodand fuel prices

T

he priority for governments is to address
the immediate needs of the poor while
minimizing the impact on already-strained
budgets. Care must be exercised to do so in a
way that does not exacerbate the crisis or impair the economic adjustment of the economy
to higher prices. Given the necessity to respondquickly and the time and cost involved in gathering information on the poor, governments
have tended to respond to the rise in foodprices by increasing resources to existing antipoverty programs. While a logical response,
in many cases care has not been taken toclearly define the temporary boost in spending
to compensate for a temporary rise in foodprices by announcing, for example, a limited
time for improved benefits or by tying them
explicitly to food prices to avoid creating an
unnecessary, permanent, and unsustainablefiscal burden.
Over the medium term, governments needto put in place more efficient policies for protecting the poor and supporting agriculture, sothat the next crisis can be met without seriously impairing incentives for production or
ramping up wasteful spending. Such policies
would entail better targeted and more efficient
safety nets, along with steps to achieve the potential for strong improvements in agricultural
production described in chapter 2, including
investing in agricultural research and infrastructure, promoting the diffusion of bestpractices, and reducing carbon emissions tominimize the extent of climate change in thelong term.

The immediate response has been policies
designed to mitigate the impact of risingfood and fuel prices
The immediate response of most countries tothe rapid rise in food and fuel prices during
the course of 2008 has included a mix of market interventions and the scaling up of existing
antipoverty measures. Almost three-quartersof the 80 developing countries surveyed by the121G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure 3.15 Developing countries have
responded to rising food prices with avariety of policies

Figure 3.16 Countries have tended to expand
cash transfers and school feeding programs
when responding to higher food prices

Percent

Percent

60

70

50

60
50

40

40
30

30

20

20

10

10
0

0
Reducefoodgrain
taxes

Increase
ExportPrice
foodgrain restrictions controls/
stocksconsumersubsidiesCashtransfer

None

Food for Food ration/
work
stamp

Schoolfeeding

None

Source: Revenga, Wodon, and Zaman 2008.

Source: Revenga, Wodon, and Zaman 2008.

World Bank in March 2008 have taken somepolicy action in response to the rise in foodprices (figure 3.15).
The most common response was reduced
tariffs on imports combined with price controls or consumer subsidies, followed by bansor restrictions on exports and decisions to add
to official grain stocks. Most oil-importing
countries have passed through all or morethan all of the fuel price increases since 2003,
but on average oil-exporting countries havepassed through only about one-half of the increase (Mati 2008).33 Indeed, as oil prices hit
the $140 range, the fiscal cost of fuel subsidies
became very large in some oil-exporting countries and represented a significant challenge tofiscal sustainability. Some 36 countries responded to higher fuel prices by increasing
subsidies and 43 by lowering fuel taxes (IMF
2008a). Those countries that have expanded
existing safety net programs have favored cashtransfers and school-feeding systems. Food forwork and food stamps were also popular options (figure 3.16).
Overall, the additional fiscal costs of measures aimed at offsetting higher fuel and foodcosts varies from zero to a maximum of
4.8 percent of GDP, with food and fuel pricesubsidies the most costly measures implemented (table 3.8). However, individual coun-

122

Table 3.8 Fiscal costs of selected
antipoverty measures vary widely
Number ofcountries
whereimplemented

Maximumincrease(percent ofGDP)

Medianincrease(percent ofGDP)

Food tax decreases
Food price subsidies
Targeted transfers
Public sector wage hikes

31
28
21
10

1.1
2.7
2.0
1.9

0.1
0.2
0.2
0.6

Fuel subsidies
Fuel tax reductions

38
37

4.0
1.3

0.7
0.3

Aggregate costs

79

4.8

0.7

MeasureSource: IMF 2008a.

try experience varied widely. Indeed, although
the majority of countries increased spending—either because preexisting subsidy policies
became much more expensive or because of
direct measures—some actually reduced thescope of programs and cut into spending because of increased budgetary cost.

Policies need to be more targeted andmore supportive of medium-term
adjustment
Although subsidies and export restrictions
have helped dampen the immediate impactof higher prices in the countries where they are
implemented, they are very expensive andoften poorly targeted. Moreover, they tend to
exacerbate the extent and duration of theD E A L I N G

crisis by reducing producers’ incentives to increase output and consumers’ incentives to reduce demand. Over the medium-term, policy
makers need to redress the balance, placing
more emphasis on well-targeted antipoverty
measures and on policies that promote increased supply and more prudent use of natural resources.

Subsidies and price floors are expensive
and poorly targeted antipoverty measures
Food and fuel subsidies tend to be costly andpoorly targeted, even when steps are taken to
make the subsidized material available only tocertain segments of the population. For example, the Egyptian system of food subsidies istargeted at the poor by restricting access to
subsidized flour to the truly poor, by locating
distribution points in poor neighborhoods,
and by using lower-quality products. Nevertheless, the system is very expensive (with anestimated financial cost of 2 percent of GDP)and ineffective (World Bank 2005a). Between
one-quarter and one-third of the poor do notbenefit from it, and fully 83 percent of thevalue of the food subsidies goes to the nonpoor. Moreover, those poor and vulnerable
households that do benefit receive so little thatthe net effect is to lift only 5 percent of the
population out of poverty.
General fuel subsidies tend to be even more
regressive and more costly than food subsidies
because they involve substantial leakages ofbenefits to higher-income groups. A study offive countries from various regions found thaton average 78 percent of fuel subsidies went to
the richest 60 percent of households (Coadyand others 2006). Even when targetedthrough voucher programs, fuel subsidies tend
to be ineffective. In India, for example, about
half of subsidized kerosene34 (which is madeavailable to poor families on a quota basis at
9 rupees a liter) is diverted to the black market where it is either sold at a higher price oris used to adulterate diesel, which sells forabout 30 rupees per liter.35
More generalized price subsidies or pricefloors (including indirect ones such as man-W I T HC H A N G I N G

C O M M O D I T Y

P R I C E S

dating the national oil company to sell at
below cost) are also common and can be very
expensive.36 Estimates suggest that India’s
total fuel subsidies amount to about 2 percent
of GDP. Even after reform, the fuel subsidy inIndonesia is expected to total 127 trillion
Indonesian rupiah ($13.9 billion) in 2008 andmake up about 13 percent of the country’s
total budget (more than the total of spending
on education and health).
The imposition of export bans by foodexporting countries has the same basic goal of
keeping consumer prices below the market
level.37 Some 20 developing counties haveintroduced such bans since 2007, including
Argentina, China, Egypt, India, Kazakhstan,
Pakistan, Russia, Ukraine, and Vietnam. Several different policies have been used, including export taxes on a particular commodity(India), taxes on transport (Kazakhstan), restricting licenses to export (Argentina), and acomplete ban on exports (Vietnam).

Price containment policies distortincentives, reducing supply, limiting
conservation, and exacerbating andprolonging high prices
While expensive and generally poorly targeted,
all of these policies (price subsidies, pricefloors, and export bans) do succeed in limiting
the immediate domestic impact of rising international prices. However, they do so at a cost.
Not only are they fiscally unsustainable inmany cases, but they also tend to exacerbate
and prolong the price increase. Lower producer prices mean that less new supply is forthcoming, while lower consumer prices meansthat demand is not curtailed—both domestically and internationally. For example a seriesof steps taken by Serbia in 2007 to secure domestic supply, including a temporary ban onexports of wheat, maize, soybeans, and sunflower backfired. Serbia’s wheat plantings fell
to a 90-year low (partly because of bad
weather) and prices rose (USDA 2007).
The problem with export bans is even more
severe. Although they are domestically appealing, these bans decrease confidence of net

123G L O B A L

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P R O S P E C T S

2 0 0 9Figure 3.17 After India banned rice exports,
international prices rose

Table 3.9 Increasing rice self-sufficiency
can be more costly than relying on imports
Cost of riceconsumption

US$/ton375
360

India banned rice
exports

ImportSelfProduction Consumption Imports strategy sufficiency

345(millions of metric tons)($US billions)

330
315

07

/1
7
07 /07
/3
1/
08 07
/1
4
08 /07/2
8
09 /07/1
1
09 /07/2
5
10 /07/0
9
10 /07/2
3
11 /07/0
6
11 /07/20
12 /07/0
4
12 /07
/1
8/
07

300

Source: International Grains Council, USDA.
Note: Price for Thailand's export price ($/ton) for 100 percent B
white rice.

importers in the international trading system
as a reliable source of food. For example, following India’s ban on exports of premium riceon October 9, 2007, domestic prices remained
well below international prices, but the withdrawal of supply from international markets
sparked an almost immediate rise in international rice prices (figure 3.17).38
Although countries’ food security concerns
are legitimate, a widespread return to policies
of food self-sufficiency could be very costly
depending on how quickly it is achieved, theresource endowments of the country and thepolicies used to achieve it.39 If investments inresearch and infrastructure are made to improve productivity, the costs may not be toohigh. Although the rate of return on suchinvestments is high, it can take many years
to raise production enough to achieve selfsufficiency.
If price policies are used to boost domestic
production, the costs could be very high andthe effectiveness uncertain. First, the supply
response of the agricultural sector as a whole
is low (Cavallo 1988).40 Raising the total of
agricultural production as opposed to production of a single crop takes many years. Thus,
unless a policy is very carefully constructed, itrisks increasing production in one food item atthe expense of reduced production (and increased dependence) in another.

124

China
Indonesia
Nigeria
Iran,
Islamic
Rep.
Iraq
European
Union
Philippines
Bangladesh
SenegalCôte
d’Ivoire
Total

123.2
33.8
2.2

133.8
36.1
3.7

10.6
2.3
1.6

28.8
7.8
0.8

43.2
11.6
1.2

1.6
0.1

2.9
1.1

1.3
1.0

0.6
0.2

0.9
0.4

1.7
8.7
25.3
0.1

2.6
9.6
26.0
0.9

0.9
0.9
0.8
0.7

0.6
2.1
5.6
0.2

0.8
3.1
8.4
0.3

0.5
197.2

1.2
217.9

0.7
20.7

0.3
46.8

0.4
70.3

Source: World Bank.

Moreover, using a price subsidy or import
restrictions to boost domestic prices and induce additional production is often a costly
alternative to importing (table 3.9). For example, to increase domestic rice output by
10 percent, a country would have to increase
domestic prices by as much as 50 percent.41
For the 10 largest rice importers over 2000–05(who imported about 10 percent of their total
consumption), achieving self-sufficiency inthis way would imply a $24 billion dollar increase in food costs compared with the current
situation where the rice is imported—mainly
because the extra 50 percent would have tobe paid both on the rice currently produced
domestically as well as on the new rice to be
produced (currently imported).
A better approach would be to enter into
long-term supply arrangements, such as those
discussed earlier in the context of the oil market. Under these agreements, importing countries could agree to buy a minimum amount ofgrain or other food crop each year in exchange
for a commitment by the exporting country
to meet larger imports when needed. Alternatively, countries might make more intensive

D E A L I N G

use of the kinds of conditional contracting recently used by Malawi (see box 3.6).

Over the medium term, countries need tomove toward more flexible and targetedsocial safety net schemes
Having weathered the initial consequences ofhigh food and fuel prices, countries need totransfer more of the burden of dealing withhigh prices to better-targeted social safety nets
and market mechanisms. Doing so will bringboth fiscal and economic benefits, in the formof increased poverty reduction, reduced cost,and lower commodity prices.
There is no magic prescription for effective
social safety nets, especially among developing
countries where both fiscal and administrative
resources are often in short supply. Successful
systems usually consist of several individual
programs that complement each other as wellas other public or social policies. Ultimately,
the particular policy mix put into place will
depend on the country context.
Nevertheless, there is general consensus on
the relative strengths and weaknesses of different forms of support. A loose ranking of
programs would favor targeted cash transfersof adequate coverage, generosity, and quality
as the best option and could include increasing
pensions and unemployment benefits when
they target the poor (box 3.8).
Emergency food aid distribution, used inplaces like Afghanistan and Angola, often in
partnership with agencies such as the World
Food Programme (WFP), ensure food security
for vulnerable groups and are appropriate
where markets are functioning poorly or
where foreign assistance is only available inkind, but the physical transfer and potential
leakages can make these programs costly.
School feeding programs can be used for aquick response, but these do not typically address child malnutrition at its most criticalpoint—when children are in their infancy. Conditional cash transfer programs can help foster
increased use of health and education services
and are generally most efficient, but they are
not always a feasible option in low-income

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P R I C E S

countries with weak administrative capacity.
Finally, public works programs, in food or
cash (such as in Cambodia and Mozambique),can be effective only for a few areas and forpeople who are currently unemployed.
Household targeting systems—such as
proxy means tests or means tests, sometimes
community-based decision making, or hybrids
among these—can be effective in directing resources to the poor. Where a household targeting system is not in place, a combination ofgeographic targeting, self-targeting, or demographic targeting can produce at least moderately good results, reducing the cost of administrative targeting.42 For example, school
feeding programs targeted geographically topoor rural areas may have relatively low
errors of inclusion. Self-targeting can beachieved by setting low wages for labor-intensive public works. Open market operations
for food sales can be geographically targeted
to slum areas, with a limitation on quantityand provision of an inferior staple commodity
inducing some degree of self-targeting. Fees
for networked electricity can be differentiatedby use level or neighborhood. Provision of fortified weaning foods that are culturally acceptable for only very young children is agood use of demographic targeting.

Although the economics of reform aresolid, eliminating existing but inefficient
antipoverty measures is politically difficult
Removing subsidies is difficult and can be met
with strong opposition and violent protest.
Nevertheless, given the fiscal burden thatsuch subsidies impose—especially on oil
importers—governments have little choice but
to reform. While many different approaches
have been followed, those that have worked
have tended to use a strategy that replaces thesubsidy with a better-targeted benefit, preceded by an effective publicity campaign thatemphasizes the poorly targeted nature of theexisting subsidy (Kojima and Bacon 2006).
Several countries have used some variationof this approach. Chile made a one-time payment of $28 to low-income households to125

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2 0 0 9Box 3.8 Conditional cash transfers are most effectivein getting money to the poorT

argeted cash transfers are the cornerstone ofsafety net programs in most of the countries
with safety nets. They help protect poor households
by providing them with the resources they need tomaintain a minimum level of consumption. These are
the most flexible programs and can be adapted toparticular circumstances. It is not surprising that targeted cash transfers are used in countries of varying
income level, from Albania to Mexico to Zambia.
Even poor countries can afford to allocate resources for safety net programs. The fiscal costs of awell-targeted safety net for the poorest need not be
unduly high. For a large share of developing countries, spending on overall safety nets has been on theorder of 1–2 percent of GDP in recent years. However, the costs of the responses differ according to
the scope, generosity, and degree of targeting: ranging from a mere 0.04 percent of GDP in Chile (for awell-targeted response) to more than 1 percent of
GDP in Ethiopia (for lifting the value added tax onfood grains, raising the wage on the cash-for-work
program, and distributing wheat to the urban poorat a subsidized price). A careful fiscal-planning exercise will be needed in each country. Such a planshould seek to protect critical growth-enhancing
spending and prune low-priority expenditures, andbe embedded in a medium-term fiscal sustainability
strategy so that the longer-term fiscal sustainabilityof the program is ensured. For the poorest countries,
international assistance will be essential.
The quality and care with which programs aredesigned and implemented, including the selection,
provision, and monitoring of benefits, have a large
impact on program efficiency and effectiveness.
No program is a guaranteed success, and few areguaranteed failures. The role of good systems andadroit managers in getting the most from a program
cannot be overemphasized.
Conditional cash transfer programs have a good
reputation and are an effective mechanism for directing assistance toward the poor. Large-scale conditional cash transfer programs were developed in
Mexico (Progresa, Oportunidades) and in Brazil(Bolsa familia) and later spread to other countries in
Latin America and the Caribbean and to the rest of
the world. Those programs are well targeted to poorfamilies through a combination of geographic prioritization and household assessment mechanisms andare particularly efficient in providing transfer to thepoor. Administrative costs are relatively low, averaging about 5 percent of total program costs after
start-up, compared with food-based programs,
whose administrative costs average 36 percent of
total program costs. However, because they are moredifficult to set up than unconditional programs andmight exclude the neediest where services are scarce,
cash transfer programs can be part of an emergency
response, for example to high food prices, where
they are already established.
Care must be taken to ensure that the policy response to temporary crises is temporary. Although apermanent increase in fiscal space may be justified incountries that have underinvested in adequate safety
net systems, in countries that already had broadly
adequate safety nets a temporary expansion of benefits may be best. Permanent changes in the benefit
levels or scope of the transfer program can be
avoided by targeting additional benefits at those already qualified for a program; making payments in alump sum or explicitly time-limited fashion.
Source: Grosh, del Ninno, and Tesliuc 2008.

compensate for higher fuel prices and provided
extra cash compensation to 1.4 million households consuming less than 150 kilowatt-hoursof electricity a month. Indonesia used an effective public relations campaign, coupled with acash compensation scheme and general trust in
the government, to more than double gasoline

126

and diesel prices and nearly triple kerosene
prices in 2005 with no substantial opposition.
Ghana combined prior analysis of who benefited from fuel subsidies with a campaign publishing the measures that would be used tocompensate for removing subsidies in a successful effort to remove subsidies (box 3.9).

D E A L I N G

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Box 3.9 Removing fuel subsidies in Ghana

Ghana could not continue fuel subsidies as world
oil prices rose in 2004, and the government
launched a poverty and social impact assessment tostudy the situation. Guided by a steering committeeof stakeholders from ministries, academia, and thenational oil company, the assessment was completed
in less than a year. By the time the government announced the 50 percent price increases in February
2005, it could use the assessment findings to makeits case for liberalizing fuel prices to the public—
including the fact that the price subsidies mostly
benefited the better-off.
The minister of finance launched the public relations campaign with a broadcast explaining the needfor the price increases and announcing measures to

The international response tohigh commodity pricesT

he effectiveness of the policy response to
the recent rise in food and fuel prices
will, in the main, depend on the ability of individual governments to put in place welltargeted programs to ameliorate hardshipand to provide the infrastructure, services,
and appropriate incentives required to raise
food production and encourage adjustments
to high food and fuel prices. For the poorest
countries, some form of additional assistancewill be required, while for other countries international coordination may be required tohelp restore confidence in global food markets and provide emergency assistance forpoor consumers.

The loss of real income from higher foodprices is too great to compensate all
consumers
As discussed earlier, the rise in food and fuelprices substantially reduced the purchasing
power of the poor throughout the developing

mitigate their impact. A series of interviews withgovernment officials and trade union representatives
followed. The Energy Ministry used newspaper advertisements with charts to show that Ghana’s fuelprices were the lowest in West Africa, after Nigeria’s.
The mitigation measures, which were transparent
and easily monitored by society, included an immediate elimination of fees at government-run primaryand junior secondary schools and a program to
improve public transport. Although the trade unions
remained opposed to the price increases, the publicgenerally accepted them, and no large-scaledemonstrations occurred.
Source: Bacon and Kojima 2006.

world. During such episodes, short-term assistance is urgently needed to avoid hardship.
However, effective targeting of assistance iscritical. The cost of compensating all consumers for the rise in food prices alone since
January 2007 is impossibly large—perhaps
more than $270 billion annually. Moreover,insulating consumers from the effects of priceincreases (and taxing producers to finance thisassistance) delays the necessary adjustments indemand and supply that will eventually bringprices down.
Even if a program could be devised thatconcentrated aid only on the poor, it would
cost some $38 billion annually, or about
14 percent of all official development aid in
2007. Focusing international assistance on
the poorest countries makes sense, in part because higher proportions of their populations
are extremely poor and because their own fiscal resources are particularly weak. The total
cost of reversing the poverty impact of higher
food prices in IDA-eligible countries would
be a more manageable $2.4 billion.

127

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2 0 0 9Box 3.10 The international response to risingfood prices

T

he UN secretary-general established a Task Forceon the Global Food Security Crisis aimed at promoting a unified response to the global food pricechallenge. An initial meeting was held in June 2008,attended by 181 countries, and 60 nongovernmental
and civil society organizations.
The summit concluded with a declaration callingon the international community to increase assistance for developing counties, in particular the least
developed countries and those that are most negatively affected by high food prices. The immediate response was to call for increased humanitarian assistance to those hardest hit by the rise in food prices

through food aid and balance of payments support
to countries. The medium-term response has been toassist countries to put in place revised policies andmeasures to help farmers, particularly small-scale
producers, to increase production and integrate into
local, regional, and international markets along withmeasures to moderate the fluctuations in food grain
prices through increased stockholding capacity andbetter use of risk management practices. Longer-term
responses have focused on how to increase the resiliency of food production systems to challenges
posed by climate change.

The international community has reacted
swiftly to the rise in food prices
The international community has been quick
to recognize the serious risks that higher foodprices posed for the poor. The United Nations
has established a Task Force on the Global
Food Security Crisis to formulate a unified response to the food crisis (box 3.10).
Donors ramped up existing programs andlaunched new initiatives to speed the provision of food aid to the poor. Examples include
the Food and Agricultural Organization has
launched the Initiative on Soaring Food Prices,which assists small-holders in critically affected countries (beginning with Burkina
Faso, Haiti, Mauritania, and Senegal) to obtain seeds, fertilizers, and animal feedstock;
the International Fund for Agricultural Development (IFAD) is making up to $200 million
from existing loans and grants available to improve poor farmers’ access to seeds and fertilizer; bilateral donors (for example, the U.S.
Agency for International Development andthe U.K. Department for International Development) are focusing existing programs on
countries most affected by the food crisis; theEuropean Union has committed ⇔€1.0 billion
in funds from European farm subsidies that128

have not been used (because high prices have
reduced the compensatory amounts payableto farmers) to farmers in developing countries,
mostly in Africa; and the World Food Programme has pledged $214 million to provide
assistance to vulnerable groups.
For its part, the World Bank has created a$1.2 billion rapid financing facility, the Global
Food Crisis Response Program (GFRP), to address immediate needs arising from the foodcrisis. The facility includes $200 million in
grants targeted at vulnerable poor countries,
with priority given to the most fragile states.
The GFRP strives to create a balance between short-run food stabilization and measures to ensure that countries are able to cope
better in the medium term. Countries can select measures most relevant to their individual
situations from program components that
address price policies, social protection andnutrition, and immediate supply response provisions for getting seeds and fertilizers tofarmers.
The World Bank is also establishing a multidonor trust fund, with an initial contribution
from Saudi Arabia, to help the poor respondto high energy and food prices. This fund will
operate in parallel with the GFRP and will

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provide priority assistance to countries whose
economies are most severely affected by theincrease in the price of imported fuel, thathave already embraced or are pursuing energies policies that are more fiscally sustainable,
and that propose cost-effective social safety
net programs.

Improvements are required in thearchitecture for humanitarian aid tostrengthen the response to the food crisis
The dramatic increase in food prices has underlined the importance of improving the efficiency of programs to deliver emergency foodaid. Bilateral food aid programs are largely
based on the disposal of surplus commodities.
This approach has played an important role ingarnering political support for the provisionof food aid. However, 60–86 percent of theaid is tied, either directly to commodities provided by the donor country or through constraints on the use of cash donations (FAO
2006). As a consequence, the cost of this aid
can be 30–50 percent higher than nontied
sources (OECD 2005). Moreover, tied foodaid of this type slows the delivery of food aid,
and reduces supplier incentives in local foodmarkets. 43
Progress is being made in improving theadministration of food aid programs. Somedonors have lifted requirements that food aid
be procured domestically and have shiftedfrom providing commodities to providing
cash, making it possible to purchase some food
locally. Resources have shifted toward the provision of emergency aid, implying an improvement in the targeting of food aid (FAO 2006).
Additional efforts to provide cash aid andallow the food to be purchased where andfrom whom made most economic sense would
reduce costs and help make food aid a more
efficient instrument in reducing poverty.
Improvements in food aid management are
required at the international level as well. The
main multilateral provider of food assistanceis the UN’s World Food Programme, which
delivers more than half of the humanitarian
food aid in the world. Higher food prices haveW I T HC H A N G I N G

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made it very expensive for the WFP to purchase food on international markets, threatening its capacity to deliver emergency humanitarian aid in a timely manner.
A strengthening of the financing arrangements for the WFP could markedly improve theefficiency of its operations, allowing for an expansion in food aid and a reduction in costs.44
Financing of the WFP depends on voluntary
contributions from donor countries that arelargely tied to assistance for specific countries
or programs on a year-to-year basis.45 As a result, WFP programs can be designed and implemented only after financing is committed.
Contributions are often based on surplus disposal, with provision that the food be transported on the carriers of the donating nation.
These arrangements are major constraints
on the WFP’s ability to respond flexibly andefficiently to the need for assistance. The timerequired to obtain donor commitments makes
it difficult to respond to unexpected shocks.
The timing of commitments also can meanthat food purchases must be made when prices
are at seasonal highs rather than following
harvest when prices are at seasonal lows. Several donors provide commodities rather thancash, significantly increasing the cost of foodcompared to local purchases. Providing an annual dollar budget equivalent to the value ofcurrent commitments would dramatically improve the efficiency of WFP operations. Given
the volatility of food prices, this budget might
be supplemented by a line of credit uponwhich it could draw in years when either
prices or needs are unusually high.

Steps to assist the replenishment ofinternational grain stocks would help
The role that low stocks have played in therise of food prices has raised the issue of
whether or not an international food stockpile
should be created to help prevent a repetitionof the past year’s high prices, in part by ensuring that supply would be available to themarket and by dissuading speculative behavior. While an appealing notion, it is not clearthat such a stockpile would be effective—or

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2 0 0 9needed. To have a significant dampening effecton the market, such a stockpile would have to
be large and would be very expensive to create
and maintain. Rough calculations suggest thata stockpile equivalent to 10 percent of global
production would cost about $66 billion
to create and some $8–10 billion annually
to maintain.46 Moreover, the creation of thestockpile would add significantly to global
food demand and price pressures during theperiod in which it was being created. Nor is it
clear that a global stockpile would actually increase world stocks. The public stock increase
may well be matched by a reduction in private
stocks, thus transferring the costs of keeping a
stock to the public sector without necessarily
improving the stability of the market.
A more effective strategy might be to improve information flows about stocks and create mechanisms by which they can be managed. Currently most stocks are held by alimited number of major producers and importers. It may be possible to create an international agreement that provides for the sharing of some of these costs—perhaps along thelines of the International Energy Agency
agreement governing oil reserves. As in thatagreement, the rules for accumulating and distributing grain stocks would need to be clearly
defined to prevent their being used for surplus
disposal or price support and to ensure they
are used for humanitarian purposes.

More multilateral discipline in trade policies
would help mitigate the rise in food prices
A range of multilateral and trade policies(export restrictions, biofuel subsidies, tariffs,
mandates, and global protection of agriculture
more generally) have contributed to the risein food prices. Moreover they have reduced
confidence in the international food trading
system and interfered with consumer and producer incentives, reducing supply and increasing demand. As a result, the price hike has
been larger and longer lasting than it would
have been otherwise.
A strengthening of existing internationalrules governing the imposition of export re-

130

strictions may be desirable. Currently, unlike
countervailing duties, the conditions that must
be met before export restrictions are introduced are ill defined, and although there is arequirement that the World Trade Organization be notified of their implementation, it is
not enforced.47 Even the enhanced rules proposed under the Doha Round should probably
be strengthened.48 Helpful measures might include including stricter (even pre-) notification
requirements, limits on the allowed durationof restrictions, and possibly a definition of theconditions under which such restrictions
might be admissible.
Policy makers should also consider phasingout biofuel subsidies and production mandates, especially where these are coupled withtariffs that restrict imports from lower-cost
producers. This step would both reduce pressure on food prices and help low-cost andenvironmentally cleaner developing-country
biofuel producers that are currently shutout of major markets by these rules.49 There
are indications that a number of developed
countries are beginning to reexamine their
biofuel policies, but it remains a contentious
issue.
More fundamentally, decades of tradedistorting policies (such as tariffs, quantitative
restrictions, and subsidies) are partly responsible for the current spike in food prices, having
encouraged inefficient agricultural production
in rich countries and discouraged efficient
production in developing countries (Chauffour 2008). The kind of agricultural trade barrier reductions contemplated in the Doha
Round might lead to higher agricultural prices
in the short term, but in the long run, theyshould help establish a more transparent,
rules-based, and predictable food trading system that would stimulate trade and raise incomes around the world. An ambitious program could reduce global poverty by as muchas 8 percent (World Bank 2004).50
Moreover, removal of the rules that allow
such trade restrictions would help ensure that,as prices come down, countries cannot introduce new subsidies and restrictions in an effort

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to prevent domestic producers’ prices from declining as sharply as they would otherwise.

Conclusions

T

he rise in primary commodity prices since2003 was much larger and more sustained
than those of earlier periods. This boom generated dramatic transfers of income within andamong countries and has imposed severe burdens on some consumers. However, it has also
created opportunities for producers and these,
if managed properly, can provide significant
growth opportunities. The boom has also exposed weaknesses in domestic and international policies that have contributed to andprolonged the period of high prices and reduced confidence in international markets.
For commodity producers, commodity
dependence need not hurt long-term growth.
Although commodity-dependent economies
have, on average, grown more slowly thanmore-diversified economies, for mosteconomies dependence on commodities is theresult of slow growth, not the cause. To
achieve the growth potential inherent in commodity riches, countries need to implement
policies that minimize the potential disruptive
impacts of volatile export revenues, exchange
rate appreciation that can erode the competitiveness of manufacturing, and incentives forrent seeking and corruption. It would appear
that producing countries have responded tohigher prices in a more prudent manner during this boom than in the past. Fiscal policy
has been less procyclical than in the past,
countries have made greater efforts to save
windfall profits, and rate appreciation has
been muted. As a result, they are less likely toendure the major setbacks that characterized
the 1980s as prices declined. An exception tothis generally welcome response has been theperformance of countries with newfoundcommodity wealth and some newly independent resource-rich countries that may haverepeated some of the mistakes of the past.
Consumers have faced daunting challenges
from the commodity price boom. The rise in

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food prices has presented the greater challenge
because the poor in developing countries spend
as much as half of their incomes on food, while
fuel is a smaller share of their expenditures. The
rise in food prices has increased poverty andboosted the cost of many countries’ poorly targeted and inefficient subsidy programs, which
by limiting the impact of food and fuel prices
impede the necessary adjustment to high prices.
The expansion of existing programs and theadoption of emergency measures are understandable, given the magnitude of the oil andfood price increases, the potentially dire implications for the poor, and the limited time. However, the high cost of this response underlines
the importance of putting in place well-targetedand efficient safety net programs, so that nexttime countries can address the needs of thepoor without incurring undue fiscal costs. Thisepisode has also shone light on the need forinternational coordination to encourage countries to avoid counterproductive policies andto marshal aid resources to help the poor.
Policies to deal with the rising food andfuel prices have often exacerbated the problem by slowing necessary adjustments. Suchpolicy responses have included price controls
and export bans that have impaired incentives
to reduce consumption and invest in the additional capacity that would help bring prices
down, while weakening confidence in theinternational trading system.
The dramatic increase in food prices has
underlined the importance of improving theefficiency of programs to deliver emergency
food aid and transition these programs fromlargely surplus disposal programs to effective
humanitarian assistance programs with fewer
constraints on their use. A range of multilateral and trade policies (export restrictions,biofuels subsidies, tariffs, mandates, andglobal protection of agriculture more generally) have contributed to the rise in foodprices and need to be reconsidered. The Doha
Round, while not likely to lower food prices
in the near term, would provide longer-term
discipline to agricultural policies and raise
incomes around the world.

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2 0 0 9Technical Annex: Sensitivity
AnalysisT

he poverty effects of higher food prices
discussed in chapter 3 are based on a number of assumptions. This annex reports thesensitivity of the results (change in the numberof poor and the change in the income gap
ratio) under different assumptions regarding
the nature of the price shock and the proportion of increased food expenditures that accrue
to agricultural households.
The results presented in the main text deflate the increase in food prices by the nonfood deflator. More traditionally in highincome countries, where food represents asmall share of total spending, real food prices
are deflated by the overall consumer priceindex. If the whole consumer price index had
been used to deflate the increase in foodprices, the overall shock would have beenmuch smaller and hence the estimated poverty
effects would have been milder. Under this
scenario, labeled “real price change” in table
3A.1, the total number of poor would bearound half as large as in the central scenario.

Another important assumption driving theestimated poverty effects is the allocation of
the revenues from higher food prices to different households. In the central scenario, producer prices are increased by the same proportion as consumer prices. To the extent that
all of the increase in retail food prices is attributable to an increase in farmgate prices,then the proportional increase in farmgate
prices should have been larger than that experienced by retail prices.51 The other issue is
how the price change affects the incomes ofdifferent households. In the kind of short-term
simulation being conducted here, wages andemployment are normally held constant.
Therefore, only the incomes of self-employed
agricultural workers or landowners, who sell
the final product, should increase, not those of
agricultural wage laborers. Unfortunately, the
GIDD database does not distinguish between
different income sources. Therefore the datain the GIDD is complemented with information from the Rural Income Generating Activities (RIGA) project. RIGA is an FAO–WorldBank funded project that uses data from 21(household) Living Standards Measurement

Table 3A.1 Sensitivity analysis
Real price change

Relative price change
Central Scenario:

All agricultural
incomes affected

Self-employment
agricultural incomesaffected

All agricultural
incomes affected

Self-employment
agricultural incomesaffected

Change in number of poor (million)
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Developing world

52.1
0.0
0.4
1.9
10.8
2.0
67.2

59.9
0.0
0.8
3.0
14.3
2.2
80.3

103.7
0.1
0.7
4.6
16.8
5.7
131.6

114.7
0.1
1.3
7.2
24.4
5.9
153.5

Change in income gap ratio (percent)
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Developing world

0.36
0.00
0.00
0.03
0.17
0.10
0.16

0.43
0.00
0.01
0.06
0.24
0.11
0.21

0.78
0.00
0.01
0.09
0.28
0.30
0.33

0.93
0.00
0.01
0.15
0.43
0.32
0.41

RegionSource: World Bank.

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D E A L I N GSurveys (LSMS) to identify the various income
generating activities of rural households.52
The information on total agricultural incomesand self-employment agricultural incomes reported in RIGA is used to estimate the econometric relationship between this and percapita household income and consumption,
which was then used to impute agricultural income shares in all the households included in
the GIDD (De Hoyos and Medvedev 2008).53
If the short-term price increase benefits
only self-employed landowners, the increaseof self-employment agricultural incomesshould be larger than the increase in retailprices. At the limit, if agricultural wages andemployment are held constant, then all of theadditional income would accrue to landowners and none to farm workers.
Mathematically,P1c * Q1 ⫽ ⌸1 * SE ⫹ W1 * E ⫹ other costs,
where P1c , Q1 are the retail price and quantity
consumed of good 1, respectively. ⌸1, W1 are
remunerations of self-employed workers (including the return to land to self-employedlandowners) and wage earners, respectively.
Rearranging:P1c ⫽ ⌸1SE
other costs
EAG
⫹ W1
⫹
,
Q
Q
Q

where SE兾Q is profits share in total output.
We denote these as alpha and those of othercosts as beta, giving us:
P1c ⫽ ⌸1␣ ⫹ W1(1 ⫺ ␣ ⫺ ␤) ⫹ ␤other cost.
Q

Taking the total derivative while holding
wages and other costs constant gives us:d cdP ⫽␣ ⌸
dt
dt
or
d
1 d c
⌸⫽
P.
dt
␣ dt

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Numerically, if the landowner’s share in thevalue of output initially is 50 percent, then thepercent increase in his revenues will be twicethat of the increase in the retail price (assuming all the changes in retail price are translated
into increases in profits).
In the central scenario, all agricultural incomes are raised by the same amount as retailprices. This is tantamount to assuming thatwages, self-employed profits, and other costs
all rise by the same proportion as the increasein consumer food prices.
It is also equivalent to assuming that all of
the increase in farm incomes accrue tolandowners but that all the farm workers
work for poor landowners.
An alternative assumption is to assume that
only landowner incomes and other incomesrise in the same proportion as consumer
prices. This essentially assumes that none of
the agricultural workers work for proper
landowners. Under this assumption, the headcount poverty rate increases by substantiallymore— 153 million (see results in table 3A.1
under the label “self-employed agricultural incomes affected”).
The lower panel of table 3A.1 reports thechange in the income gap ratio (Foster, Greer,
and Thorbecke 1984)—the average difference
between the per capita income of poor households and the poverty line stated as a percent of
the poverty line—for the various scenarios. The
differences in the income gap ratio between different scenarios confirm that larger poverty impacts are found when the change in relative
prices is used as the shock and when only selfemployment agricultural household incomes are
assumed to respond to change in relative prices.

Notes
1. The idea that dependence on natural resources
may impede development dates back at least to the decline of Spain, a period when it was benefiting fromsubstantial gold inflows from the New World in the
17th century (Landes 1999). The idea was forcefully
restated by development theorists in the decades following World War II (such as Prebisch 1950 and Singer
1950) and continues to attract attention.

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2 0 0 9

2. Sachs and Warner (1995, 2001) are perhaps themost influential. See also Gylfason, Herbertsson, andZoega (1999); Leite and Weidmann (1999); Auty
(1998); and Bravo Ortega and De Gregorio (2005).
Gylfason (2001) finds that resource dependence is associated with lower education levels, implying that
economies dependent on primary commodities have
limited incentives to invest in human capital. Lederman
and Maloney (2007) find that the Sachs and Warner results are not robust to data modifications and changes
in estimation techniques.
3. Bevan, Collier, and Gunning (1991) provide
case-study evidence of excessive expenditures, debt accumulation, and low-quality investments during commodity price booms in Sub-Saharan Africa. Cuddington (1989) finds that many developing countries
overspent during and after the 1970s boom.
4. Manzano and Rigobon (2006), for example, findthat the post-boom slowdown in Latin America in the
1980s was almost entirely explained by the debt overhang accumulated during the boom period.
5. The average data presented in this section tend to
obscure the great diversity of country experiences, because both the rate of increase in government expenditures and in exports (relative to GDP) vary enormously. The difference between changes in the ratio ofexports to GDP and changes in the ratio of government
expenditures to GDP may be viewed as a rough summary indicator of the fiscal response to primary commodity booms. In both the 1980s and the 2000s, thisdifference varied by as much as 60 percent of GDP
between countries.
6. Historically, the very different circumstances facing individual countries were reflected in diverse fiscal
responses to commodity booms. For Sub-SaharanAfrica, see Deaton and Miller (1995); for a more geographically diverse collection of countries, see Collier
and Gunning (1994).
7. This analysis includes developing countries
where primary commodities accounted for more than70 percent of merchandise exports. Boom periods aredefined as sequential increases in merchandise export
revenues that average more than 10 percent a year.
Thus “booms” do not represent trough-to-peakchanges in prices but simply periods of rapid growthin export revenues in countries dependent on primarycommodities. We report simple averages of the percentage point change in the ratios of exports and government expenditures to GDP.
8. Because of the small number of countries in thesample for fuel exporters during the 1980s (owing to
the lack of government expenditure data for many
countries), these results must be treated with caution.
The basic results for nonfuel primary commodity exporters remain robust to the exclusion of the two134largest outliers in the sample (São Tomé and Principe,
whose government expenditures declined by 45 percentage points, and Paraguay, whose export revenuesrose by 37 percentage points of GDP).
9. For any given price forecast, countries with 70 or
80 years of reserves at current production levels have ahigher permanent income from the oil price rise thancountries with only 10 or 20 years of reserves at current production. Thus, assuming countries wish tosmooth the revenue flow over an extended period oftime, countries with large reserves relative to production should spend a larger share of the current revenues
than countries with smaller reserves.
10. The countries of concern here are mostly oil exporters. Based on available data, only one country(Zambia) relies on minerals for more than 70 percent
of export revenues. (Botswana’s dependence on diamonds would be another example, except that a large
share of diamond exports are counted as processed
goods in trade statistics.)
11. The calculation of the life span of reserves issubject to considerable uncertainty, given that geologists are continually increasing estimates of reserves,and changes in technology and in prices raise the shareof proven reserves that can be exploited profitably (seechapter 2).
12. This calculation does not take into account theshare of the increase in export revenues captured by thegovernment. Most of the high-reserves countries control their oil resources through a state company, buteven so the government may not see the full proceedsfrom the increase in price.
13. A brief discussion of this type of reduction in
the context of the Dutch disease is given in Sachs andWarner (1995). See also the references they cite andTorvik (2001).
14. Comparisons with the experience of the 1980s
are difficult to draw because of missing data for oilexporting countries. Moreover, after initially appreciating, the currencies of many non-oil primarycommodity exporters depreciated sharply in real terms
in the 1980s in reaction to the debt crisis, so that foreign exchange was limited, despite the rise in export
earnings.
15. On corruption, see Lane and Tornell (1999),
Baland and Francois (2000), Torvik (2002), and Wickand Bulte (2006). On resource wealth and civil wars,
see Collier and Hoeffler (2004). On inefficient distribution of rents, see Acemoglu and Robinson (2001).
16. Mehlum, Moene, and Torvik (2006) provide
evidence that natural resource abundance has a negative impact on growth only in countries with poor institutions. Murshed (2004) finds that oil and mineral
wealth slows growth through impairing institutional
development.

D E A L I N G

17. Oil and mineral wealth can be more heavily
taxed than agricultural wealth (see above) and thus
generates more opportunities for corruption.
18. The relationship between government revenues
and expenditures has been found to be weaker in countries with national revenue funds than in countries
without such funds (Davis and others 2001; Crain and
Devlin 2003). Analysis of 15 oil-dependent economies
over 30 years indicates that national revenue funds areassociated with reduced volatility of broad money andprices, but the relationship with real exchange volatility is weak (Shabsigh and Ilahi 2007).
19. In countries with strong political institutions (asmeasured by the existence of effective checks and balances in decision making), government consumption isunrelated to changes in oil revenues (that is, it is notprocyclical), but in countries with weak institutions,
government consumption is strongly related to oil revenues (Humphreys and Standbu 2004).
20. Such deals are, by no means a new phenomenon. Firms from high-income countries have enteredinto such contracts for several decades.
21. Factors such as delivery specifications, contract
liquidity, particular industry structures in various
countries, and transportation differences make defining standardized contracts more difficult.
22. “Indian Fuel Prices, Too Hot to Touch,” Economist, November 29, 2007.
23. Estimating the impact of rising metals prices iseven more difficult, because metals tend to enter into
the consumption basket of households only indirectlyin the form of manufactured goods.
24. The GIDD data set consists of 73 recent household surveys for low- and middle-income countries
complemented with more aggregate information on income distributions for 25 high-income and 22 developing countries, together representing 90 percent of
the world’s population.
25. According to household surveys in Africa, therelationship between food shares and per capita household incomes is concave, that is, for very low levels of
income, food shares accelerate as the households become richer. The household surveys indicate that in extremely poor households, consumption items such as
wood or kerosene are incompressible.
26. The cost is estimated as the change in thepoverty deficit (Atkinson 1987), that is, the variationin financial resources required to eliminate poverty
under a perfect targeting scenario.
27. This share assumes the same poverty line forrural and urban areas. Ravallion, Chen, and Sangrula(2007) use a higher poverty line for urban areas andshow that the rural share of poverty is 75 percent.
28. Real price increases are calculated as the total
increase in the ratio of the food and nonfood consumer

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price index (CPI) over the period January 2005–December 2007. This differs from the common practice in high-income countries where the numerator isthe level of the overall CPI including food prices. The
definition adopted here provides a better measure of
the relative increase in food prices because food is avery large share of the overall CPI in most developing countries. Were the more usual measure to be employed, the real price increases would be seriously
underestimated.
29. For details on this and other reported simulations, see De Hoyos and Medvedev (2008).
30. Despite a very different methodology and amuch smaller sample set, Ivanic and Martin (2008)
arrive at a similar figure—105 million.
31. In part, this reflects the influence of higher oil
prices on nonfood prices—-the numeraire used for calculating real food price increases. Unfortunately, too
few countries had information on the actual impact ofhigh fuel prices on the consumer price index to use a
nonfood non-oil index to deflate the increase in foodprices.
32. An analysis of Argentina suggests that a 10 percent increase in prices will increase output by 3.6, 7.1,
and 17.8 percent after 5, 10, and 20 years respectively(Cavallo 1988), a result that is consistent with Binswanger’s (1989) estimate that long-run effects may
take between 10 and 20 years to play out.
33. The pass-through was defined as the ratio of
absolute changes since December 2003 in the retailprice of fuel and the local currency price of the relevant
fuel import product.
34. Many countries subsidize kerosene, which isused for lighting and cooking fuel by the poor, andunlike gasoline and diesel, whose retail prices roseby more than the international price in 2007, themedian increase in domestic kerosene prices was only
85 percent of the international price increase (Mati2008).
35. “Indian Fuel Prices, Too Hot to Touch.” Economist, November 29, 2007.
36. For example, diesel is kept artificially cheap by
preventing state oil companies from raising prices; inreturn these companies issue oil bonds that the government guarantees.
37. Export bans are not new (the United States imposed one on soybeans in the 1970s and the European
Union banned wheat exports in 1995), but their use
has become more common.
38. India’s ban was later replaced by a minimum
export price, which was then replaced by another complete ban on exports. Other factors also contributed tothe increase in international rice prices, including thethinness of the international rice market and a simultaneous decision by consuming countries to increase135

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2 0 0 9demand to build stockpiles. Increased government-togovernment rice sales, which are not subject to the ban,have reduced its effectiveness.
39. Reacting to its inability to secure imports of ricein early 2007, the Philippines recently passed policies
aimed at achieving rice self-sufficiency.
40. Although the supply of a single crop may respond quickly to an increase in prices, supply is normally achieved through crop switching.
41. Binswanger (1989) estimates the long-term
price elasticity of supply to be approximately 0.2.
42. Self-targeted programs are designed to minimize the incentives the nonpoor may have to participate, typically achieved through a mix of rationing
benefits (such as limiting food quantities), imposing
physical requirements (such as manual work for food),
and limiting the subsidies to inferior commodities.
43. For example, delivery of emergency food aid
provided under U.S. Title II takes five months, on average (CARE 2006).
44. This discussions is based on “Strengthening theWorld Food Program’s Role in Humanitarian Food
Assistance,” a note prepared by World Bank staff.
45. Fully 93 percent of commitments are tied to
specific operations. A few countries (Canada, theNetherlands, Russia, and the United States) have begun
making limited three-year pledges.
46. Financing costs (based on a 6 percent interestrate) would be around $4 billion, while storage costs
would be around $1.4 billion, based on U.S. storage
costs of $0.29 a bushel or $10.70 a metric ton incurred
during 2004–07 for wheat in the Bill Emerson Humanitarian Trust (pers. comm., Fred Blott, USDA, August
11, 2008). Assuming that 3–5 percent of the stockpile
spoiled each year (consistent with losses in high-income
countries), the annual cost would be an additional$3–5 billion.
47. Under existing rules, export restrictions are allowed to prevent or relieve critical shortages of foodstuffs or other essential products. The last notification,
by Hungary, dates to 1997.
48. The Doha rules, for example, proposed that
notification be made within 90 days from the entry into
force of the measure and that it explain the reasons fortheir introduction. The rules also would limit the duration of export restrictions to 12 months unless importing members agree to an 18-month period.
49. This need not eliminate the impact of biofuels
production on food prices, because at some level all
biofuel production inevitably competes with food for
agricultural land, water, and other resources
50. A pro-poor agreement in which rich countries
cut tariff peaks to 10 percent in agriculture and 5 percent in manufacturing, combined with cuts of 15 and136

10 percent in developing countries, respectively, could
yield gains in developing countries of $315 billion over
10 years along with gains of $170 billion for rich countries (World Bank 2004).
51. The difference would stem from transport, merchandising, and other costs.
52. For more details on the LSMS household surveys
see http://www.worldbank.org/LSMS/. For a complete
description of the RIGA project, including publicationof the first results, see Carletto and others (2007).
53. Notice that given the data restrictions, all rural
households are assumed to have positive agriculturaland self-employment agricultural income shares, andtherefore a good part of the distribution story behindhigher food prices is lost.

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Appendix
Regional Economic Prospects

East Asia and the Pacific
Recent DevelopmentsS

ubstantial headwinds buffeted the economies
of East Asia and the Pacific during 2008,
causing GDP growth to slow sharply, from the10.5 percent pace of 2007 to 8.5 percent in
the year. The surge and relapse of crude oiland non-energy commodity prices affected alarge and diverse set of countries in the region,
from the hydrocarbon-exporting countries ofIndonesia, Malaysia, Papua New Guinea, andVietnam, to food and agricultural raw materials exporters, Thailand, the Philippines, andagain Indonesia and Malaysia. The fall tonegative ground in U.S. and Japanese importdemand—under way for more than two years
in the case of the United States—began to takea toll on the region’s export growth and todampen the earlier buoyancy of intra-region
trade.1
What began in August 2007 as financial difficulties in the United States tied to subprime
mortgage-based securities had turned into a
global financial crisis as of October 2008, raising risk perceptions for several economies in
East Asia. Equity markets were hard hit,spreads on international sovereign- and especially corporate debt increased sharply, exchange rates depreciated rapidly, and grosscapital flows to the region fell by half during
the first 9 months of 2008. Slower investment
growth in East Asia is now expected to spillover into still weaker production, employment, household spending, and GDP growth.

Growth outturns were fairly diverse acrossthe region in 2008. China registered a diminished 9.4 percent advance, down from 11.9
percent during 2007, on a slowdown in investment and smaller positive contributions togrowth from net exports. The larger membersof the Association of South Eastern Asian
Nations (ASEAN)—Indonesia, Malaysia, andThailand—grew 5.2 percent in the year, downfrom 6.1 percent during 2007. Growth inVietnam dropped by 2 full percentage points
to 6.5, in part as oil and non-energy commodities prices slumped, while a group ofsmaller economies saw a pick-up in growth to
5.1 percent from 3.7 percent, on the back ofrecovery in Fiji and continued strong growthin Papua New Guinea, powered by oil exports(table A1).
Even before the financial crisis intensified,there were signs of slowing growth. In China,
GDP in the third quarter of 2008 eased to again of 9 percent (year-over-year) from 11.2
percent in the final quarter of 2007, marking a
fifth consecutive quarter of slowing growth(figure A1). Thailand and Malaysia witnesseda larger falloff, with Thailand dropping to 2.9
percent in the second quarter from 7.1 (saar) in
the fourth quarter of 2007, and Malaysia
falling to 4.2 percent from 6.7 percent, on
softer exports and private consumption. In
contrast, growth in Indonesia accelerated,boosted by public spending financed from increases in windfall revenues thanks to highprices for hydrocarbons, fats, and oils.

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2 0 0 9

Table A1 East Asia and Pacific forecast summary(annual percent change unless indicated otherwise)
1991–2000a

2005

2006

2007

2008e

2009f

2010f

GDP at market prices (2000 US$)b
GDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

8.4
7.1
—
7.3
9.0
10.3
11.7
11.2
0.3
0.1
6.7
⫺0.7

9.1
8.2
9.1
7.5
10.9
12.6
18.5
11.0
4.1
5.8
6.5
⫺1.1

10.1
9.2
10.0
2.6
9.5
12.6
18.6
11.6
4.6
8.6
5.8
⫺0.6

10.5
9.7
10.5
3.4
11.8
12.9
15.4
10.9
3.8
10.5
4.0
0.2

8.5
7.6
8.4
5.6
13.0
10.5
8.3
10.8
0.2
9.0
7.5
⫺0.9

6.7
5.9
6.7
6.7
13.4
6.9
2.6
3.4
0.0
8.7
6.6
⫺1.4

7.8
7.0
7.8
7.9
10.4
8.4
9.7
11.7
0.5
7.7
4.9
⫺1.5

Memo items: GDP
East Asia excluding China
China
Indonesia
Thailand

4.8
10.4
4.2
4.5

5.4
10.4
5.7
4.5

5.7
11.6
5.5
5.1

6.2
11.9
6.3
4.8

5.3
9.4
6.0
4.6

4.0
7.5
4.4
3.6

5.3
8.5
6.0
5.0

Source: World Bank.
Notes: — ⫽ not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.

Figure A1 GDP growth eases in several East
Asian economies
GDP growth (percentage change, saar)
12
10

umes are expected to decline from 8.3 percent
in 2008 to 2.6 percent; investment to ease to
7 percent (still relatively strong due to developments in China), and net trade to contributeno impetus to regional growth for the firsttime in some years.

8

Commodity prices plummet;
export-market growth contracts

642
ChinaaQ4, 2007Thailand

Malaysia

Q1, 2008

Q2, 2008

Indonesia
Q3, 2008

Source: World Bank and national agencies.

a. China ⫽ year-on-year.

Regional GDP is projected to slow to 6.7
percent in 2009, the weakest since the dot.com
recession of 2001, and prior to that, the East
Asia crisis of 1997–98. Regional export vol-142

East Asia (excluding China), along with theLatin America region, has benefitted from highfood and fuel prices from 2005 through mid2008. During this period, terms of trade
improved by a cumulative 10.3 percent in Vietnam, 4 percent in Indonesia, and 4.8 percent in
Malaysia. In contrast, the terms of trade
moved against China by a substantial 11.4 percent, with little effect, however, on the current
account surplus. The steep decline in commodity prices since mid-2008 should benefit China
and other oil importers in the region, helping
to improve East Asia’s aggregate terms of tradeR E G I O N A L

by 3.5 percent in 2009, with China’s picking
up 5.5 percent.
Sharply higher food and fuel prices andoverheating in several economies accelerated
inflation in the region, from a median 5.7 percent increase during 2007 to 11.9 percent by
July 2008 (year-over-year). September figures(8.2 percent) suggest that favorable inflation
responses are coming in step with the falloff incommodity prices and improved terms oftrade since mid-2008. Headline consumer
price inflation has eased substantially in
China, for example, from a peak of 8.5 percent in April to 4 percent by October 2008;
but Indonesia and the Philippines continue towitness building price pressures, stoked in theformer by still strong consumer demand.
The spread of technical recession from theUnited States to Japan and the Euro Area during the second half of 2008 has begun to makea dent in export performance for the region,
with China’s outbound shipments (in dollar
terms) easing below 20 percent growth (yearover-year) in October from the 30 percent paceof early 2007 (figure A2). Growth of exports
from Hong Kong, China, reflecting in largepart transshipments from the mainland, have
halved to 5 percent. And the falloff in export
performance is particularly acute in Singapore
and Taiwan, China, where exports are now declining, affected in particular by a sharp dropFigure A2 Export growth in East Asia turns
down on falling OECD demand
Export values (US$, percentage change, 3-month moving
average year-on-year)
35

China

30

Thailand

25
20
15
10
5
0
Jan.
2007

Malaysia
May
2007

Sep.
2007

Source: Haver Analytics.

Hong Kong,
China
Jan.
2008

May
2008

Sep.
2008

E C O N O M I C

P R O S P E C T S

in demand for high-tech products. Export
growth is also slowing in Malaysia and Thailand, which are experiencing sluggish manufactures shipments as well as the effects ofcommodity price declines on the dollar valueof oil and agricultural exports. As recession
deepens across the countries of the Organisation for Economic Co-operation and Development (OECD) during the course of 2009,
East Asian export volumes are likely to fall
sharply—to negative territory for many
countries—with China seeing a modest advance of some 4.2 percent, down from the10.1 percent gain of 2008.

Ripples of the financial crisis arereaching East Asia
The region was spared significant fallout during the early stages of the financial crisis in
2007, because, outside of China, holdings of
securities backed by subprime U.S. mortgages
were quite small. But with the intensificationof the crisis, effects within the region are
spreading. A sharp increase in risk aversion at
the global level, plus a process of deleveraging
by firms and banks that have suffered large
losses in both high-income and developing
countries, resulted in a heavy sell-off of global,
including East Asian, equities. The benchmark
MSCI Asia-Pacific Index plummeted by a cumulative 50 percent from January throughOctober 2008, while China’s ‘B’ share market
in Shanghai is off a full 75 percent. The proceeds of these sales have been converted out of
local currencies, resulting in a sharp depreciation for many regional currencies against both
the dollar and the yen (figure A3). The Philippine peso, for example, has given up some
18 percent against the dollar over 2008 todate and 30 percent versus the yen. These developments have sharply increased the cost ofcapital for regional firms and escalated the
local currency cost of international debt servicing, both factors likely to dampen private
investment outlays in the coming months.
In international debt markets, sovereign
spreads for East Asia jumped by some 610
basis points since the spring of 2008, reaching143

G L O B A L

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2 0 0 9Figure A3 Exchange rates decline sharply
as carry trades unwind

Figure A4 Gross capital inflows to East Asia
contracted 40 percent in 2008

Local currency unit/US$ index (Jan. 01, 2008 ⫽ 100)

US$ billions

120

60
Philippine peso
50

110

Malaysian ringgit
40

100
30
90

20

Japanese yen
Thai baht

80
Jan. 1
2008

Mar. 1
2008

10
May 1
2008

Jul. 12008

Sep. 1
2008

Nov. 12008

0
Bond issuance

Equity issuanceBank borrowing

Source: Thomson/Datastream.
Note: Increase implies weaker local currency.

Jan.–Aug. 2007

Jan.–Aug. 2008

Source: World Bank.

825 basis points as of late October, well above
the high of 450 basis points at the peak of theEast Asian crisis in 1998. But as conditions ininternational markets began to unfreeze, andmore and more countries announced fiscal
stimulus packages to underpin theireconomies, spreads narrowed once more to560 basis points during the first week of November. As of November 7, 2008, spreads
were up by a modest 50 basis points for
China, 300 points for Malaysia, 250 points in
the Philippines, but a more-substantial 570
points in Indonesia. Spreads for corporate borrowers have increased by far more, and thosefor noninvestment grade corporations—themajority of private sector issuance in theregion—have skyrocketed (see chapter 1). For
several countries in East Asia, the hike inspreads has become problematic, effectively
shutting down bond issuance as a cost-effectivemeans of finance.
Given the process of deleveraging now
under way among high-income financial institutions, the retreat from regional equity markets should be viewed together with a substantial falloff in capital flows to the region
over the course of 2008. Gross capital flows toEast Asia and the Pacific, not including foreign direct investment (FDI), dropped from$100 billion to $60 billion from January
through August 2008, down 40 percent from144

the same period in 2007. The bulk of the
falloff may be traced to sharp contractions in
the issuance of initial public equity offerings(IPOs), largely from China, which were off
65 percent, from $56 billion to $19 billion in
the year, in line with the deterioration of conditions in international markets. But banking
flows also dropped 12.5 percent to $35 billion, and bond issuance eased by 7.5 percent
to $7 billion (figure A4).
In contrast, FDI flows to the region surged
by some two-thirds to a fresh record $175 billion in 2007, with FDI to China picking up
75 percent to near $140 billion, and with advances of 40 percent in Malaysia to $8.5 billion. Estimates for 2008 suggest a modest increase in overall FDI flows, showing someresilience in the face of the crisis. Measured by
the extent to which sovereign spreads haveincreased, equity markets declined and exchange rates depreciated since September 15,
together with the sharp falloff in capital flows
in the last year, East Asian economies hit hardest by the crisis to date include Fiji, Indonesia,
the Philippines, Thailand, and Vanuatu.

Difficult policy decisions
The general stance of policy in the region ismoving from a tightening posture—initiatedR E G I O N A L

to deal with rising inflation—to a more relaxed one; large efforts have been made to free
up liquidity to support banking systems fromthe contagion of financial stress from the highincome countries. Moreover, measures to underpin growth at a time of downside risks havealso come to the fore. In China, bank rates
were raised to 7.47 percent in January to help
dampen inflation, then reduced to 6.66 percent on October 28, as the risk of financial
disruptions and loss of liquidity in the banking
system increased in importance. Further
actions undertaken by China to prop up economic activity have included the announcement of a massive $586 billion stimulus program to focus on infrastructure, housing andincome support, and increasing export tax rebates. In contrast, the Philippines first reduced
policy rates to 7 percent to stimulate growth,then raised rates in four steps of 25 basis
points to 8 percent to help stem a ramp-up in
inflation.

Medium-term outlook
As always, developments in China will play a
key role in shaping the region’s growth profile
through 2010. China’s buffers against thefinancial crisis are impressive: $1.6 trillion ininternational reserves; a fiscal surplus of 1 percent of GDP; and a current account surplus ofalmost $400 billion or 10.4 percent of GDP in
2008. Policy efforts to underpin exports andhousehold spending—to maintain GDP
growth at rates near 9 percent in 2009 andforward—should carry positive effects. But an
extreme falloff in export volume growth to
4.2 percent, on the back of recession in highincome countries, and slippage in investment
to 8 percent in the year is projected to slow
GDP growth to 7.5 percent in 2009, from the
9.4 percent pace of 2008 (table A2). A stepdown in China’s import growth to 6.5 percent
will dampen the momentum of intraregional
trade, causing exports for East Asia in aggregate to slide to 2.6 percent from the 8.3 percent advance of 2008.
Growth among the larger ASEAN countries is expected to ease to 3.8 percent fromE C O N O M I C

P R O S P E C T S

5.2 percent in 2008, as export volumes decline
by a percentage point, and the squeeze oncommercial credit hits fixed investment, dropping it from growth of 8.8 percent in 2008
to 3.6 percent. Lower commodity prices andweaker import demand are projected to improve the group’s current account surplus to$58 billion in 2009 from $55 billion in 2008.
Among smaller countries, including Fiji, theLao People’s Democratic Republic, and Papua
New Guinea, output growth is projected toslow to 3.4 percent from 5.1 percent in 2008,
on the back of a sharp 5 percent decline inexports.
Recovery in regional growth during 2010is anticipated to be fairly swift. The downturnin investment should be relatively short-lived,
as credit and capital flows begin to thaw, andexpectations for stronger domestic and external demand underpins a revival in regional
capital spending to 8.4 percent (see table A1).
Export growth is expected to rebound to
9.7 percent in the region (to 10.7 percent for
China), as OECD and regional demand return to positive territory. Moreover, a moderation in East Asian inflation, as the surge incommodity prices passes out of calculation,
will help to restore purchasing power tohouseholds and support a renewal in spending. Inflation as measured by the median GDP
deflator for the region is expected to decline
from 7.5 percent in 2008 to 4.9 percent by
2010.
Under these conditions, aggregate GDP for
the region is anticipated to grow 7.8 percent in2010, underpinned by 8.5 percent growth inChina. For East Asia excluding China, GDP is
expected to grow 5.3 percent in 2010, up from4 percent. Current account positions are projected to vary across countries, easing to
8.8 percent of GDP in China, to 4.4 percent in
the larger ASEAN members to minus 5.7 percent among the smaller countries of the region.

Risks
The favorable external environment that cameto benefit the region in the past five years
has shifted dramatically to the downside. Given

145

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2 0 0 9

Table A2 East Asia and Pacific country forecasts(annual percent change unless indicated otherwise)

Cambodia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
China
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Fiji
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Indonesia
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Lao PDR
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Malaysia
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Papua New Guinea
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Philippines
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Thailand
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Vanuatu
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Vietnam
GDP at market prices (2000 US$)b
Current account bal/GDP (%)

1991–2000a

2005

2006

2007

2008c

2009d

2010d

—
—

13.5
⫺5.7

10.8
⫺4.7

10.2
⫺6.0

6.7
⫺15.3

4.9
⫺11.2

6.0
⫺8.0

10.4
1.5

10.4
7.2

11.6
9.9

11.9
12.2

9.4
10.7

7.5
10.2

8.5
8.8

2.1
⫺3.7

0.7
⫺13.3

3.6
⫺24.1

⫺6.6
⫺15.6

1.7
⫺22.6

⫺1.0
⫺23.6

3.0
⫺22.5

4.2
⫺0.4

5.7
0.1

5.5
2.9

6.3
2.6

6.0
0.8

4.4
⫺0.1

6.0
⫺0.4

6.3
⫺12.5

7.1
⫺19.3

8.1
⫺9.7

7.9
⫺16.4

6.8
⫺16.0

4.5
⫺17.2

7.5
⫺16.8

7.1
⫺0.4

5.0
14.6

5.8
17.2

6.4
16.7

5.5
22.0

3.7
17.5

4.6
16.4

4.8
2.4

3.3
8.5

2.6
17.5

6.2
21.6

5.5
24.1

4.5
9.8

5.5
7.7

3.0
⫺3.1

4.9
2.0

5.4
4.0

7.2
4.1

4.0
0.4

3.0
3.6

4.1
3.5

4.5
⫺1.2

4.5
⫺4.3

5.1
1.1

4.8
6.3

4.6
2.2

3.6
5.2

5.0
5.0

4.1
⫺8.2

6.5
⫺14.3

7.2
⫺8.1

5.0
⫺9.8

4.5
⫺14.4

3.0
⫺7.1

5.2
⫺5.3

7.6
⫺5.1

8.4
0.2

8.2
1.2

8.5
⫺0.2

6.5
⫺8.5

6.5
⫺3.4

7.5
⫺2.6

Source: World Bank.
Note: — ⫽ not available. Growth and current account figures presented here are World Bank projections and may differ fromtargets contained in other World Bank documents. American Samoa; Micronesia; Federated States of Kiribati; Marshall Islands;
Myanmar; Mongolia; N. Mariana Islands; Palau; Korea, Dem. Rep. Of; Solomon Islands; Timor-Leste; and Tonga are notforecast because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.

the sensitivity of regional GDP growth totrade, the possibility of a more extended period of recession, or only sluggish activity
among the OECD countries, represents one ofthe primary risks to growth in East Asia. Sucha scenario would be predicated on a more prolonged period than projected for the financial
sector in the high-income countries to redress
their balance sheets and for lending to resume.
A second area of risk relates to continued

146

adverse developments in financial markets.
Should sovereign and especially corporate
spreads not retreat from current levels, theregion could face difficulty financing new investment and sustaining current projects. As aresult, investment activity would continue tobe depressed and the recession deeper; in thatcase, the risk that a country in the region could
suffer significant exchange rate pressure or abalance of payments crisis cannot be ruled out.

R E G I O N A L

Europe and Central Asia
Recent developmentsT

he rapid GDP growth in Europe and Central Asia of the past 20 years, which largely
reflected the enormous reform efforts undertaken by countries in the region (including
those associated with accession to the European Union), eased in 2008 and is expected togive way to a sharp slowdown in 2009. The
global financial crisis is expected to cut heavily
into capital inflows and investment in the region. Moreover, a number of countries are particularly vulnerable because of high current account deficits that in many instances have beenreliant on short-term capital inflows for theirfinancing.
Regional GDP growth fell almost 2 percentage points to 5.3 percent in 2008, moderating from 7.1 percent in 2007, tied largely toa sharp falloff in growth during the second
half of the year. The financial crisis and associated growth slowdown outside of the region
is eroding macroeconomic buffers, includinginternational reserves, and is placing banking
sectors in several countries (notably, Hungary,
the Russian Federation, and Ukraine) under
severe stress. Even economies with little direct
exposure to troubled U.S. financial assets arelikely to be hit hard by direct and indirect
spillover effects from the financial crisis.

The region exhibits diverse performance
GDP growth slowed across the region during
2008. The group of Central and Eastern
European countries (CEE), (including Bulgaria,
Poland, Romania, and the middle-income
Baltic states but excluding Turkey), saw
growth ease from 6.6 percent to 5.5 percent in
the year. Slowing demand in the Euro Area
dampened export performance, while overheating in several countries required a mix offiscal and monetary tightening to stem inflationary pressures. Growth in the Baltic states
has come close to a standstill, with Estonia
and Latvia falling into recession and Lithuania
faring little better. The global financial crisis

E C O N O M I C

P R O S P E C T S

disrupted Hungary’s slow recovery of domestic
demand and led the country to accept an emergency €15 billion Standby Arrangement with
the International Monetary Fund. Growth inTurkey eased from 4.6 percent to 3 percent in2008, as financial and exchange rate pressurespicked up in the second half of the year
(table A3).
GDP among the Commonwealth of Independent States (CIS) slid from the robust 8.6
percent registered in 2007—grounded in a surge
in activity across hydrocarbon exporters—to
6.4 percent in 2008, reflecting reduced incomes as oil prices declined, and the effects ofthe banking crisis in Russia (growth in Russia
eased from 8.1 percent to 6.0 percent). Excluding Russia and Kazakhstan (where growthslowed sharply from 8.5 to 4 percent), GDPdeclined less dramatically in the remaining
CIS states, falling from 10.4 to 8.5 percent in
the year.
The commodity price surge of 2006
through mid-2008 contributed directly tohigh inflation across almost all countries of
the region. Most countries tightened monetary policy to stem second-round effects
from the initial price hikes, while substantial
currency appreciation (against the dollar)
helped to mitigate inflation pressures to adegree. Romania posted the highest interest
rates in the European Union, while Turkey
scored the highest across all developing andadvanced economies in Europe. The global
food crisis had not caused the serious social
tensions witnessed in other regions, because
almost all countries in Europe and Central
Asia have more or less adequate social safety
nets in place. The World Bank is currently
helping to finance seed purchases and nutritional programs for the Kyrgyz Republic,
Moldova, and Tajikistan. And with threemajor grain exporters (Kazakhstan, Russia,
and Ukraine) relaxing previously imposed
export bans amid the region’s best harvest ina decade, food prices are expected to moderate, helping to ease the earlier jump in headline inflation.

147

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2 0 0 9

Table A3 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)
1991–2000a

2005

2006

2007

2008e

2009f

2010f

GDP at market prices (2000 US$)b
GDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

⫺1.1
⫺1.3
⫺1.2
0.6
0.0
⫺7.0
0.3
⫺2.8
1.1
⫺0.7
—
⫺5.0

6.4
6.3
6.3
7.0
3.6
11.0
5.6
10.6
⫺2.0
2.6
6.8
2.6

7.5
7.4
7.7
8.2
5.2
14.9
8.0
15.5
⫺3.4
1.5
5.8
2.9

7.1
7.0
7.4
8.5
5.5
15.4
7.8
18.8
⫺5.5
⫺0.6
7.5
2.4

5.3
5.3
5.7
8.4
4.9
10.0
9.4
14.7
⫺3.6
⫺0.8
10.9
1.9

2.7
2.7
2.6
5.3
3.3
⫺0.7
5.4
6.3
⫺1.2
⫺4.1
8.9
1.1

5.0
5.0
5.1
6.2
4.0
7.2
10.1
11.0
⫺1.8
⫺4.5
6.8
1.1

Memo items: GDP
Transition countries
Central and Eastern Europe
Commonwealth of Independent States
Russian Federation
TurkeyPoland

2.3
1.4
⫺4.3
⫺3.9
3.7
3.8

6.1
4.3
6.8
6.4
8.4
3.6

6.7
6.6
8.4
7.4
6.9
6.2

5.7
6.6
8.6
8.1
4.6
6.6

4.4
5.5
6.4
6.0
3.0
5.4

2.6
3.2
2.9
3.0
1.7
4.0

4.8
4.7
5.2
5.0
4.9
4.7

Source: World Bank.
Note: — ⫽ not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.

The sudden deepening of the financial crisis in
the United States during September andOctober, and the accompanying start ofdeleveraging across financial institutions worldwide, triggered a wave of sell-offs in emerging
market assets across the globe. Widening sovereign spreads, sharp currency depreciation,
and a halving of domestic equity prices havebeen witnessed across emerging markets. The
magnitude and extent of these developments
in Europe and Central Asia are of concern(figure A5).
Recent spikes in sovereign spreads for anumber of countries in the region havedwarfed those witnessed in earlier periods offlare-up since the start of financial turmoil in
2007. Except for Kazakhstan and Russia,
where massive central bank intervention has
taken place, other regional currencies have

148

Figure A5 Deepening global financial crisis
affects Europe and Central Asia
Percent

Basis points (inverted scale)

⫺0

0

⫺10

60

⫺20

120

⫺30

180

⫺40

240

⫺50

300

⫺60

360

Fe Ru
de ss
ra ia
tio n
n
U
kr
ai
ne
Tu
rk
Ka
ey
za
kh
st
a
Bu n
lg
ar
ia
La
tv
ia
Li
th
ua
ni
a
R
om
an
ia
Po
la
nd

Intensification of global crisis begins
to exact toll

% change in stock market in
Sept. and Oct., 2008, local currency% change in exchange rate versus
US$ in Sept. and Oct., 2008, (-) depreciation% change in capital flows, Jan.–Aug. 2008
vs. Jan.–Aug. 2007
increase in JPMorgan sovereign
bond spread in Sept. and Oct., 2008 (right axis)
Source: World Bank.

R E G I O N A L

depreciated quite sharply, reversing almost all
the gains of the last two years. Moreover,gross capital inflows to the region (equity
IPOs, bond issuance, and bank lending) declined to $123 billion from January throughAugust 2008, from $187 billion in the likeperiod of 2007, a drop of some 34 percent.
These developments underscore the swift
spread of effects from the deterioration ininternational financial markets and point tomore difficult financing conditions ahead,with funding for fixed investment in theregion—a primary driver for growth—underparticular uncertainty.
Activity in Russia already showed signs ofslowing before fall 2008, when the financial
crisis entered a more intense phase. Industrial
production over the first eight months of2008 declined by 2.3 points to 4.9 percent,compared with the same period in 2007, andgrowth in fixed capital investment almost
halved. Gross capital inflows did halve to$74 billion in the January–August period,
compared with $150 billion for all of 2007.
Moreover, the credit crunch appeared to bedraining domestic liquidity from the economy
either directly (given that Russia is Europe’s
third largest bank borrower) or indirectly
through the interbank and corporate sectors.
The Russian stock market crisis forced
multiple suspensions of trading, and the government has taken all possible measures tomitigate growing financial and economic difficulties. These include but are not limited to
cutting banks’ reserve requirements and oilcompanies’ export duties several times; injecting liquidity (more than $200 billion in federal budget fund deposits, subordinatedloans, and the like), increasing coverage of retail bank deposit insurance by 75 percent; intervening in the foreign exchange market, evidenced in a decline of more than $100 billion
in reserves between August and October;committing an additional $50 billion of reserves to solve refinancing difficulties inbanks and companies (estimated to hold $80
billion-90 billion in debt service due in 2009);
and using another $20 billion from its

E C O N O M I C

P R O S P E C T S

national wealth fund to boost domestic stock
markets directly.
As in Russia, Ukraine’s banks have relied
on foreign bank- and other loans to fund domestic lending. And about $1 billion to service foreign debts is due during the final
months of 2008. Facing rating agencies’
downgrades, and massive withdrawals fromthe banking system during the first three
weeks of October (amounting to $3 billion or
about 4 percent of total deposits), the central
bank banned preterm withdrawals, injectedfurther liquidity, and imposed exchange
controls. On the real side of the economy,
Ukraine is starting to see decline in the metallurgy industry and in exports of these products (which provide 40 percent of export
revenues), as global production and metal
prices cool. These negative developments haveprompted Ukraine to seek an IMF loan of$16.4 billion. Turkey’s second-quarter GDP
deteriorated sharply to 1.9 percent year-overyear from 6.7 percent a quarter earlier. And
given Turkey’s traditional reliance on shortterm debt and external financing, the debt
rollover situation is no better for Turkey thanfor Russia and Ukraine; Turkey holds morethan $280 billion of foreign debt, of which
one-sixth is short term.
Based on credit-default swap prices,
Kazakhstan stands second in the global
league of economies as riskiest for severebanking disruptions—after Iceland. The government has $15 billion dollars ($10 billionof which from its oil fund) available to stabilize the banking situation. Many other countries in Central and Eastern Europe carrysimilar vulnerabilities in terms of banking
exposures, external deficits, and reliance on
foreign capital flows, and governments havereacted to address them while trying to reassure investors and depositors. In Bulgaria,
Poland, and Romania, guarantees on individual bank deposits have been raised in linewith EU levels; Hungary, the Slovak Republic, and Slovenia have all enacted unlimited
government guarantees on private bankdeposits.

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2 0 0 9Medium-term outlook
The outlook for 2009 appears fairly sobering
at this juncture. Slower growth in the region’s
main trading partners, the EU, (and for the
CIS countries) Russia and China, will limit export opportunities. For example, the auto fabrication and export–industry, which had been
performing well in Turkey and some CEE
countries, will be put to a difficult test. Declines in equity markets will tend to raise thecost of capital for domestic firms and could
delay privatization plans. Moreover, in countries where foreign banks have a dominantpresence, local subsidiaries may feel the pinchfrom headquarters in the high-income countries, further escalating difficulties in domestic
credit markets and contributing to a slowdown in economic activity.
Table A3 shows that still-robust gains in investment continued during 2008—an advanceof 10 percent for the region; Russia gained
16 percent, other CIS countries grew capitalspending 14 percent, with the CEE countries up
10.5 percent. But a flattening in domestic andforeign demand and much more difficult financing conditions are expected to cause real
investment to stagnate in 2009, with related declines in orders, production, and employment.
Signs of the slowdown have already begun
to emerge. In Russia, for example, Sberbank
and Gazprom, the leading state bank and statecompany, both plan to cut back on workforce
and investment; the third-largest steelmaker,
Magnitogorsk, is reducing workforce levels by
3,000; truck manufacturer KamAZ plans tocurtail production by 20 percent; and carmaker GAZ also foresees substantially less domestic and export demand. Russia’s GDP is
anticipated to drop to 3 percent in 2009, fromthe 6 percent pace of 2008 (table A4). However, financial support policies enacted to date,plus the substantial amount of international
reserves held by the country, should help Russia weather the depth of global crisis in 2009
and rebound to growth of 5 percent by 2010.2
Deterioration in the external environment—
and the fragile set of current conditions in alarge number of European and Central Asian

150

countries suggests the potential for a sharp
slowdown in regional GDP growth to 2.7 percent in 2009 from the 5.3 percent advance of2008. But under assumptions that global credit
markets begin to function once more by early
to mid-2009, and that growth in OECD centersstarts to pull-up at the same time, regional
growth is anticipated to firm to 5 percent by
2010. CIS countries outside of Russia are expected to realize a rebound in exports and apick-up in consumer spending, as growth recovers from 2.8 percent in 2009 to 5.7 percent.
And gradual revival in Euro Area demand helps
CEE exports pick-up from 2.5 percent gains in2009 to 7.6 percent by 2010, supporting a
move in GDP from 3.2 percent to 4.7 percent.
Lower oil prices will help alleviate a portion of
the current account burden in oil importing
countries, especially Turkey, and a large number of Central European countries.

Risks
In the short term, the financial system will betested. In Russia, for example, the largest
banks have enjoyed generous government support, but private and smaller banks may faceliquidity shortages and possibly large-scale
withdrawals should the situation worsen.
Russia currently is home to 1,100 banks, ofwhich the 20 largest account for 70 percent ofhousehold deposits and corporate loans. Outside Russia, the financial sector in a number ofcountries is dominated by banks from Western
Europe, carrying the potential risk of contagion from difficulties being experienced bytheir home-country institutions.
In the medium-term, divergent performance in 2008 should not belie either thecommon factors underlying growth in Europe
and Central Asia or the associated common
risks. Recent growth has been supported bydomestic demand and enabled by easy accessto external financing in bank lending, bondissuance, and FDI, while net exports continue
to offer a substantial drag on growth. Rapid
credit expansion and accommodative wage
policies have been widespread, while domestic
saving is insufficient, while pro-cyclical fiscal

R E G I O N A L

E C O N O M I C

P R O S P E C T S

Table A4 Europe and Central Asia country forecasts(annual percent change unless indicated otherwise)

Albania
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Armenia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Azerbaijan
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
BelarusGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Bulgaria
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Croatia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Georgia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Kazakhstan
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Kyrgyz Republic
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Lithuania
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
LatviaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Moldova
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Macedonia, FYR
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
PolandGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Romania
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Russian Federation
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
TurkeyGDP at market prices (2000 US$)b
Current account balance/GDP (%)

1991–2000a

2005

2006

2007

2008c

2009d

2010d

1.4
⫺5.6

5.5
⫺6.8

5.0
⫺7.3

6.0
⫺10.0

6.0
⫺11.2

5.0
⫺5.3

5.5
⫺4.7

⫺3.8
⫺12.0

13.9
⫺1.1

13.3
⫺1.8

13.7
⫺6.2

9.0
⫺7.6

6.4
⫺4.3

6.7
⫺4.3

⫺5.2
⫺15.8

26.2
1.3

34.5
17.7

25.0
30.7

17.7
41.6

10.4
30.7

7.8
28.4

⫺1.2
—

9.4
1.4

9.9
⫺4.1

8.2
⫺6.4

9.2
⫺5.5

5.0
⫺6.2

5.8
⫺6.4

⫺1.7
⫺2.3

6.2
⫺12.3

6.3
⫺15.7

6.2
⫺21.6

6.0
⫺24.3

2.4
⫺15.6

6.0
⫺13.6

⫺1.5
1.0

4.3
⫺6.6

4.8
⫺7.6

5.6
⫺8.6

3.5
⫺9.9

2.3
⫺4.2

5.1
⫺3.2

⫺9.3
—

9.6
⫺11.9

9.4
⫺16.2

12.4
⫺21.5

3.5
⫺21.9

4.0
⫺20.7

6.0
⫺22.0

⫺3.6
⫺2.1

9.7
⫺1.9

10.7
⫺2.2

8.5
⫺6.9

4.0
0.1

1.9
⫺7.0

6.2
⫺7.2

⫺4.0
⫺10.6

⫺0.2
⫺2.4

2.7
⫺10.6

8.2
⫺7.2

6.6
⫺10.6

4.2
⫺5.6

5.6
⫺2.4

⫺3.3
⫺5.8

7.9
⫺7.1

7.7
⫺10.7

8.8
⫺13.6

4.0
⫺13.9

⫺0.3
⫺12.2

2.0
⫺10.9

⫺2.8
⫺1.6

10.6
⫺12.4

12.2
⫺22.7

10.3
⫺22.8

⫺0.8
⫺15.2

⫺3.5
⫺10.5

0.7
⫺8.2

⫺9.8
—

7.5
⫺8.3

4.0
⫺11.5

3.0
⫺15.8

6.5
⫺17.7

4.0
⫺4.4

4.0
⫺5.8

⫺0.9
—

4.1
⫺1.4

3.0
⫺0.4

5.1
⫺3.4

5.5
⫺9.8

4.8
⫺4.4

5.6
⫺3.5

3.8
⫺3.5

3.6
⫺1.2

6.2
⫺2.7

6.6
⫺3.8

5.4
⫺5.4

4.0
⫺6.2

4.7
⫺5.6

⫺1.7
⫺4.8

4.1
⫺8.7

7.9
⫺10.5

6.0
⫺13.7

8.6
⫺15.5

3.2
⫺8.6

5.8
⫺7.4

⫺3.9
—

6.4
11.1

7.4
9.6

8.1
6.1

6.0
6.0

3.0
⫺3.4

5.0
⫺5.0

3.7
⫺1.1

8.4
⫺4.7

6.9
⫺6.0

4.6
⫺5.7

3.0
⫺8.4

1.7
⫺3.9

4.9
⫺3.1
(continued)151

G L O B A L

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2 0 0 9

Table A4 (continued )(annual percent change unless indicated otherwise)
1991–2000a

UkraineGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Uzbekistan
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

2005

2006

2007

2008c

2009d

2010d

⫺8.0
—

2.7
2.9

7.9
⫺1.5

7.7
⫺4.2

6.0
⫺6.5

⫺3.0
⫺2.2

4.4
⫺1.3

⫺0.2
⫺0.9

7.0
13.1

7.3
14.3

9.5
18.8

8.0
20.6

7.0
14.7

6.5
13.1

Source: World Bank.
Note: — ⫽ not available.
Growth and Current Account figures presented here are World Bank projections and may differ from targets contained in other
Bank documents. Bosnia and Herzegovina, Montenegro, Serbia, Tajikistan, Turkmenistan, and Yugoslavia are not forecast
because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.

policy is underway in a number of countries,
such as Belarus, Romania, Russia and Ukraine.
The potential for second-round inflation
effects remains a problem in the region. The
reversal in commodity prices since mid-2008
has been reflected in a flattening or decline ininflation trends in at least 12 countries amidsome indications of a falloff in core inflation(figure A6).3 However, because domestic factors such as government spending and strong
wage growth also drive prices, inflation expectations remain high, and the potential fora wage spiral is notable. Moreover, recent
sharp currency declines and loosening ofmonetary policy, together with other aggressive measures to resist the economic downturn, may drive up inflation and endanger
fiscal positions, causing problems in thelonger run.
For many small and poorer countries that
rely on remittances as an important source offinancing, a downturn in neighboring countries in Western Europe and the CIS implies
less in remittance flows from migrants
abroad, raising the need for financing fromother sources and potentially exacerbating
poverty. This said, historical evidence shows
remittances tend to be relatively resilient during a downturn, and should help cushion theslowdown.

152

Figure A6 Core inflation is rising in several
countries of Europe and Central Asia
CPI inflation (percentage change, year-on-year)
16

12

8

4

0
Jan. May Sep. Jan. May Sep. Jan. May Sep.
2006 2006 2006 2007 2007 2007 2008 2008 2008
Croatia

Kazakhstan

LatviaPolandLithuania

TurkeyRussianFederation

Belarus

Source: World Bank.

Beyond the set of immediate challenges, alonger-term concern is the set of substantial
bottlenecks to growth that have been reached
in infrastructure and labor markets in developing countries in general, and in a large number of European and Central Asian countries
in particular. Faster GDP growth in the futureis likely only if countries can take the necessary steps to improve the supply of essential

R E G I O N A L

utilities and upgrade transport, communications, and other key infrastructure. Such improvement, together with a diminishing of institutional and structural inefficiencies could
help alleviate current constraints on growth in
the longer run.

E C O N O M I C

P R O S P E C T S

Figure A7 Contributions to GDP growth in
Latin America and the Caribbean
Percentage points
8
6

GDP

4

⫺2

08

07

20

06

20

05

20

04

20

03

20

02

20

01

20

00

20

94

20

19

93

⫺4

92

T

he global financial crisis has come to affectLatin America and the Caribbean after aperiod of exceptional GDP growth. The region
grew at an annual rate of 5.3 percent over
2004–08, the strongest pace in the last three
decades. GDP gains were led by República
Bolivariana de Venezuela, which advanced at a10.5 percent clip; Argentina at 8.4 percent;and Peru at 7.4 percent. Growth was alsobroad-based during this period, with the
Caribbean countries gaining 5.9 percent annually and Central American countries growing
3.7 percent. The oil-exporting economies of
the region saw GDP pick up at a 5.7 percent
rate, and oil importers also grew briskly at
5.3 percent. Only two countries grew slower
than 3 percent per year over the period—
Jamaica at 1.6 percent and Haiti at 1.4 percent. The last period of strong region-wide
growth occurred in 1991–94 when GDP advanced 4.2 percent annually (figure A7).
A favorable external environment of highcommodity prices and strong import demandin high-income countries supported the region’s recent growth performance. The role ofthe external environment is emphasized in
Izquierdo and others 2008; Calvo and Talvi
2007; and Österholm and Zettelmeyer 2007.
However, the region has also made genuine
progress in maintaining independent monetary policy and increasing the credibility ofcentral banks, introducing exchange rate flexibility, deepening local currency debt markets,and providing supportive fiscal policy (WorldBank 2008c). Because of the improvements inpolicy and in the external environment, the region is in better macroeconomic and fiscal

0

19

Recent developments

2

19

Latin America andthe Caribbean

Net exports

Private consumption

Investments

Government consumption

Source: World Bank.

health than it was five years ago, or at the endof the previous growth spurt. But this healthy
starting position will be seriously tested by the
global crisis, which has already led to a withdrawal of funds from regional equity markets
by international investors, sharply depreciating currencies and soaring sovereign- and corporate bond spreads. The U.S. and European
recessions and the turnaround to decline inglobal commodity prices further darken theexternal environment for the region.
During 2008, Latin American GDP advanced 4.4 percent, still robust, albeit downfrom the strong 5.7 percent pace of the previous year. Buffers in the form of large levels ofreserves and current account surpluses mitigated the impact of slowing exports to theUnited States to a degree. Latin America’s exports lost momentum, however, growing only
1.7 percent in 2008 compared with 5 percent in
2007, while the region’s current account position dropped from a surplus of 0.5 percent of
GDP to a deficit of the same magnitude.
Output gains were quite differentiatedacross key countries and sub regions in Latin
America and the Caribbean. The outrightdecline in U.S. imports adversely affected153

G L O B A L

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P R O S P E C T S

2 0 0 9Mexico’s exports, sending them from growthof 3.3 percent in 2007 to contraction of
0.9 percent in 2008, and contributing to a
slowdown in GDP growth from 3.2 percent to
2 percent over the period. Argentina’s growth
performance also slipped, from 8.7 percent in2007 to 6.6 percent in 2008, on the back ofslowing consumer spending and exports. In
contrast, Brazil maintained GDP gains at astill-robust 5.2 percent pace, with its economy
grounded in stronger consumer outlays andinvestment, further supported by favorable
terms-of-trade developments during the firsthalf of the year.
GDP growth eased in the Caribbean, declining from 6 percent in 2007 to 4.6 percent
in 2008. The falloff was linked in part tohurricane damage but also to weaker exports
and a negative contribution of trade to GDP.
And Central American GDP slowed by morethan a percentage point to 2.2 percent from

3.6 percent, largely because of a downshift inexports tied to the slowdown in U.S. demand(table A5).
Although not yet visible in GDP figures, alarge number of countries in the region are already subject to adverse spillover effects of thefinancial crisis. Between September 15, when
Lehman Brothers announced bankruptcy, andthe end of October, equity markets lost half of
their dollar values; currencies, especially thoseof Brazil, Chile, and Mexico depreciated precipitously against the dollar; the cost of corporate and government borrowing on international bond markets surged; investment
spending appeared to be slowing, and theavailability of trade finance tightened. Thesedevelopments have added to the region’s concerns regarding falling commodity prices (onthe upside of which food and oil exporters
benefited greatly), slowing remittance inflows
and rising inflation.

Table A5 Latin America and the Caribbean forecast summary(annual percent change unless indicated otherwise)
1991–2000a

2005

2006

2007

2008e

2009f

2010f

GDP at market prices (2000 US$)b
GDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

3.3
1.6
4.2
—
—
4.7
8.1
10.9
⫺0.4
⫺2.8
11.3
—

4.6
3.3
4.6
5.8
3.0
11.3
8.1
11.9
⫺0.8
1.4
5.7
1.2

5.6
4.2
5.5
6.3
4.6
14.6
7.7
14.3
⫺1.6
1.6
8.0
1.4

5.7
4.4
5.7
6.9
4.0
12.2
5.0
11.9
⫺1.9
0.5
7.5
1.3

4.4
3.1
4.4
5.4
4.5
14.6
1.7
12.3
⫺2.9
⫺0.6
10.2
0.9

2.1
0.9
2.2
3.1
2.4
⫺4.1
⫺2.1
⫺3.9
0.6
⫺0.3
6.7
0.6

4.0
2.8
4.1
4.6
2.6
8.8
2.4
6.9
⫺1.4
0.0
5.5
0.4

Memo items: GDP
Latin America excluding Argentina
Central America
CaribbeanBrazilMexicoArgentina

3.1
3.6
3.6
2.5
3.5
4.5

3.9
3.0
6.7
2.9
2.8
9.2

5.1
5.1
8.7
3.8
4.9
8.5

5.2
3.6
6.0
5.4
3.2
8.7

4.1
2.2
4.6
5.2
2.0
6.6

2.2
1.4
3.3
2.8
1.1
1.5

4.1
3.3
4.7
4.6
3.1
4.0

Source: World Bank.
Note: — ⫽ not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.

154

R E G I O N A L

Credit conditions tighten, capital flows
plummetSovereign spreads, as measured by JPMorganChase Emerging Market Price Index (EMBI),
have increased rapidly since mid-September
throughout the region, with the largest rise(over 1,000 basis points) for Argentina andRepública Bolivariana de Venezuela (figure
A8). The corporate bond market is seeing asimilar trend, with soaring corporate spreads.
Moreover, gross capital inflows to the region
halved over January–August 2008 comparedwith the like period in 2007. Bond issuance
dropped 46 percent to $18.5 billion; equity
IPO issues virtually vanished in the hostile climate of 2008 (down 75 percent); and bankborrowing dropped one-third to $36 billion
over the year to date.
Tighter financing conditions and expectations of weaker demand growth have led corporations and governments alike to review
investment plans. The Republic of Korea’s
Hyundai, India’s Reliance, and Brazil’s Petrobras have either announced or postponeddecisions on investment plans in Brazil.
Petroleos de Venezuela has postponed several
refining projects across the Caribbean andCentral America. The Mexican airline Aladia

Figure A8 Bond spreads have increased
sharply for many Latin American countries

E C O N O M I C

P R O S P E C T S

filed for bankruptcy protection in Octoberbecause of financing difficulties. And Controladora Comercial Mexicana, a large supermarket chain, also filed for bankruptcy after
sustaining losses from derivatives trading.
As a result of falling equity markets andrepatriation of foreign funds to home currencies, many of the region’s currencies haveexperienced sharp depreciation since midSeptember, a situation that runs the risk ofreigniting inflation, even as commodity prices
decline. After several years of appreciation, theBrazilian real started to decline in early July(figure A9). The central banks of Argentina,
Brazil, Chile, and Mexico sold dollars on the
spot market during October to prevent theircurrencies from sliding further. Mexico offereddirect financing to commercial banks. Brazil
relaxed reserve requirements, eliminated taxes
on foreign investment, authorized state-ownedbanks to buy stakes in financial institutions,and allowed the central bank to enter intocurrency swaps with other central banks.
Another consequence of tightened credit
conditions has been vanishing export credit

Figure A9 Exchange rates in Latin America
and the Caribbean fell sharply against the
dollar in late 2008
Local currency unit/US$ index (Jan. 1, 2008 5 100)130

Spreads in basis points
120

700
600

1710

1475

500

110
100

400
90
300
80
Jan. 1
2008

200
100

Jan. 1, 2008
Source: JPMorgan-Chase.

nt

Nov. 10, 2008

R

Ve

ne

ge

z
. B uel. d a,
e

in

a

ru
Pe
Ar

o
ex
ic

om
ol
C

M

bi

a

le
hi
C

Br
a

zi
l

0

Feb. 20
2008

Apr. 102008

May 302008

Jul. 192008

Sep. 07
2008

Argentina

BrazilChile

Colombia

MexicoPeru

Venezuela, R. B. de
Source: Thomson/Datastream.
Note: Increase = weaker local currency.

155

G L O B A L

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P R O S P E C T S

2 0 0 9lines, which allow exporters to purchasegoods and services they need to support theirexport sales. Exporters now face a double hit,with slowing import demand in high-income
countries on the one hand, and more expensive credit to support export operations on theother. Anecdotal evidence from Brazil suggeststhat the fall of Lehman Brothers precipitateda collapse in export credit in Brazil, leading
foreign investors and companies to repatriate
billions of dollars from Brazil. Shrinking export credit could lead to difficult conditions
for businesses that supply inputs to exporters,with ripple effects to the rest of the economy.

Remittance inflows are slowing
Worker remittances are an important source ofincome for many Latin American countries. The
region has sent 28.3 million workers abroad—
5.1 percent of the region’s population—who
send back $60 billion, on average, to their homecountries (World Bank 2008a). The UnitedStates is the primary recipient of the region’s
emigrants, followed by Spain and Italy. In eight
Latin American countries, remittances accountfor more than 10 percent of GDP. Mexico is thelargest recipient with $25 billion in receipts. But
the slowdown in the U.S. housing market andthe resulting loss of construction jobs led to a
4.2 percent decline in remittances to Mexico
over January–August 2008, compared with thesame period of 2007. No evidence of similarlarge-scale decline has yet come to light in otherregional economies.

Inflation remains high, notably in food
Rapid economic growth in Latin America alsobrought with it a ramp-up in inflation, whichin 2008—abetted by the price surge for oil andfood traded internationally—was at its highest
level in a decade. Food prices rose substantially faster than the overall consumer priceindex for most countries (World Bank 2008b),
and fundamental changes in global food dynamics appear to be under way. High energy
prices, climate change, and rising biofuel
production have driven the rise in food price156

inflation. Although Latin America has thelargest surplus in food trade of all developing
regions, food price inflation adversely affects
most of the population, because households
are net buyers of food. Poor people are also
affected disproportionately because they
spend a larger share of their income on food.
Two developments have occurred in recent
months that are likely to help ease the pressureof food inflation. Central governments acrossthe region raised interest rates in the first halfof 2008 to stem inflationary pressures. More
importantly, commodity prices began toplummet after reaching historically high levels
in mid-2008. The latest inflation numbers(September 2008) for the region were generally lower than their peak levels in the preceding months (figure A10).

Medium-term outlook
GDP growth in the region is expected to fall
off sharply to 2.1 percent in 2009 from
4.4 percent in 2008, driven by a sharp decline
in capital spending—from robust growth of

Figure A10 Inflation still high in Latin
America and the Caribbean despite sharp
falloff in food and fuel prices
Consumer price inflation (percentage change year-on-year)
12

9

6

3

0
Jan. May Sep. Jan. May Sep. Jan. May Sep.
2006 2006 2006 2007 2007 2007 2008 2008 2008
Argentina

BrazilMexicoColombia

Latin America& Caribbean

Peru

Source: World Bank.

Chile

R E G I O N A L

14.6 percent in 2008 to a decline of 4 percent.
Increasing cost of capital for business, channeled through falling domestic equity markets,
widening spreads on international corporate
bonds, and depreciating exchange rates is anticipated to combine with expectations for a
sharp falloff in both domestic and overseas
sales growth, leading to a retrenchment in private capital outlays (see table A5, earlier).
Falling investment is expected to lead tosimilar declines in regional imports, because
the import content of investment tends to bequite high in Latin America. With imports declining almost 4 percent in 2009 and exports
falling 2 percent, the contribution of trade to
growth will shift to positive 0.6 points ofgrowth for the first time in 20 years. But thedrop in investment and in export revenues
also carry multiplier effects through the regional economy, with real household spending
easing to a 3.1 pace from 5.4 percent in 2008,
and GDP growth slowing to 2.1 percent. GDP
could rebound fairly quickly to 4 percent
gains by 2010, should global credit markets
thaw, risk aversion subside, and OECD countries revive on the back of renewed vigor in
consumer spending—in step with the anticipated remission of inflation pressures. Thesedevelopments represent a substantial change
from recent global forecasts prepared in June
2008, when the region was expected to grow
4.3 percent in 2009 and 4.2 percent in 2010(see Global Development Finance 2008,
World Bank 2007d).
Growth in Brazil is expected to slow from
5.2 percent in 2008 to 2.8 percent in 2009. Inflation has already started to level off, in partas a result of the Central Bank of Brazil’s raising policy interest rates, amid falling commodity prices. Consumer price inflation is expected to diminish from 6.3 percent in 2008 to
4.8 percent in 2009. Brazil is likely to witness
its first current account deficit since 2002, tied
to developments in the income accounts, as
repatriation of profits by foreign companies isunder way. However, a decline in the importsof capital goods is expected to help improve

E C O N O M I C

P R O S P E C T S

the current account in 2009 and 2010
(table A6).
Mexico’s close economic ties to the U.S.
economy are expected to slow its growth
sharply in 2009. Export volume growth—which was already in negative territory in
2008—is projected to drop by 5 percent in2009. Argentina will perhaps see the sharpest
growth falloff in the region as it experiences
declines in export market demand, commodity prices, and investment. Peru, Panama, andthe Dominican Republic will also slow after
very high growth averaging 8 percent for thelast four years.

Risks
With the onset of the financial crisis, skyrocketing costs of capital, or an outright shutdown
in credit flows, are the primary risks faced by
the region. Should sovereign and corporate
spreads not retreat from current levels, Latin
America could have difficulty financing newinvestment projects and sustaining current
projects. Although central banks worldwide
have undertaken steps to inject liquidity intobanking systems, a marked thawing of interbank rates and revival of credit flows has yet
to be seen.
The favorable external environment that
benefited the region in the past five years has
almost vanished. Both high-income anddeveloping-country GDP growth is slowing,
diminishing demand for Latin America’s commodities, manufactures, and services exports.
Although inflation is still much higher thanin early 2007, increases in headline inflation
appear to have peaked in July or August
2008 in the seven largest economies in the region. Although inflation will likely continue
to ease given declining commodity prices, apotential revival of inflation remains a concern, given depreciating currencies, a movetoward monetary accommodation (mitigating a portion of the economic downturn),
and the potential for second-round inflation
effects.

157

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2 0 0 9

Table A6 Latin America and the Caribbean country forecasts(annual percent change unless indicated otherwise)
1991–2000a

Argentina
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
BelizeGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Bolivia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Brazil
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Chile
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Colombia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Costa Rica
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Dominica
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Dominican Republic
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
EcuadorGDP at market prices (2000 US$)b
Current account balance/GDP (%)
El Salvador
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
GuatemalaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
GuyanaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Honduras
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Haiti
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Jamaica
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Mexico
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Nicaragua
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

2005

2006

2007

2008c

2009d

2010d

4.5
⫺3.1

9.2
2.8

8.5
3.7

8.7
3.0

6.6
0.4

1.5
⫺3.2

4.0
⫺2.3

5.9
⫺7.3

3.1
⫺13.6

5.6
⫺1.2

3.0
⫺3.0

2.8
⫺3.7

2.1
⫺3.7

2.9
⫺1.6

3.8
⫺6.1

4.4
6.5

4.8
11.5

4.6
13.4

4.1
13.3

3.6
9.9

4.3
8.3

2.5
⫺2.0

2.9
1.7

3.8
1.3

5.4
0.1

5.2
⫺1.3

2.8
0.6

4.6
1.1

6.4
⫺2.7

5.7
1.2

4.3
5.0

5.1
4.3

4.2
⫺0.8

3.4
⫺0.8

4.7
0.0

2.5
⫺1.9

4.7
⫺1.6

6.8
⫺2.9

8.2
⫺2.6

3.7
⫺3.0

2.6
⫺1.5

4.7
⫺0.6

5.2
⫺3.6

5.9
⫺4.9

8.8
⫺1.9

6.8
⫺8.7

4.0
⫺2.2

3.9
⫺3.3

4.9
⫺6.9

1.8
⫺16.9

3.1
⫺32.6

4.0
⫺0.3

3.2
⫺0.4

3.1
0.4

⫺1.5
6.2

3.3
6.9

6.0
⫺3.2

9.3
⫺1.9

10.7
⫺3.7

8.5
⫺5.7

5.2
⫺9.5

2.6
⫺8.0

4.5
⫺3.8

1.8
⫺2.3

6.0
0.8

3.9
3.5

1.9
2.3

2.5
5.2

0.8
5.4

2.1
4.0

4.6
⫺2.0

3.1
⫺5.3

4.2
⫺4.7

4.2
⫺6.0

2.0
⫺8.4

2.6
⫺5.5

2.9
⫺5.2

4.1
⫺4.6

3.2
⫺4.5

4.5
⫺4.4

5.7
⫺5.1

2.8
⫺7.5

3.1
⫺5.3

3.3
⫺4.3

4.9
⫺15.4

⫺2.2
⫺12.1

4.8
⫺19.7

5.5
⫺15.4

4.8
⫺18.2

4.0
⫺16.6

3.1
⫺15.1

3.3
⫺7.7

6.1
⫺3.0

6.3
⫺4.7

6.3
⫺10.6

3.1
⫺14.7

4.0
⫺9.6

4.8
⫺8.3

⫺1.3
⫺1.7

1.8
⫺6.4

2.3
⫺7.6

3.5
⫺1.8

3.0
⫺11.9

3.8
⫺12.1

3.9
⫺13.1

1.9
⫺2.7

1.8
⫺11.4

2.5
⫺10.9

1.2
⫺11.7

0.9
⫺17.0

0.8
⫺12.8

2.3
⫺10.8

3.5
⫺3.7

2.8
⫺0.7

4.9
⫺0.3

3.2
⫺0.6

2.0
⫺1.0

1.1
⫺1.7

3.1
⫺1.7

3.4
⫺28.7

4.3
⫺15.3

3.7
⫺16.4

3.5
⫺17.7

2.2
⫺20.9

1.5
⫺19.0

2.9
⫺15.4
(continued)

158

R E G I O N A L

PanamaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Peru
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Paraguay
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
St. Lucia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
St. Vincent and the Grenadines
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Uruguay
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Venezuela, R. B. de
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

E C O N O M I C

1991–2000a

2005

2006

2007

2008c

2009d

2010d

5.1
⫺4.8

7.2
⫺3.1

8.5
⫺7.2

11.5
⫺5.4

7.8
⫺7.6

3.3
⫺9.4

6.2
⫺9.1

4.0
⫺5.5

6.4
1.6

7.6
3.0

9.0
1.3

8.5
⫺2.2

5.2
⫺1.6

6.6
⫺1.6

1.8
⫺2.2

2.9
0.5

6.0
2.0

6.8
0.8

4.2
0.0

3.0
⫺1.0

3.8
⫺0.8

3.1
⫺11.6

7.3
⫺17.4

4.5
⫺23.4

4.0
⫺21.4

4.4
⫺21.8

4.8
⫺20.7

5.0
⫺19.8

3.1
⫺18.8

1.5
⫺26.3

4.5
⫺25.9

5.5
⫺24.5

6.3
⫺24.7

⫺0.6
⫺24.2

5.6
⫺20.0

3.0
⫺1.5

6.6
0.1

7.0
⫺2.3

7.4
⫺0.7

4.7
⫺1.7

2.8
⫺1.4

3.0
⫺0.9

2.1
2.6

10.3
17.5

10.3
14.8

8.4
8.8

5.3
8.7

1.0
9.0

3.2
8.0

P R O S P E C T S

Source: World Bank.
Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Barbados, Cuba, Grenada, and Suriname are not forecast because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.

Middle East and North Africa
Recent developmentsThe Middle East and North Africa region
has been affected dramatically by developments in global commodity markets over thelast three years, notably in 2008.4 As a result
there have been substantial up- and downshifts
in terms of trade, current account positions,and external financing requirements. These
shifts have occurred at the same time as the external environment for growth and for international finance deteriorated markedly. Still, regional GDP held up well through 2008, withdomestic demand, notably investment financed
in large part by FDI, providing impetus for
growth. The pace of GDP growth for the developing countries of the region was unchanged in 2008 from the strong 5.8 percent
registered in 2007. A falloff in the Islamic Republic of Iran’s hydrocarbon sector eased GDP
growth among oil-dominant economies from
6.4 percent in 2007 to 5.8 percent. And growthamong the more diversified economies pickedup from 3.8 percent in 2007 to 5.7 percent, led
by a strong recovery from drought in Morocco(table A7).

Commodity price changes carry extreme
effects across the region
The region has undergone tortuous change
linked to global commodity prices through thelast years—from gradual increases to a surge incrude oil, food (especially grains), and raw materials prices from 2005 through mid-2008—toa sudden and forceful unwinding of the bubble
during the second half of 2008. On the upsideof the commodity run, the developing oil exporters—Algeria, the Arab Republic of Egypt(though a more diversified economy), the Islamic Republic of Iran, the Syrian Arab Republic, and the Republic of Yemen—accumulated$82 billion in additional revenues over
2003–07, with receipts coming to stand at$130 billion in the latter year. During the first159

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9

Table A7 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
1991–2000a

2005

2006

2007

2008*

2009†

2010†

GDP at market prices (2000 US$)b
GDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

3.7
1.6
4.8
3.9
4.2
3.9
3.1
1.4
0.4
⫺0.3
9.1
4.0

4.2
2.5
4.3
5.0
5.6
7.8
9.5
14.0
⫺1.7
10.9
6.3
5.5

5.3
3.6
5.4
6.2
4.2
4.8
6.7
7.6
⫺0.6
14.9
8.0
0.7

5.8
4.0
6.3
6.1
1.8
16.8
6.0
14.3
⫺3.1
12.8
5.3
1.3

5.8
4.0
5.7
7.0
8.7
18.9
10.1
19.8
⫺4.3
13.5
14.1
2.0

3.9
2.2
3.8
4.2
5.4
7.0
⫺2.1
1.7
⫺1.3
6.0
6.6
0.0

5.2
3.5
5.0
6.0
5.4
10.5
4.9
8.8
⫺2.2
4.1
7.2
⫺1.0

Memo items: GDP
Middle East and North Africae
Resource poor and labor abundantf
Resource rich and labor abundantg
Resource rich and labor importingh
Egypt, Arab Rep.
Iran, Islamic Rep.
Algeria

3.4
4.2
3.3
3.0
4.3
3.7
1.7

5.1
3.8
4.6
6.5
4.4
4.3
5.3

4.9
6.3
4.5
4.2
6.8
5.9
1.8

5.1
5.6
6.1
4.1
7.1
7.8
3.1

5.9
6.5
5.1
6.0
7.2
5.6
4.9

4.1
4.3
3.6
4.3
4.5
3.5
3.8

5.5
5.9
4.5
6.0
6.0
4.2
5.4

Source: World Bank.
* Estimate.
† Forecast.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Geographic region includes these high-income countries: Bahrain, Kuwait, and Saudi Arabia.
f. Arab Rep. of Egypt, Jordan, Lebanon, Morocco, and Tunisia.
g. Algeria, Islamic Rep. of Iran, Syrian Arab Rep., and Republic of Yemen.
h. Bahrain, Kuwait, Oman, and Saudi Arabia.

half of 2008, revenues jumped a further
50 percent to nearly $200 billion. Since then,however, the financial crisis and expectationsof much lower global growth have caused oil
prices to plunge from peaks of nearly$150/bbl in early July to near $65/bbl by
end-October 2008. As a result, regional oil
exporters are now experiencing a substantial
downshift in hydrocarbon receipts, terms oftrade, and current account surplus positions that will manifest more clearly in 2009
(figure A11).
The oil exporters’ current account surplus
increased from 17.2 percent of GDP in 2007
only moderately to 18.7 percent in 2008, but
global economic recession in 2009 will pressure oil prices lower and yield a sizable additional falloff in world oil demand. The group’s

160

current surplus position is projected to drop
steeply to 8 percent of GDP during 2009 andto 5.4 percent by 2010. Real-side growth will
be affected as revenue declines are likely to result in downsizing of ambitious investment
projects or postponement of planned programs. At the same time, the Organization ofPetroleum Exporting Countries (OPEC) will
likely attempt to set limits on the decline in oil
prices by constraining oil production, which
will depress the oil sector in many economies,
with ripple effects to the non-oil economy andthe private sector.
The diversified economies of the region,
including Jordan, Lebanon, Morocco, andTunisia, are to varying degrees highly dependent on imports of oil and refined petroleum
products, as well as on food and feedstuffs,

R E G I O N A L

Figure A11 Current account positions in the
Middle East and North Africa set to shift
dramatically
Current account balance as a share of GDP (%)
20
15
10
5
0
⫺5
⫺10

Middle East &North Africa

Oilexporters
2006

2007

2009

2010

Diversified
economies
2008

Source: World Bank.

notably wheat and coarse grains. Their termsof trade worsened by 4.2 percent in 2008,
pushing the group’s current account deficit to
7.3 percent of GDP (not witnessed since theAsia crisis of 1997) from 3.6 percent in 2007(see figure A11). Looking forward, these
economies will benefit from lower commodity
prices through 2010, and current accountdeficits are projected to decline to 0.7 and 0
percent of GDP in 2009 and 2010 respectively.

Effects of financial crisis are fairly muted,
but several countries are vulnerable
To date, the direct effects of the financial crisis experienced by most developing economies
in the region have been relatively mild. Banksand investment companies in the Middle Eastand North Africa were not large holders of
subprime mortgage-backed securities, or“toxic assets” (though there may be questions
concerning portfolios of sovereign wealthfunds in the Gulf States). Indirect effects, however, have become evident. Following the announcement of the U.S. financial rescue planin early October 2008, spreads on sovereign
debt increased 170 basis points for Lebanon
and 100 points for Egypt; but these increases
contrasted well with the average rise of 250
basis points for all developing economies atthat time. With country-specific developments

E C O N O M I C

P R O S P E C T S

set against the background of subsequent concerted policy rate reductions across the OECD
countries, a step-up in economic stimulus
plans and the beginnings of a thaw in credit
markets, spreads in Egypt eased to 350 points,
but those in Lebanon escalated to 730 basis
points by early November.
Equity markets across the region echoed
the sharp declines seen by emerging markets
generally, as international (and domestic) investors withdrew funds from the asset class.
From peak levels in the spring through earlyNovember 2008, the Egyptian bourse dropped
54 percent, Morocco’s exchange fell 33 percent, and the Gulf Cooperation Council (GCC)
markets in aggregate declined 50 percent. This
contrasts with a 54 percent decline in the
MSCI index which covers all emerging markets (figure A12).
Gross capital flows to countries in the region have also declined, and may be expected
to weaken further. Bond issuance dropped by
two-thirds from $4.6 billion to $1.5 billion
between January and August 2007 and thelike period of 2008. Equity issuance declined
from $2.1 billion to $750 million or 65 percent in the period as well. But a surge in bankborrowing from $4 billion to $14 billion in
the period offset the downturn in otherFigure A12 Markets in the Middle East andNorth Africa are hard hit by financial crisis
MSCI equity market price indexes (percentage change, US$)200

Egypt,
Arab
Rep. of

Morocco
175
150
125
100
75

GCC market average
MSCI total

50
Jan. 1
2007

May 1
2007

Sep. 1
2007

Jan. 1
2008

May 1
2008

Sep. 1
2008

Source: Morgan-Stanley.
Note: Gulf Cooperation Council (GCC).

161

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9finance components. Moreover, preliminary
data for September show declines across all
segments of flows to the region. The processof deleveraging across high-income financial
institutions appears to have raised the possibility for a potentially sharp reduction in capital flows, particularly syndicated bank lending and to a lesser degree bond issuance, forthe region. This is likely to carry adverse effects across countries, but with highly differentiated outcomes.5
Several countries stand exposed to the riskof adverse developments in international financial markets, which could negatively affect investment spending and growth. These
countries may suffer from fragilities in macroeconomic structure (for example, a string of
substantial current account- or fiscal deficits)
or from the presence of stress points madeclearer by the heightening of investor risk
aversion.
The vulnerability index presented in chapter 1 (a weighted measure of the exposure of acountry to developments in sovereign spreads,
equity markets, and exchange rates, as well as
in gross capital inflows) suggests that Lebanon,
Syria, Jordan, and Egypt have been among themore affected countries in the region, though
the vulnerability of these economies is low incontrast with the average exposure for otherregions. Under a global scenario in which financial markets require a prolonged period toreturn to balance, these countries might findthemselves at risk of adverse capital movements, pressures on equity markets, exchange
rates, and eventually investment and growth.

the developing oil exporters picked up fromnegative ground in the first quarter to 3 percent in the third, as growth in the non-oil sectors in both Algeria and the Islamic Republicof Iran well outpaced sluggish conditions inhydrocarbons. Output among the high-income
GCC economies continued to grow quickly,
underpinned by a continued rapid pace ofcommercial and residential real estate development in Bahrain, Qatar, Saudi Arabia, and theUnited Arab Emirates (UAE). Production gains
for the group jumped from 3 percent to 10 percent by the third quarter, with Qatar up 12 percent, Saudi Arabia climbing 11 percent, andthe UAE moving to 20 percent growth in the
period.
The surge in global prices for crude oil,food, and feed grains (50 percent or moreduring the first half of 2008), together withoverheated domestic demand in several
economies in the region (notably Egypt, theIslamic Republic of Iran, and a number of
GCC countries), led to a sharp rise in consumer price inflation across the Middle Eastand North Africa (figure A13). Consumer
prices for the diversified economies (GDPweighted) accelerated to 7 percent in August
2008 from a trough nearer 1.5 percent in
mid-2007; much of the increase was centered

Figure A13 Inflation rises across the Middle
East and North Africa
Consumer price inflation (percentage change, year-over-year)
24

Egypt, Arab Rep. of

20

Production is mixed; inflation ramps
higher, denting budgets across the region
Industrial production for the diversified
economies of the region tailed off in late 2008,
shifting from gains of 8 percent (on a GDPweighted basis) during the first quarter to 4.5
percent by the third quarter (year-over-year).
This decline reflects the increasingly sluggish
performance of exports to key European and
U.S. markets as well as emerging softness in domestic demand. In contrast, production among

162

Developing
oil exporters

16
12

GCC

8
4

Diversified
0
Jan.
2006

Jul.
2006

Jan.
2007

Jul.
2007

Source: World Bank data.
Note: Gulf Cooperation Council (GCC).

Jan.
2008

Jul.
2008

R E G I O N A L

in Jordan, where inflation reached 20 percent.
Aggregate inflation for developing oil exporters
also breached 20 percent, mainly reflecting developments in the Islamic Republic of Iran,where substantial monetary stimulus led tooverheating, pushing inflation to 27 percent;consumer prices in Egypt rose to a 24 percent
pace, pushed up primarily by rising foodprices and expanding domestic demand fueledby monetary growth.
Inflation remains a key challenge for the region. Although extensive reliance on fuel andfood subsidies helps limit inflationary pressures, it comes at a very high fiscal cost. Not
only do such steps reduce fiscal space to address other priorities, as discussed in chapter 3,
they tend to be very inefficient mechanisms foralleviating poverty. Iranian energy subsidies exceeded 20 percent of GDP in 2007—08. Foodand energy subsidies in Egypt increased to 1.9
and 6.9 percent of GDP in fiscal 2008, up from
1.3 and 5.5 percent, respectively, in fiscal 2007.
Second-round inflationary effects have been
boosted in several countries that responded tohigh food prices by increasing wages of selectgroups to help mitigate the worst of the impact
on living standards.

Domestic demand, underpinned
by substantial FDI, drives growthin the region
Strong gains in consumer spending, and especially in fixed investment, have been the key
factors supporting growth across the region in
2008—all the more so as exports of the oildominant economies have been restrained in aneffort to prop up crude oil prices, and those of
the diversified economies have been increasingly affected by the slowdown in export market demand. Investment in the region grew almost 20 percent in 2008, accounting for 3.4
points of the region’s 5.8 percent growth in theyear, while consumer spending grew 7 percent(see table A7, earlier). Large infrastructure investment projects, such as the Programme
Complémentaire de Soutien à la Croissance(PCSC) in Algeria, find counterparts in new realestate, commercial, and industrial developments

E C O N O M I C

P R O S P E C T S

in countries such as Egypt, Jordan, Morocco,
and Tunisia, funded in large part by direct investment flows from the GCC.
Sectors benefiting from FDI have diversified from real estate and tourism-related properties toward industrial and infrastructure
projects in the past few years. FDI to the developing countries of the region increased
more than five-fold from $4.7 billion in 2000
to $26.4 billion in 2006; preliminary estimatesfor 2007 suggest a moderate downshift to$21.5 billion, reflecting diminishing levels offlows to Egypt, Jordan, and Tunisia.
Recent examples of FDI-driven developments include the Mediterranean Gate project, which aims to turn Tunis into a regional
hub for finance, business, and technology.
Work has begun on the first $1 billion of the$25 billion project, which is slated to house
2,500 international firms and provide
350,000 jobs over a 20-year period. In Jordan,
Aqaba Development signed a $100 million
agreement to develop an industrial port at
Aqaba to handle potash exports. And in
Morocco, construction is under way on a new
Renault/Nissan production site—the plant willsponsor about 6,000 direct jobs, with 90 percent of production exported.
Among the region’s oil exporters, Algeria
experienced a fillip to growth in 2008, to 4.9
percent from 3.1 in 2007, as gains continued at
a rapid 6 percent clip in the non-oil sector, notably in construction and services linked to infrastructure projects (table A8). Algeria stands
in fair stead to weather financial spillovers fromthe global crisis; at end-September 2008, reserves
stood at $140 billion, up $30 billion from end2007. A falloff in the oil sector to 2 percent pressured growth in the Islamic Republic of Iranfrom 7.8 percent in 2007 to 5.6 percent. Overall GDP was supported by industry, which
advanced 7.4 percent, services (6.8 percent),
and agriculture (6.2 percent). Growth is being
powered by a highly expansionary fiscal policy,
which has pushed inflation toward 30 percent;and public spending is anticipated to movehigher still ahead of presidential elections slated
for 2009.

163

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E C O N O M I C

P R O S P E C T S

2 0 0 9

Table A8 Middle East and North Africa country forecasts(annual percent change unless indicated otherwise)
1991–2000a

Algeria
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Egypt, Arab Rep.
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Iran, Islamic Rep.
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
JordanGDP at market prices (2000 US$)b
Current account balance/GDP (%)
LebanonGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Morocco
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Syrian Arab Rep.
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Tunisia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Yemen, Rep.
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

2005

2006

2007

2008c

2009d

2010d

1.7
3.2

5.3
21.6

1.8
24.7

3.1
21.2

4.9
23.3

3.8
12.2

5.4
9.8

4.3
0.9

4.4
2.3

6.8
2.4

7.1
0.3

7.2
⫺5.1

4.5
⫺2.7

6.0
⫺1.3

3.7
1.2

4.3
20.4

5.9
27.6

7.8
28.5

5.6
36.3

3.5
17.9

4.2
12.1

5.1
⫺4.3

7.3
⫺17.7

6.3
⫺8.1

6.0
⫺13.9

5.5
⫺14.9

4.2
⫺0.8

6.0
0.0

7.2
—

1.0
⫺12.8

0.0
⫺5.3

2.0
⫺8.7

5.5
⫺16.4

4.0
⫺6.5

4.5
⫺5.9

2.4
⫺1.4

2.4
1.7

7.8
2.0

2.7
⫺0.3

6.2
⫺4.5

4.0
1.0

6.0
1.7

5.1
1.0

4.5
1.0

5.1
2.7

6.6
1.2

3.7
2.4

2.5
⫺2.0

4.2
⫺3.3

4.7
⫺4.3

4.2
⫺1.1

5.7
⫺2.0

6.3
⫺2.6

5.1
⫺3.9

3.7
0.0

5.8
0.8

5.5
⫺4.3

4.6
3.7

3.2
8.1

2.8
⫺0.5

2.7
1.3

5.7
1.3

4.0
2.5

Source: World Bank.
Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Djibouti, Iraq, Libya, and West Bank and Gaza are not forecast because of data limitations.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.

Growth in Egypt continued its strong momentum into 2008, moving from GDP gains of
7.1 percent in 2007 to 7.2 percent, as investment advanced by more than 30 percent
funded in large part by FDI. Egypt has been thelargest recipient of FDI in the region, attracting$13 billion (8.4 percent of GDP) in fiscal 2008,
up from $11 billion in the previous fiscal year.
But the country’s equity markets have been
hard hit by recent financial turmoil, with the
CASE index off more than 50 percent since
May 2008. Moody’s and Fitch had earlier lowered the outlook on the country’s Ba1 rating tonegative from stable, citing inflation and thefiscal deficit as primary concerns. Egypt appears among the more exposed economies in164

the Middle East and North Africa to potential
repercussions from developments in international financial markets.
In Syria, domestic demand, supported bystrong output gains in transport, communications, finance and real estate, and public administration, drove growth of 3.7 percent during 2008. Declining oil production is the key
challenge facing the economy. Oil output
dropped 23 percent between 2003 and 2007,
increasing pressure to expand the scope forprivate non-oil activities. Similar falloffs in oil
production in the Republic of Yemen continue
to plague the economy, restraining GDP
growth there to 2.7 percent in 2008; though acoming online of large natural gas facilities in

R E G I O N A L

2009 should yield a fillip to growth by morethan 3 percentage points at that time.
Among the more-diversified economies,
growth in Morocco recouped sharply to 6.2
percent in 2008 from the drought-inflicted 2.7
percent outturn of 2007. Vigor in nonagricultural sectors, especially in telecommunications, financial services, and construction,
has driven growth. Policies to control domestic prices––food and fuel subsidies, temporary
waivers on customs duties for cereals, and actions to fight price speculation––have helped
maintain overall inflation at relatively low levels compared with many countries in the region. But subsidies have tripled in two years,
reaching close to 6 percent of GDP in 2008. In
Tunisia, GDP eased to 5.1 percent growth in2008, from 6.3 percent in 2007, largely because of deterioration in the external environment, in particular the economic slowdown in
the EU. Remaining import tariffs on EU goods
were dismantled in January within the framework of the EU-Tunisia Association Agreement, and steps have been taken in the financial
sector to reduce unsound and nonperforming
loans by improving credit risk appraisals.
Over the first seven months of 2008, foreign
investment in industry increased 47.2 percent,widening from the earlier focus of FDI in
tourism.
Jordan’s growth slipped to 5.5 percent
from 6 percent in 2007, on the back of stillbuoyant domestic demand, financed in part bylarge capital inflows. Heavy public sector outlays in 2008 (and anticipated in the draft 2009budget) suggest that fiscal and financing pressures will continue in the short term. The risein fuel and food prices, together with expansionary policy, has pushed inflation above 22
percent as of August, and the current accountdeficit widened to almost 15 percent of GDP
in the year. These circumstances place Jordan
at some risk of interruption in private capital
flows in the short term, but official development assistance and worker remittances mayhelp the country bridge the potential financing
gap. Finally, in Lebanon, GDP picked up to a
5.5 percent pace in 2008, from 2 percent

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during 2007, on a strong rise in consumer
spending. At the same time, inflation lofted
into double digits on the back of food and fuelprices, as well as high public sector wage
settlements. Lebanon managed to finance its
large trade deficit through stronger exports ofservices and higher net inflows from abroad.

The medium-term outlook
The global downturn and financial crisis will
exact a toll on growth in the Middle East andNorth Africa, but one that will be less dramaticthan, for example, in Europe and Central Asia
or South Asia, where country exposure andfragility of initial conditions are considerably
more pronounced. As world oil demand falls
sharply, any decisions by the region’s oil exporters to curtail output to set a “floor” under
oil prices—will play a large role in shaping
growth profiles. And the shift from windfall
revenue gains to current account surplus positions of less than 6 percent of GDP by 2010,
much weaker oil revenues, tighter credit conditions, and weaker demand for the region’sexports (including tourism) are expected tocause investment to decelerate sharply, risingby 7 percent in 2009 after growing 18.9 percent in 2008.
As a result, the region’s GDP is anticipatedto slow from 5.8 percent in 2008 to 3.9 percent in 2009. Growth among the oil exporters
as well as the diversified economies is anticipated to fall to about 4 percent in 2009 (figure
A14). Recovery in 2010, predicated upon aquick resolution of the financial crisis in highincome countries and a moderate revival ofOECD growth, would see GDP pick-up to 5.2
percent, led by a return to 5.7 percent growthamong the diversified economies. A very gradual buildup in global oil demand is likely torestrain GDP gains among the oil-exporting
countries to 5 percent in 2010. Mainly reflecting cuts in oil production, export volumes areprojected to decline 2.1 percent in 2009, while
the regional current account surplus falls to
6 percent of GDP, from 13.5 percent in 2008.
Recovery for the region in 2010 hinges ona pickup in exports and a moderate upturn in165

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2 0 0 9Figure A14 Notable slowing of growth acrossthe Middle East and North Africa in 2009
GDP growth (%)
7
6
5
4
3
2
1
0
2007

2008
Oil exporters
GCC countries

2009

2010

Diversified economies

Source: World Bank.

investment, but primarily on a 1.8 percentage
point pickup in household outlays to growthof 6 percent, as the earlier run-up in commodity prices and consumer price inflation moderates, giving way to gradual stabilization andto a pick-up in consumer purchasing power.
The region’s current account position should
continue to narrow to some 4 percent of GDP,
providing a new set of “initial conditions”
from which developments into the next
decade are likely to spring.

Risks
Uncertainty surrounding the medium-term
path for oil prices is probably the element ofgreatest risk confronting the region. Where
the global price of oil settles, grounded in thefundamentals—as well as by pressures exertedby OPEC—will determine the potential
growth path for the oil-dominant economiesof the region. The “base case” view posits
world crude oil prices remaining within a $65
to $75/bbl range through 2010, moving toward a real equilibrium price of $60/bbl in2007 dollars by 2015. But substantial downsides to this price forecast can be envisioned
should the slowdown in developing-country
GDP growth fall much below the 4.5 percent
posited for 2009. Although a repeat of
1985–86, when oil prices tumbled to $10/bbl

166

is unlikely, prices below $50/bbl could be in
the cards, with attendant adjustments requiredby the region’s exporters.
A second element of concern for the regionis the potential for unrest among the populace
under the potentially harsh conditions of a
global recession. A slowdown in remittanceinflows would carry direct effects to poor families in need of income to sustain household
consumption. And government budgets willremain under pressure, in part to maintain
subsidies for basic goods.

South Asia
Recent DevelopmentsG

DP growth in South Asia slowed markedly
in 2008 to 6.3 percent from 8.4 percent in2007.6 The onset of the financial crisis in the
United States and Europe in mid-September
2008—which led to severe financial turmoil inemerging markets, including in many South
Asian countries—ushered in a downshift in activity that started to take hold in late-2008.
Growth had already begun to wane in the region prior to the onset of the global crisis, asrising inflationary pressures and tight credit
conditions had started to take a toll on domestic activity, while already slowing external demand and high international commodity prices
led to a deterioration in external positions.
The initial effects of the global financial crisis in South Asia were sharp corrections in regional equity markets. Bourses in India, Pakistan, and Sri Lanka dropped 57 percent, 39
percent, and 35 percent, respectively, over theyear through mid-November (and 66, 50, and39 percent, when measured in U.S. dollars).
Notably in Pakistan, curbs on the sale of equities were imposed in August, effectively preventing the exit of existing investors and discouraging potential new investors.
Equity sell-offs and ‘flight-to-quality’ contributed to significant currency depreciation insome countries, with local currencies in India,
Pakistan, and Nepal7 falling by 21 percent,
30 percent, and 21 percent, respectively,
against the U.S. dollar, over the year throughR E G I O N A L

mid-November. The Sri Lankan rupee depreciated by nearly 2 percent when the Central
Bank allowed the peg against the U.S. dollar
to adjust at end-October 2008. In contrast,
the Bangladeshi taka appreciated slightly (2 percent) over the same period.
Notably, the region’s banking sectors havebeen largely insulated from the crisis, given
very limited exposures to the toxic debt instruments tied to U.S. sub-prime mortgages. With
respect to the associated impacts of the financial crisis on the real economy—as financing
for corporations, loans for households, andtrade credit for exporters have become significantly more difficult to obtain—indications ofa fall-off in external and domestic demand havebegun to trickle in. For example, India’s goods
exports contracted 12 percent in October (yearover-year). This comes on the heels of a substantial deceleration in export growth to 10 percent in September from 27 percent in August
despite the marked weakening of the rupee. Sri
Lanka’s exports also declined, falling 9.4 percent in September, contrasted with growth of
16.6 percent and 24.1 percent in August andJuly, respectively. Further, consumer confidencein India has deteriorated, with the index related
to consumer spending down for a fourth consecutive month in October.8
Weaker conditions in South Asia were evident in the region prior to the onset of the
global financial crisis, and were marked by anincreasingly challenging global environment.
In particular, sharply negative terms-of-tradeeffects from the rise in oil and global nonenergy commodity prices, which peaked in mid2008, acted as a drag on regional growth andcontributed to a doubling of the regional current account deficit in the year. Rising international prices also contributed to a pronounced
buildup in South Asia’s inflation pressures.
Higher prices, particularly for food and fuel,undermined real household incomes—with
the poorest households generally affected themost—thus crimping household expenditures.
Several governments attempted to offset theinternational price hikes with domestic subsidies, placing strains on fiscal balances. But

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with substantial and sustained increases
through the middle of 2008, a greater degreeof feed-through of higher food and fuel prices
to households in these countries became inevitable. Tighter credit conditions, moderating
demand, higher prices, and diminishing levelsof confidence weighed on consumer and business spending alike. And investment growth
decelerated to single digits from the robust
growth witnessed during recent years.
The slowdown in growth during 2008reflected increasing weakness in the region’s
two largest economies, India and Pakistan(table A9). In India, growth slowed across all
sectors, with tighter monetary policy, rising inflationary pressures, and mounting fiscal andcurrent account deficits weighing down economic activity. The more recent onset of the
global financial crisis resulted in sharp losses
in India’s equity markets and drove down thevalue of the rupee. Foreign institutional investors pulled out of India to cover losses inhigh-income countries and as risk aversion
heightened across the globe.
In Pakistan, the economy deteriorated
sharply over the course of 2008, as headline inflation surged, and the current account and fiscal deficits jumped on the back of rising oil andfood prices. Political turmoil and ongoingsecurity concerns have also taken a toll on
Pakistan’s economy, while the global financial
crisis added substantial downward pressureson its financial markets. Prior to reaching anagreement with the IMF for standby credit in
mid-November, Pakistan came close to a fullblown balance of payments crisis. In neighboring Afghanistan, the economy has been
hurt by a decline in agricultural output causedby poor precipitation, a sharp rise in international food prices, and the wheat export restrictions imposed by Pakistan, in addition to
the disruptive effects of the spreading insurgency. And while GDP growth in Bhutan remained vibrant at 14.4 percent in 2008, it
moderated from the 17 percent expansion of
2007, stemming from the initial boost from thefirst full year of operation of the immense Talahydropower project.

167

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2 0 0 9

Table A9 South Asia forecast summary(annual percent change unless indicated otherwise)

GDP at market prices (2000 US$)b
GDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
South Asia excluding India
India
Pakistan
Bangladesh

1991–2000a

2005

2006

2007

2008e

2009f

2010f

5.2
3.1
6.3
3.9
4.7
5.5
10.6
9.8
⫺0.1
⫺1.6
8.2
⫺7.7

8.7
6.9
8.7
7.0
8.8
14.6
7.0
12.9
⫺1.0
⫺1.2
6.5
⫺5.9

9.0
7.2
9.0
6.0
10.0
16.5
17.3
21.9
⫺0.8
⫺1.5
9.2
⫺6.1

8.4
6.9
8.4
7.5
4.9
13.5
7.3
7.0
0.0
⫺1.6
8.4
⫺6.4

6.3
4.8
6.3
5.7
8.8
7.1
4.3
6.5
⫺0.5
⫺3.5
9.7
⫺8.1

5.4
4.0
5.4
4.7
9.2
4.8
3.7
2.7
0.2
⫺2.0
8.0
⫺8.6

7.2
5.8
7.2
5.7
6.7
10.7
8.3
7.8
0.0
⫺1.9
6.0
⫺8.0

4.4
5.5
3.9
4.8

6.7
9.2
7.7
6.0

6.4
9.7
6.2
6.6

6.1
9.0
6.0
6.4

6.1
6.3
6.0
6.2

4.0
5.8
3.0
5.7

5.2
7.7
4.5
6.2

Source: World Bank.
Note: To simplify presentation across countries and with other regions, annual national income and product account data forSouth Asia are reported in calendar years, although official country data are originally reported by fiscal year for Bangladesh,
India, Pakistan, and Nepal.
a. Growth rates over intervals are compound average; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.

In contrast with broadly declining activity
in the region, growth in Bangladesh held
steady, with domestic demand buoyed by a
sharp increase in remittance inflows and by robust garment exports recorded in the first halfof 2008. With relatively thin capital markets,
Bangladesh’s equities experienced much more
muted declines than those experienced in otherregional markets. Growth in Sri Lanka has
also proven resilient in 2008, primarily because of a marked rise in agricultural production and a boom in tea exports, which helped
to offset slower growth in garment exports.
While its equity markets also suffered sharp
corrections with the global financial crisis, theSri Lankan rupee, which was pegged to the
U.S. dollar early in 2008, remained stableagainst that currency. Partially in consequence,real appreciation of the Sri Lankan rupee has
contributed to substantial widening of the current account deficit. In Nepal, growth firmed
in 2008, helped by higher agricultural output

168

and rising remittance inflows. These factors
supported an increase in household incomesand private consumption, despite a buildup in
inflation pressures.
The general deterioration in regional tradebalances has been offset by large remittanceinflows, which represent a sizable, and generally increasing share of GDP: during 2007,14 percent in Nepal, 8 percent in Bangladesh
and Sri Lanka, 4 percent in Pakistan, and 3
percent in India. FDI inflows remained strong
through the first half of 2008, helping to ease
external financing requirements. In India, FDI
surged to 3 percent of GDP in 2008, up from
1.4 percent in 2007. FDI inflows to Pakistan
remained relatively steady through the summer of 2008—on course to match the 3.7 percent of GDP recorded in 2007—but theextreme financial and economic difficulties
encountered during the second half of the year
were likely to have changed that for the worse.
In 2007, FDI inflows to Sri Lanka andR E G I O N A L

Figure A15 Key international finance links inSouth Asia, 2007
Share of GDP (%)
9Inwardremittances
6
Portfolio
inflows

FDI
inflows

3

0

India

Pakistan

Sri Lanka

Bangladesh

Source: World Bank.

Bangladesh reached 1.7 and 1 percent of GDP
respectively (figure A15).
In contrast, net portfolio flows to the region
turned sharply negative during the first half of2008, shifting from vibrant inflows of recent
years. In India, where portfolio inflows surged
to 3 percent of GDP in 2007, outflows areprojected to exceed 1 percent of GDP in 2008.
With the increase in global risk aversion andrebalancing of portfolio holdings in the highincome countries, gross capital flows decelerated in 2008, with an especially sharp falloff inequity and bond issuance and a somewhat lesspronounced decline in bank borrowing. Faltering investor confidence led to higher international bond spreads, with those for Pakistan
and Sri Lanka spiking to prohibitive levels in
September and October. Hard currency reserves were drawn down to varying degrees, as
investors pulled out of regional markets and as
central banks sought to shore up currencies.
Fiscal policy across South Asia is broadly
expansionary, with deficits generally exceeding 4.5 percent of GDP—they are projected toreach 8.5 percent in India, 7.5 percent in Pakistan and Sri Lanka, and 4.7 percent in
Bangladesh in 2008. Nepal is an exception,
where the 2008 deficit is projected at 2.8 percent of GDP, although that would be double
the 2007 deficit. In 2008, budget deficits rose
across the region—or remained high—as

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P R O S P E C T S

price subsidies for food, fuel, and fertilizer
contributed to higher fiscal outlays. In somecases (India, Bangladesh, Pakistan), the subsidies contributed to a reversal in the generaltrend toward fiscal consolidation in recent
years. Downward pressure on the revenue
stream, resulting from the deceleration in
growth, also played a role. As a consequence,a number of regional governments had begun
to cut development spending.
With low, or in many cases, negative real interest rates, monetary policy is also broadly expansionary in South Asia. Prior to the onset of
the global financial market crash in September
2008, some countries had tightened monetaryconditions through interest rate hikes (India)
or slower credit growth (Sri Lanka) in an effort
to curtail rising inflationary pressures. Later inthe year, however, as the credit crunch became
manifest, regional monetary authorities
quickly responded by injecting liquidity intobanking systems through various measures, including lowering required reserve ratios andreducing policy interest rates.

Medium-term outlook
The outlook for regional growth is highly uncertain, because of the sustained degree ofvolatility and synchronized nature of the slowdown across countries—and because the full
extent of financial disruption on both the regional and global economies remains unclear.
South Asian GDP growth is projected to step
down to 5.4 percent in 2009 from 6.3 percent
in 2008. Continued financial sector volatility
and balance sheet weakness will translate into
ongoing risk aversion. That is expected to leadto a further contraction in portfolio inflows
and mute the prospects for FDI, primarily affecting India and Pakistan, which receive thelion’s share of the region’s inflows. In turn,these factors are projected to lead to a sharp
falloff in private investment growth. Equity
price declines are expected to generate negative
wealth effects, especially in the case of India,
where market capitalization reached 160 percent of GDP in 2007, up from 90 percent in169

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2 0 0 9

Table A10 South Asia country forecasts(annual percent change unless indicated otherwise)

Bangladesh
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
India
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Nepal
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Pakistan
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Sri Lanka
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

1991–2000a

2005

2006

2007

2008c

2009d

2010d

4.8
⫺0.4

6.0
⫺0.3

6.6
2.0

6.4
1.2

6.2
0.8

5.7
0.7

6.2
0.7

5.5
⫺1.2

9.2
⫺1.0

9.7
⫺1.0

9.0
⫺1.2

6.3
⫺3.1

5.8
⫺1.7

7.7
⫺1.9

5.0
⫺6.3

3.1
0.0

3.7
⫺0.1

2.6
⫺1.2

5.5
1.2

3.8
1.0

4.9
0.8

3.9
⫺3.7

7.7
⫺3.3

6.2
⫺5.4

6.0
⫺5.8

6.0
⫺8.1

3.0
⫺4.6

4.5
⫺3.2

5.2
⫺4.6

6.0
⫺3.2

7.7
⫺5.3

6.8
⫺4.4

6.3
⫺7.5

4.0
⫺5.7

5.5
⫺5.5

Source: World Bank.
Note: Growth and Current Account figures presented here are World Bank projections and may differ from targets contained inother World Bank documents. Afghanistan, Bhutan, and Maldives are not forecast because of data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.

2006 and where the housing boom has begun
to lose steam (table A10).
Weakening foreign demand is expected tolead to a significant slowing in regional export
growth, including services. In particular, the information technology and communications sector is considered vulnerable to shifts in financial
sector activity, and clothing and tourism revenues are vulnerable to shifts in discretionary
spending. Potential mitigating factors include
cost-cutting measures by companies in highincome countries to the benefit of outsourcing
suppliers (such as India) and shifts in spending
to low-priced retailers, such as Wal-Mart, to thebenefit of their suppliers (such as Bangladesh).
Recession in high-income countries and a slowdown in growth among the Gulf oil exporters
are expected to depress remittances inflows.
However, the set of unfavorable global
conditions are anticipated to lead to lower
commodity prices, which will not only provide a fillip to real household incomes, butalso provide governments with greater scopefor fiscal stimulus. Falling commodity prices
will reduce the import bill and boost the region’s terms of trade. At the regional level, the170

current account deficit is expected to narrow
substantially. Additionally, the recent sharp
depreciation of local currencies against the
dollar for India, Pakistan, and Nepal will help
boost export competitiveness. This should
help offset partially the negative effects of thecoming contraction in world trade.
To help cushion the downturn related to thefinancial crisis, South Asian governments areseen to pursue countercyclical measures, although fiscal space is limited. Thus, monetary
policy measures will often be the key mechanism for response to the crisis, although reductions in policy rates should be undertaken withcare where there is pressure on the exchange
rate. Even with tight budget envelopes, regional governments can improve the efficiencyof public outlays by more directly targeting
safety net programs to the benefit of the poor.
In addition, and particularly where both fiscal
and monetary policy responses are constrained, expansion of structural reforms
should be pursued to stimulate growth in thenear term and improve prospects for the
medium and longer terms. Examples include
improving governance and management of

R E G I O N A L

public sector firms, rationalizing government
finances, enhancing openness where it could
improve stability (such as FDI), and improving
the quality of physical and financial infrastructure. Moving forward with existing planned
investment programs, which often take years
to develop, will support current activity andbuild capacity for eventual recovery.
Given strong underlying growth dynamics
in South Asia, the negative feedback effects ofthe global financial crisis are expected to be
temporary. A relatively rapid rebound is expected in 2010, with a projected revival of
GDP growth to 7.2 percent by 2010. Private
consumption and investment growth are forecast to gain steam, supported by strengthening
global demand and a rebound in consumer
and business confidence. Commodity price decreases are projected, which will support a reduction of inflationary pressures within theSouth Asian economies. The region’s median
inflation rate will have peaked in 2008 at 9.7
percent, although sustained pipeline pressures
will prevent a rapid easing, with inflation
moderating incrementally to 8 percent in 2009
and 6 percent by 2010.

Risks
Given the synchronized and widespread natureof the current crisis, downside risks to thebaseline are pronounced. A more prolonged
and pervasive credit crunch than envisioned in
the baseline would lead to a deeper global recession. That in turn would likely lead to outright contraction of South Asia’s private fixed
investment (compared with the sharp slowingof growth found in the baseline), driven in partby a crimping of FDI inflows. South Asia’s exports would also likely contract instead ofslow, and remittances could compress sharply,
especially were destination countries to send
migrants home. With the growth slowdown,household incomes would decline and unemployment rise. Progress in poverty alleviation
could slow markedly. While the region’s banking sector has not been exposed to the toxic
debt instruments that have plagued many highincome countries, in a downside scenario of

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protracted sluggish growth and risk aversion,
weaknesses in the region’s financial sector
could emerge.
Whereas India holds sizable foreign exchange reserves (despite recent draw-downs)
to help weather more negative than expected
growth dynamics, other countries in the region have seen widening trade deficits andcapital outflows reduce their reserve holdings,
increasing their vulnerability to sustainedpressure on currencies. Countries holding substantial short-term debt obligations would be
more vulnerable. In the Maldives, the rapid
buildup of debt obligations with the construction boom following the tsunami is of concern. Sri Lanka has a large public debt (equivalent to 83 percent of GDP in 2007), with
44 percent of the debt external, albeit primarily
concessional; the country’s fiscal position isthus vulnerable to higher interest rates and exchange rate depreciation. The Sri Lankan currency peg against the dollar could come underpressure, because the foreign reserve cover isrelatively low. Bhutan also holds significant
external debt obligations, but these are held
primarily by India for the development ofhydroelectric power, which Bhutan is in turnexporting to India. Should a deeper crisis leadto a falloff in foreign assistance, countries significantly reliant on aid (such as Afghanistan)would be more adversely affected.
In contrast, should the current global financial crisis be resolved relatively quickly,
and growth dynamics prove more favorable
than projected, policy makers would face very
different challenges. Inflationary pressures
could return to the forefront—as countercyclical measures could become effectively
pro-cyclical—leading to higher internal and external deficits, hindering investment (throughcrowding out), and acting as a drag on growth.

Sub-Saharan Africa
Recent DevelopmentsS

ub-Saharan Africa’s economy expanded
5.4 percent in 2008, the first time in morethan 45 years that growth exceeded 5 percent

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2 0 0 9for five years in succession—this despite substantial deterioration in the external environment during the year. GDP gains have beenbroad-based and less volatile, even in oil-importing economies, as strong commodity export revenues and capital inflows underpinned
domestic demand. Another notable and encouraging feature of the recent growth spurt isthe sustained contribution of fixed investment
to growth, which carries positive implications
for long-term potential growth.
Strong external demand, high commodity
prices, and relatively robust private capital inflows invigorated growth across a large spectrum of economies, whether resource rich or
resource poor. Oil-importing economies, outside of South Africa, grew 5.2 percent in 2008,
down from 5.8 percent in 2007, while oil-exporting countries grew by more than 7.5 percent for a second consecutive year. However,
several years of above-trend economic expansion have pushed a larger number of African
economies up against capacity constraints

stemming from inadequate investment in energy, roads, railways, and ports over the past
decades. This constraint along with high foodand fuel prices has contributed to the upturn
in inflation witnessed across the subcontinent
during the year (table A11).

South African growth eases
Growth in the Republic of South Africa
trailed growth in other African economies in
2008, slowing markedly to an estimated 3.4
percent from 5.1 percent in 2007. Power outages plagued output growth in the mining sector, and household consumption slowed
sharply, undercut by slower growth of credit,
falling asset prices, and higher food and fuelprices. The region’s largest economy has felt
the repercussions of the intensification of thefinancial crisis since September 15. Increased
risk aversion vis-à-vis emerging markets
caused asset prices in South Africa to plummet, putting pressure on the rand, which has
depreciated nearly 25 percent in nominal

Table A11 Sub-Saharan Africa forecast summary(annual percent change unless indicated otherwise)
1991–2000a

2005

2006

2007

2008e

2009f

2010f

2.3
⫺0.5
3.2
1.3
2.4
3.6
4.6
4.5
0.1
⫺2.0
10.2
⫺4.7

5.9
3.4
6.2
5.2
6.2
14.8
6.2
12.8
⫺2.3
2.4
7.2
0.2

5.9
3.4
6.1
6.5
6.0
19.4
4.7
12.8
⫺3.1
0.7
7.3
1.0

6.3
4.3
6.7
6.5
6.2
20.3
5.4
11.9
⫺2.9
⫺0.3
6.3
⫺1.9

5.4
3.4
5.7
3.4
5.4
12.7
5.9
7.6
⫺1.2
1.0
8.6
⫺0.6

4.6
2.7
4.9
3.5
6.0
7.7
4.5
5.6
⫺0.8
⫺3.5
6.5
⫺1.3

5.8
3.8
6.1
5.2
7.4
9.9
7.2
9.4
⫺1.6
⫺3.7
4.1
⫺1.5

2.6
2.0
2.5
1.8
2.8
1.9

6.4
7.5
4.0
5.0
7.2
5.7

6.2
6.8
2.4
5.4
5.2
6.1

7.0
8.2
3.4
5.1
6.5
7.1

6.6
7.8
4.5
3.4
6.3
3.3

5.7
6.6
4.3
2.8
5.8
3.7

6.6
7.3
5.0
4.4
6.2
5.9

GDP at market prices (2000 US$)b
GDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Current account balance/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
Sub-Saharan Africa excluding South Africa
Oil exporters
CFA countries
South Africa
Nigeria
Kenya
Source: World Bank.

a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.

172

R E G I O N A L

Figure A16 Bond spreads for Africancountries jumped after mid-September
Spreads in basis points
1400

Ghana

1200
1000
800

Gabon

600
400

South Africa

200
Sep. 1 Sep. 11 Sep. 21 Oct. 1 Oct. 11 Oct. 21 Oct. 31
2008
2008
2008 2008
2008
2008
2008
Source: JPMorgan-Chase.

effective terms since the beginning of 2008.
Like most emerging markets, South Africa saw
spreads on its sovereign bonds surge, by morethan 450 basis points between the beginning of
September and mid November 2008; equity
prices plummeted 40 percent in dollar terms
over the same period (in local currency the loss
was 21.7 percent) (figure A16).
Helped by higher exports of gold and platinum, South Africa’s current account deficit
retreated to 7.3 percent of GDP in the second
quarter of 2008, from 8.9 percent in the previous quarter. Lower prices for its main exports, together with weaker external demand,
will cause the current account deficit to rise to
8 percent of GDP this year from 7.3 percent in2007. With portfolio inflows financing threefourths of South Africa’s current accountdeficit in 2007, and with the increased volatility of these inflows, South Africa may find it
difficult to finance its large current accountdeficit, especially if FDI inflows are also
falling. Meanwhile, fiscal financing requirements are much more modest; South Africa is
expected to run a small budget deficit in 2009,
after being almost in-balance in 2008. Furthermore, government indebtedness remains
low, with debt at 23.3 percent of GDP as ofMarch 2008, and foreign debt accounting forless than 20 percent of total. This means thatthe government has room to borrow domestically to finance countercyclical policies.

E C O N O M I C

P R O S P E C T S

Higher fiscal spending, a slowdown in FDI,
and drying up of credit suggests that private
investment growth, which has already been affected by tighter monetary policy, will slow
further. The intensification of political tensions within the ruling African National Congress Party, which led to the resignation of
President Thabo Mbeki several months before
the end of his term, is likely to have a minimal
direct impact on the economy but will add touncertainties faced by investors now worried
about a possible shift in economic policy.
Outside of South Africa, large commodity
windfalls have fueled growth in resource-richcountries. Encouragingly, growth is spillingover to other sectors outside oil and mining, as
part of the windfall is spent. In Nigeria, thenon-oil economy is booming, despite continued unrest in the Niger Delta that caused oil
output to drop 11.2 percent in the second
quarter of 2008. Despite underperformance inthe oil sector, second-quarter growth accelerated to 6.7 percent, from 5.5 percent in thefirst, as output in non-oil industries picked up
to 8.5 percent, mainly on strong growth inagriculture, trade, and telecoms, which together accounted for 95 percent of non-oil
growth. In Angola, GDP growth remained robust in the first half of the year, and growth in
the non-oil sector will approach 20 percent
this year, marginally down from 21.5 percent
in 2007, as the construction, agriculture, andcommunication sectors continue to expand at
an impressive pace.
High energy and agricultural prices andlower agriculture output caused by unfavorable weather conditions have affected industrial output in some countries. Indeed, in many
West African countries the food processing sector has contracted due to lower agricultural
output and higher input costs. Surges in foodand fuel prices have pushed headline consumer
price inflation into double digits in almost halfof the countries in Sub-Saharan Africa, withmedian inflation moving rapidly to nearly 13
percent as of September 2008; median food inflation increased to more than 17.7 percent(figure A17). For example in Ethiopia, headline173

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Figure A17 African headline inflation jumps
as food prices skyrocket
Median CPI inflation (year-on-year)
20
Food
16

Medium-term outlook

12

8

4
Jan.
2005

Headline consumer price inflation
Jul.
2005

Jan.
2006

Jul.
2006

Jan.
2007

Jul.
2007

Jan.
2008

Jul.
2008

Source: World Bank.

inflation surged as high as 64 percent in 2008,
as food inflation breached 80 percent. In somecases, core inflation also accelerated, as secondround inflation effects through wage settlements incorporating expectations of higher inflation were concluded. For example, in South
Africa, unit labor costs increased 10.5 percent
in the second quarter of 2008, spurred by average wage increases of 9.6 percent in the firstnine months of the year.
High import prices in conjunction, in somecases, with strong investment demand (investment carries high import content in Africa) led
current account balances to deteriorate inmore than one of every two countries during
2008 relative to 2007. Thirteen of 44 countries
experienced a worsening in excess of 2 percent
of GDP, and 19 of 44 countries registered current account deficits in excess of 10 percent of
GDP. In Ghana, for example, the trade deficit
breached 26.2 percent of GDP in the second
quarter of 2008 and is expected to reach morethan 30 percent in 2009. The deficit excluding
official transfers is likely to rise to more than17 percent of GDP.
Political instability can still derail growth,
as it did in Kenya, where output contracted
0.8 percent in the first quarter of 2008 (yearover-year). Political tensions caused a sharp
contraction in tourism arrivals and in the
agriculture sector. Other sectors were also af-

174fected to varying degrees, with transport contracting 2.2 percent; strong performance inmining and construction prevented a moredismal growth outcome. A resumption of
conflict is also threatening growth prospects
in the Democratic Republic of Congo.

The rapid and marked deterioration in the external environment will cause growth in SubSaharan Africa to slow, coming in at 4.6 percent in 2009, a pace below 5 percent for only
the first time in five years (see table A11, earlier). Direct effects of the global financial andeconomic crisis are likely to be much more limited than in other regions, because African
economies are less integrated into the international financial system and rely relatively lesson international capital and bond markets tofinance investment.
For Africa, weaker external demand andlower commodity prices will be the majormechanisms through which the financial crisis
will be transmitted. Declines in demand in key
external markets will take a toll on exports,
and the contribution of trade to GDP growthis likely to be negative in 2009. Perhaps more
importantly, export revenues will be affectedby markedly lower commodity prices nextyear, eroding government and corporate finances and affecting farmers’ incomes adversely. Additional adverse factors coming toaffect Sub-Saharan Africa, potentially withsome lag, are a slowing pace of worker remittance receipts, and importantly for many lowincome countries, possible moderation in Official Development Assistance (ODA) flows.
More of an issue for commodity-rich countries, gross portfolio flows to the region are expected to fall markedly as credit becomesscarce and more expensive and investors’ risk
aversion intensifies. Official aid may also besqueezed by reduced fiscal space in donor
countries as they tackle financial crises athome. As a result, fragile countries that rely
heavily on aid are faced with a potential deterioration in growth prospects. Moreover, recession in high-income countries will undermine

R E G I O N A L

tourism arrivals and revenues, as well as remittances, which represent a significant share of
GDP for Cape Verde, the Gambia, Kenya,
Liberia, Lesotho, and the Seychelles, among
other countries. However, for countries where
currencies depreciated heavily with respect todonor country currencies, receipts in local currency terms could still increase.
Countries with very large current accountdeficits, including Burundi, Eritrea, the Gambia,
Ghana, Madagascar, Malawi, Rwanda, Togo,and the Seychelles will need to adjust domestic
demand to lessen import growth as financing
external deficits becomes more difficult, andas export revenues and transfers are diminished by slower global growth. Many of these
economies are especially vulnerable because
they have low levels of international reserves,in many cases covering less than three monthsof imports.
While oil exporters hold sufficient resources to weather the global economic downturn, many oil-importing economies havebeen hit hard by higher food and fuel prices
and are less well equipped for the coming
downturn. In a number of cases, increased
subsidies have limited fiscal space for countercyclical spending. Over the past year, as foodprices surged, many governments removed orsuspended tariffs on imported foods, which
undercut tariff revenues. In addition, a lessthan-full pass-through of higher international
oil prices led to a large increase in fuel subsidies in some countries, further reducing fiscalroom. While the movement to lower food andfuel prices will bring some relief, countries remain in a weakened state.
Overall, aggregate GDP growth in SubSaharan Africa is projected to decline to 4.6
percent in 2009 from 5.4 percent in 2008, on
the back of weaker investment outlays, faltering export performance, and softer private
consumption. As external demand gradually
recovers over the second half of 2009 and into
2010, growth should firm to 5.8 percent by
the latter year. Excluding South Africa andNigeria, growth is projected to ease by a fullpercentage point to 5.6 percent in 2009 and to

E C O N O M I C

P R O S P E C T S

bounce back to 6.7 percent by 2010. In oilexporting economies, growth will slow by
more than a full percentage point to 6.6 percent, but the exporters will remain the fastestgrowing group of countries in the region,
while growth in oil-importing countries outside South Africa is projected to ease to 4.6 percent, a rate still above the historical trend(table A12).
South Africa’s economic growth is likely to
weaken further in 2009, falling below 3 percent for the first time in almost a decade, astighter monetary policy and high inflation
causes household consumption to falter. Private investment growth will continue to decelerate, pushed down by tighter credit markets
and as demand in main export markets contracts (figure A18). Large asset price declines
and associated negative wealth effects, alongwith slower credit creation will undermine
household consumption, and together withweaker external demand will cut into manufacturing output. Although investment growthin South Africa is projected to ease in 2009, it
will still remain one of the engines of growth
for the country, as the South African government continues to bring forth large projects inthe energy sector to address the chronic electricity deficit and in infrastructure ahead of
the 2010 World Football Cup. The falloff in
South Africa’s GDP growth will carry repercussions for neighboring economies that tradeheavily with South Africa and receive remittances from expatriate workers in South
Africa.

Risks
With the world economy at a crossroads, risksfacing Sub-Saharan Africa have intensified. If
the concerted efforts of policy makers aroundthe globe fail to re-establish trust in the international financial system, the world economy
risks a deeper and more prolonged recession.
As a result, Sub-Saharan Africa’s growthwould drop more sharply than envisaged in
the base forecast.
Among African countries, South Africa isprobably the country most directly exposed to175G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9

Table A12 Sub-Saharan Africa country forecasts(annual percent change unless indicated otherwise)

AngolaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Benin
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Botswana
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Burkina Faso
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
BurundiGDP at market prices (2000 US$) b
Current account bal/GDP (%)
Cape Verde
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Cameroon
GDP at market prices (2000 US$)b
Current account bal/GDP (%)
Central African Republic
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Chad
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Comoros
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Congo, Dem. Rep.
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Congo, Rep.
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Côte d’Ivoire
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Eritrea
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Ethiopia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Gabon
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Gambia, The
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Ghana
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

1991–2000a

2005

2006

2007

2008e

2009f

2010f

0.8
⫺6.1

20.6
16.8

18.6
20.9

24.7
14.1

15.8
17.8

11.1
8.9

11.3
9.2

4.8
⫺6.8

2.9
⫺6.3

3.8
⫺7.3

4.7
⫺7.0

5.0
⫺8.6

5.1
⫺9.5

5.7
⫺9.5

6.2
8.1

4.0
15.3

2.1
18.2

6.0
19.3

4.7
9.5

4.1
7.4

4.5
5.2

4.0
⫺5.6

7.1
⫺12.4

5.5
⫺11.7

3.6
⫺13.1

4.1
⫺14.2

4.6
⫺12.8

5.5
⫺12.2

⫺1.7
⫺3.4

0.9
⫺28.4

5.1
⫺36.0

3.4
⫺37.6

4.4
⫺38.9

4.0
⫺36.2

5.1
⫺36.7

5.8
⫺8.3

11.9
⫺3.5

10.8
⫺9.6

6.5
⫺15.5

6.7
⫺13.9

5.1
⫺11.9

6.3
⫺12.8

1.4
⫺2.9

2.0
⫺2.4

3.2
⫺2.1

3.4
⫺2.3

3.9
⫺0.5

4.0
⫺4.3

4.4
⫺4.6

1.6
⫺4.3

2.2
⫺7.1

4.1
⫺7.4

3.8
⫺7.3

3.4
⫺7.0

4.2
⫺6.7

4.8
⫺7.1

2.3
⫺5.5

7.9
⫺6.3

⫺0.5
⫺7.3

0.7
⫺8.2

1.6
⫺3.8

2.8
⫺7.0

3.0
⫺8.8

1.1
⫺6.8

4.2
⫺4.6

0.5
⫺5.5

1.8
⫺4.8

0.6
⫺7.2

1.2
⫺6.3

2.5
⫺6.8

⫺5.6
2.0

6.5
⫺10.0

5.6
⫺9.8

6.3
⫺12.2

10.7
⫺11.9

8.3
⫺13.4

11.9
⫺10.1

1.4
⫺16.5

7.7
15.1

6.2
⫺3.9

⫺1.4
⫺23.0

9.1
6.8

7.4
2.6

9.7
11.6

2.3
⫺4.0

1.2
0.2

0.9
3.4

1.5
⫺0.2

2.6
0.7

3.1
⫺3.2

4.9
⫺3.8

—
—

4.8
⫺26.1

⫺1.0
⫺29.5

1.3
⫺30.2

1.2
⫺32.8

2.0
⫺22.1

4.2
⫺19.0

2.9
⫺0.8

10.2
⫺13.7

11.5
⫺12.3

11.1
⫺11.8

8.8
⫺11.6

6.0
⫺8.9

7.3
⫺8.6

1.7
5.6

3.0
15.9

1.3
15.5

5.4
15.4

3.7
19.6

4.2
10.3

4.0
8.1

3.3
⫺1.6

5.0
⫺10.9

6.5
⫺13.8

6.4
⫺16.9

5.3
⫺19.8

4.5
⫺17.4

5.4
⫺16.3

4.3
⫺6.5

5.9
⫺10.3

6.2
⫺12.6

6.5
⫺14.2

6.0
⫺17.1

5.6
⫺15.6

6.0
⫺16.0
(continued)

176

R E G I O N A L

GuineaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Guinea-Bissau
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Kenya
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Lesotho
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Madagascar
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
MalawiGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Mali
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Mauritania
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Mauritius
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Mozambique
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Namibia
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Niger
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Nigeria
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
RwandaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
SenegalGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Seychelles
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Sierra Leone
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
South Africa
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Sudan
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

E C O N O M I C

1991–2000a

2005

2006

2007

2008e

2009f

2010f

4.1
⫺5.6

3.3
⫺4.9

2.8
⫺1.7

1.8
⫺2.4

4.3
⫺4.9

3.7
⫺7.1

4.6
⫺7.2

1.5
⫺24.0

3.5
⫺7.2

4.2
⫺19.3

2.7
⫺15.9

2.9
⫺10.9

2.8
⫺12.1

3.4
⫺10.8

1.9
⫺1.6

5.7
⫺1.4

6.1
⫺2.3

7.1
⫺3.7

3.3
⫺8.0

3.7
⫺6.4

5.9
⫺5.5

3.5
⫺13.4

2.9
⫺6.9

7.2
0.7

4.9
⫺0.2

4.1
1.8

3.2
4.6

4.2
4.5

1.7
⫺7.8

4.6
⫺12.4

4.9
⫺9.4

6.3
⫺14.2

6.8
⫺21.0

6.0
⫺15.7

10.4
⫺4.8

3.4
⫺8.5

2.7
⫺11.8

8.2
⫺19.3

8.4
⫺17.9

7.9
⫺20.7

6.5
⫺19.8

7.9
⫺19.6

4.0
⫺8.9

6.1
⫺8.2

5.3
⫺6.4

3.1
⫺9.9

5.1
⫺9.1

3.9
⫺10.5

5.1
⫺10.4

2.9
⫺0.3

5.4
⫺49.0

11.6
⫺2.8

0.9
⫺4.9

2.1
⫺4.4

5.9
⫺9.4

6.4
⫺10.7

5.3
⫺1.6

4.6
⫺5.0

3.5
⫺10.0

5.4
⫺8.4

5.0
⫺10.0

3.8
⫺8.2

5.3
⫺8.3

5.0
⫺16.4

8.4
⫺11.6

8.7
⫺9.0

7.0
⫺15.8

6.0
⫺17.0

6.3
⫺16.0

6.4
⫺16.3

4.2
3.1

4.7
4.3

4.1
18.8

3.8
20.9

3.6
23.0

3.1
21.3

4.5
20.1

1.8
⫺6.9

7.2
⫺9.1

5.1
⫺9.2

3.2
⫺10.9

4.9
⫺14.5

3.6
⫺13.7

4.9
⫺15.4

2.8
⫺0.8

7.2
31.5

5.2
22.5

6.5
21.8

6.3
20.3

5.8
7.0

6.2
4.6

0.2
⫺1.2

6.0
⫺3.9

5.5
⫺15.7

6.0
⫺15.6

8.0
⫺21.7

5.0
⫺15.7

5.5
⫺16.7

3.1
⫺5.7

5.6
⫺6.5

2.3
⫺9.3

4.6
⫺11.7

4.5
⫺14.4

4.7
⫺12.7

5.9
⫺12.8

4.5
⫺7.4

1.2
⫺29.0

5.3
⫺22.6

7.3
⫺31.4

2.3
⫺30.2

0.5
⫺27.4

3.0
⫺23.8

⫺4.7
⫺9.0

7.3
⫺14.3

7.4
⫺8.8

6.4
⫺7.2

5.8
⫺8.3

5.1
⫺9.6

6.5
⫺9.7

1.8
⫺0.2

5.0
⫺4.0

5.4
⫺6.5

5.1
⫺7.3

3.4
⫺8.0

2.8
⫺8.1

4.4
⫺8.3

5.8
⫺8.2

8.6
⫺10.8

11.8
⫺13.6

10.1
⫺10.7

10.3
⫺6.8

8.0
⫺8.9

8.1
⫺9.0

P R O S P E C T S(continued)

177

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9

Table A12 (continued )(annual percent change unless indicated otherwise)
1991–2000a

Swaziland
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Tanzania
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
Togo
GDP at market prices (2000 US$)b
Current account balance/GDP (%)
UgandaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
ZambiaGDP at market prices (2000 US$)b
Current account balance/GDP (%)
Zimbabwe
GDP at market prices (2000 US$)b
Current account balance/GDP (%)

2005

2006

2007

2008e

2009f

2010f

3.1
⫺2.4

2.3
3.3

2.1
5.9

3.2
9.5

2.2
10.7

1.8
10.7

1.9
9.3

2.9
⫺12.5

6.8
⫺7.0

6.2
⫺12.9

7.1
⫺12.7

7.2
⫺14.2

6.3
⫺12.7

7.0
⫺12.9

2.2
⫺8.5

1.2
⫺21.8

4.1
⫺17.6

2.3
⫺16.0

0.8
⫺22.1

2.4
⫺16.9

3.3
⫺16.9

6.8
⫺7.0

6.7
⫺4.8

8.4
⫺7.6

8.9
⫺8.0

7.9
⫺8.8

5.9
⫺9.3

7.6
⫺9.9

0.7
⫺10.6

5.2
⫺10.0

6.2
⫺7.3

6.2
⫺7.2

6.1
⫺5.5

4.6
⫺8.1

6.0
⫺9.5

0.9
⫺7.5

⫺5.3
28.5

⫺4.2
30.7

⫺6.3
36.6

⫺4.9
40.2

⫺2.1
18.1

⫺2.1
18.6

Source: World Bank.
Note: — ⫽ not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Growth and current account figures presented here are World Bank projections and may differ from targets contained in other
World Bank documents.
d. Liberia, Somalia, Sǎo Tomé and Príncipe, are not forecast because of data limitations. Current account balances exclude
official transfers. In SACU members they include nonduty SACU transfers.
e. Estimate.
f. Forecast.

Figure A18 Economic growth to slow in
Sub-Saharan Africa
GDP growth (%)
9
8
7
6
5
4
3
2
1
0
2005

2006

2007

2008

2009

Oil importers, excluding South Africa
South Africa
Oil exporters
Source: World Bank.

178

2010

the current global financial turmoil. South
Africa’s risk of financial contagion, however,is limited by low exposure to “toxic” assets
and foreign currency risks. However, a “flightto quality” could cause large portfolio outflows, which would imperil the country’s ability to finance its large current account deficit,
which in turn could trigger sharp depreciationof the rand and higher inflation.
Sub-Saharan African countries that are lessintegrated with international financial andcapital markets would suffer more from lower
external demand, dwindling tourism revenues,
remittances, or aid. Commodity prices would
fall further in such a scenario, causing export
revenues in many countries to fall sharply anderoding fiscal positions, corporate profitability, and incomes. Vulnerability to external
shocks, including terms-of-trade shocks, has

R E G I O N A L

increased over the past couple of years, as external and fiscal balances have deteriorated inmany countries. Several countries havereached a point where external imbalances areunsustainable and a shut-off of financing, orlarge negative terms-of-trade shocks, could
lead to balance of payments and currency
crises, with adverse consequences for hardwon macroeconomic stability and long-term
growth. Moreover, fragile economies that rely
heavily on external aid and face daunting reconstruction and stabilization challenges will
see their efforts to normalize the situation derailed by lack of sufficient external financing.
A sharp deceleration in growth would havesignificant consequences for poverty reductionin Africa. According to Arbache and Page
(2007), had the region avoided some of the
sharpest declines in per capita GDP growth,
overall growth would have been 1 percentage
point faster every year for the past three
decades. Another risk is that the large-scale injection of liquidity into the global financial
system comes to fuel inflation if monetary authorities fail to reverse polices at the first signsof a turnaround.

Notes
1. A downturn in the global high-tech cycle, inwhich East Asia plays a key role in the production andexport of higher-tech goods, also contributed to theslowing of trade growth.
2. Russia currently holds somewhat less than$500 billion in reserves, along with two large oil funds(about $140 billion and $50 billion, respectively, as of
September 2008); it also has ample fiscal and current
account surpluses (the latter, $90 billion, or 8 percent
of GDP as of September 2008).
3. Core inflation is calculated as headline CPI net offood, household energy, and transport fuels. Data for
Belarus, Russia, and Turkey, where detailed subindexes are not available, are from official sources directly, which may use different definitions and calculation methods.
4. This report covers the developing (that is, lowand middle-income) countries of the Middle East andNorth Africa region, and thus excludes high-income
economies Bahrain, Kuwait, Qatar, Saudi Arabia, andthe United Arab Emirates. In addition, for a number of

E C O N O M I C

P R O S P E C T S

middle- and high-income countries, the availability of
economic data is insufficient for inclusion in the report;these include Djibuti, Iraq, Libya, and the West Bankand Gaza. For recent developments and the outlook fora broader range of Middle Eastern and North African
economies, see Economic Developments and Prospects,
2008, The Middle East and North Africa Region
World Bank, 2008.
5. Several GCC countries have responded forcefully
to head off financial contagion. Qatar on October 13
launched a $5.3 billion plan to purchase up to 20 percent of shares in banks listed on the Doha stock exchange. This followed by one day an announcementthat United Arab Emirates would guarantee all deposits and savings in national banks, as well as all interbank operations in the Emirates. And Saudi Arabia
cut interest rates in line with the Federal Reserve, while
indicating that some $40 billion would be made available to local banks.
6. National income and product account figures arepresented in calendar years, although originally reported in fiscal years by Bangladesh, India, Nepal, andPakistan. For example, fiscal year 2007/08 is reported
as calendar year 2007 for India, and as 2008 for
Bangladesh, Nepal, and Pakistan, due to differences inthe timing of their fiscal years.
7. Nepal’s currency is pegged to the Indian rupee.
8. Source: Boston Analytics Consumer SentimentIndex (BACSI), which is based on a monthly survey
targeting Indian consumers across 11 cities (Delhi,
Mumbai, Kolkata, Chennai, Hyderabad, Bengaluru,
Nagpur, Kochi, Lucknow, Chandigarh, and Jaipur).
See http://www.bostonanalytics.com/news.html.

References
Arbache, Jorge Saba, and Page, John (2007). “MoreGrowth or Fewer Collapses? A New Look at
Long Run Growth in Sub-Saharan Africa.” Policy
Research Working Paper 4384, World Bank.
Calvo, Guillermo, and Ernesto Talvi. 2007. “Current
Account Surplus in Latin America: Recipe against
Capital Market Crises.” http://www.rgemonitor.com/latam-blog/58/current_account_surplus_
in_latin_america_recipe_against_capital_market_
crise.
DJF (Dow Jones Factiva). 2008. http://www.factiva.com.
Fajnzylber, Pablo, and J. Humberto Lopez. 2008. “TheDevelopment Impact of Remittances in Latin
America.” In Remittances and Development:
Lessons from Latin America, ed. Pablo Fajnzylber
and J. Humberto Lopez. Washington, DC: WorldBank.
ISI (ISI Emerging Markets). 2008. http://www.securities
.com.

179

G L O B A L

E C O N O M I C

P R O S P E C T S

2 0 0 9Izquierdo, Alejandro, Randall Romero, and Ernesto
Talvi. 2008. “Booms and Busts in Latin America:
The Role of External Factors.” Research Department Working Paper 631. Inter-American Development Bank, Washington, DC. http://www.imf.org/external/np/seminars/eng/2007/whd/pdf/
session1-2.pdf.
Österholm, Pär, and Jeromin Zettelmeyer. 2007. “The
Effect of External Conditions on Growth in Latin
America.” Working Paper 07/176. International
Monetary Fund, Washington, DC. http://www.imf.org/external/pubs/ft/wp/2007/wp07176.pdf.

180World Bank. 2008a. Migration and Remittances Factbook 2008. Washington, DC: world Bank.
______. 2008b. “Rising Food Prices: The World Bank’s
Latin America and Caribbean Region Position
Paper.” Washington, DC.
______. 2008c. “Shockwaves from the North: Latin
America and the External Deterioration.” Chief
Economist Office, Latin America and the Caribbean
Region.
http://siteresources.worldbank.org/
EXTLACOFFICEOFCE/Resources/8708921197314973189/Shockwaves.pdf.

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British thermal
units of totalenergy“While developing countries
entered this tumultuous
period with much improved
fundamentals, this crisis is
expected to test severely boththem and the international
financial system. In the longer
run, even after developingcountry growth recovers,
commodity supply should keep
pace with demand, but policy
will need to foster conservation
efforts and technologicalprogress. In particular, if poor
countries are to maintaindomestic food self-sufficiency,
governments will need tostrengthen investment in rural
infrastructure, agriculturalresearch, and technologicaloutreach.”—Justin Yifu Lin
Senior Vice President andChief Economist
The World BankT

he eruption of the worldwide financial crisis has radically recast

prospects for the world economy. Global Economic Prospects
2009: Commodities at the Crossroads analyzes the implications of
the crisis for low- and middle-income countries, including an in-depth
look at long-term prospects for global commodity markets and thepolicies of both commodity producing and consuming nations.

Developing countries face sharply higher borrowing costs and reduced accessto capital. This will cut into their capacity to finance investment spending—ending a five-year stretch of developing-country growth in excess of 6 percent
annually. The looming recession presents new risks, coming as it does on theheels of the recent food and fuel crisis.
Commodity markets, meanwhile, are at a crossroads. Following decades of low
prices and weak investment in supply capacity, commodity prices first spiked—
spurred on by five years of very fast developing-country growth—and have now
plummeted in response to the financial crisis.
In the longer run, commodities are not expected to be in short supply. Prices
should be higher than they were in the 1990s but much lower than in the
recent past. These higher prices should provide producers with sufficientincentive to discover new supplies, improve output from existing resources,
and promote greater conservation and substitution with more abundant
alternatives. At the same time, slower population growth will ease the pace atwhich commodity demand grows. Policies to limit carbon emissions and boost
agricultural investment, along with the dissemination of efficient techniques,should also contribute to this long-term outcome..
This year’s Global Economic Prospects also looks at government responses to therecent price boom. Producing-country governments have saved more of theirwindfall revenues, and are therefore less likely to be forced to cut into spending
now that prices have declined. The spike in food prices tipped more people
into poverty, which led governments to expand social assistance programs.
These programs need to be better targeted to the needs of the very poor sothat governments can respond effectively the next time there is a crisis.
For additional information, please visit www.worldbank.org/prospects.
An online companion to the prospects section of this report, including
access to additional data and analysis not reported here, is also available atwww.worldbank.org/globaloutlook.

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