A World Bank Group
Flagship Report

JUNE 2019

GlobalEconomic
Prospects

Heightened Tensions,
Subdued Investment

JUNE 2019

GlobalEconomic
Prospects© 2019 International Bank for Reconstruction and Development / The World Bank
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ISSN: 1014-8906
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DOI: 10.1596/978-1-4648-1398-6
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The cutoff date for the data used in this report was May 23, 2019.

Summary of Contents
Chapter 1

Global Outlook: Weak Momentum, Heightened Risks .......................................... 1

Special Focus 1.1

Investment: Subdued Prospects, Strong Needs .....................................................53

Special Focus 1.2

Currency Depreciations, Inflation, and Central Bank Independence ......................67

Chapter 2

Regional Outlooks ............................................................................................87

Special Focus 2.1

Growth in Low-Income Countries: Evolution, Prospects, and Policies .................131

Boxes

Box 1.1

Debt: No free lunch ...........................................................................11

Box 1.2

Short-term growth prospects for LICs ..................................................22

Box 1.3

Regional perspectives: Recent developments and outlook........................27

III

Table of Contents
Foreword.........................................................................................................................................xi
Acknowledgments ......................................................................................................................... xiii
Executive Summary......................................................................................................................... xv
Abbreviations ............................................................................................................................... xvii
Chapter 1

Global Outlook: Weak Momentum, Heightened Risks ...........................................1
Summary ............................................................................................................3
Major economies: Recent developments and outlook ............................................... 7
United States..................................................................................................8
Euro Area ......................................................................................................8Japan.............................................................................................................9
China ............................................................................................................9
Global trends ..................................................................................................... 10
Global trade ................................................................................................. 10
Financial markets.......................................................................................... 17
Commodity markets .................................................................................... 19
Emerging market and developing economies: Recent developments and outlook ....... 20
Recent developments..................................................................................... 21
Outlook....................................................................................................... 26
Risks to the outlook ............................................................................................ 30
Renewed trade tensions and policy uncertainty ................................................ 31
Financial stress episodes................................................................................. 32
Sharper-than-expected slowdowns in major economies...................................... 34
Region-specific downside risks........................................................................ 35
Policy challenges................................................................................................. 36
Challenges in advanced economies.................................................................. 36
Challenges in emerging market and developing economies ................................ 38
Box 1.1 Debt: No free lunch................................................................................ 11
Box 1.2 Short-term growth prospects for LICs ....................................................... 22
Box 1.3 Regional perspectives: Recent developments and outlook ........................... 27
References.......................................................................................................... 45

VSpecial Focus 1.1

Investment: Subdued Prospects, Strong Needs ..................................................... 53
Recent developments and prospects ...................................................................... 55
Drivers of investment growth............................................................................... 56
Implications and policy responses ......................................................................... 60
Annex SF1.1.1 Empirical analysis ......................................................................... 62
References ......................................................................................................... 65

Special Focus 1.2

Currency Depreciations, Inflation, and Central Bank Independence ...................... 67
Introduction...................................................................................................... 69
Pass-through across countries and over time .......................................................... 70
Pass-through to inflation and underlying shocks ................................................... 73
Pass-through and country characteristics ............................................................... 76
Conclusion........................................................................................................ 78
Annex SF1.2.1 Methodology............................................................................... 79
References ......................................................................................................... 83

Chapter 2

Regional Outlooks ............................................................................................. 87
East Asia and Pacific .......................................................................................... 89
Recent developments........................................................................................ 89
Outlook.......................................................................................................... 91
Risks .............................................................................................................. 92
Europe and Central Asia .................................................................................... 95
Recent developments........................................................................................ 95
Outlook.......................................................................................................... 97
Risks ............................................................................................................. 99
Latin America and the Caribbean ...................................................................... 103
Recent developments...................................................................................... 103
Outlook........................................................................................................ 105
Risks ............................................................................................................ 106
Middle East and North Africa ........................................................................... 109
Recent developments...................................................................................... 109
Outlook........................................................................................................ 110
Risks ............................................................................................................ 111
South Asia ....................................................................................................... 115
Recent developments...................................................................................... 115

VIOutlook ........................................................................................................ 117
Risks ............................................................................................................ 118
Sub-Saharan Africa ..........................................................................................121
Recent developments...................................................................................... 121
Outlook ........................................................................................................ 123
Risks ............................................................................................................ 124
References........................................................................................................ 128
Special Focus 2.1

Growth in Low-Income Countries: Evolution, Prospects, and Policies ................ 131
Introduction.....................................................................................................133
What has supported growth in LICs since 2001? ..................................................135
How have these factors affected LIC progression to MIC income levels? .................139
Prospects for further LIC progression .................................................................141
Conclusion.......................................................................................................143
References ........................................................................................................146

Statistical Appendix ....................................................................................................................... 149
Selected Topics .............................................................................................................................. 157
Figures

1.1

Global growth prospects ....................................................................... 5

1.2

Global risks and policy challenges .......................................................... 6

1.3

Advanced economies ............................................................................ 7

1.4

United States ...................................................................................... 7

1.5

Euro Area ........................................................................................... 8

1.6

China ................................................................................................. 9

1.7

Global trade ...................................................................................... 10

1.1.1

Government debt, deficits, and multipliers ........................................... 13

1.1.2

Borrowing costs and fiscal positions ..................................................... 15

1.8

Global finance................................................................................... 18

1.9

Commodity markets .......................................................................... 19

1.10

Activity in EMDEs ............................................................................ 20

1.2.1

Short-term economic prospects for LICs .............................................. 23

1.11

EMDE growth prospects .................................................................... 26

1.3.1

Regional growth ................................................................................ 27

1.12

EMDE per capita income growth and poverty ...................................... 30

1.13

Balance of risks.................................................................................. 31

VII

1.14

Risk of renewed trade tensions and policy uncertainty............................ 32

1.15

Risk of renewed financial stress............................................................ 33

1.16

Risk of sharp slowdowns in major economies ........................................ 35

1.17

Climate risks and poverty ................................................................... 36

1.18

Monetary and fiscal policies in advanced economies .............................. 37

1.19

Structural policies in advanced economies ............................................ 38

1.20

EMDE monetary policy ..................................................................... 39

1.21

EMDE fiscal policy............................................................................ 41

1.22

EMDE structural policies ................................................................... 42

SF1.1.1

Investment trends and prospects.......................................................... 55

SF1.1.2

Decomposition of EMDE investment trends ....................................... 57

SF1.1.3

Drivers of investment growth in EMDEs ............................................. 59

SF1.1.4

Implications of weak investment growth in EMDEs ............................. 60

SF1.2.1

EMDE exchange rates, monetary policy rates, and inflation in 2018........ 70

SF1.2.2

Correlation between inflation and effective exchange rate changes ........... 71

SF1.2.3

Pass-through during significant currency depreciations .......................... 72

SF1.2.4

Variance decompositions of exchange rate movements, 1998-2017 ......... 74

SF1.2.5

Shock-specific pass-throughs, 1998-2017 ............................................. 75

SF1.2.6

Average pass-through ......................................................................... 76

SF1.2.7

Global economic integration and pass-through ..................................... 77

SF1.2.8

Monetary policy frameworks and pass-through ..................................... 78

Annex Figure SF1.2.1.1 Robustness of pass-through estimates: One- versus two-quarter
sign restrictions ................................................................................. 80
Annex Figure SF1.2.1.2 Robustness of pass-through estimates: Additional sign restriction
to identify domestic demand shocks..................................................... 81

VIII

2.1.1

EAP region excluding China: Recent developments .............................. 90

2.1.2

China: Recent developments............................................................... 91

2.1.3

EAP region: Outlook and risks ............................................................ 92

2.2.1

ECA: Recent developments................................................................. 96

2.2.2

ECA: Outlook and risks ..................................................................... 97

2.3.1

LAC: Recent developments................................................................104

2.3.2

LAC: Outlook and risks ....................................................................105

2.4.1

MENA: Recent developments ............................................................110

2.4.2

MENA: Outlook and risks.................................................................111

2.5.1

SAR: Recent developments ................................................................116

2.5.2

SAR: Outlook and risks.....................................................................117

Tables

2.6.1

SSA: Recent developments.................................................................122

2.6.2

SSA: Outlook and risks .....................................................................123

SF2.1.1

LIC growth since 2001......................................................................134

SF2.1.2

Cyclical and structural factors supporting LIC growth ..........................135

SF2.1.3

Domestic factors supporting LIC growth.............................................137

SF2.1.4

Factors supporting LIC progression to MIC income levels.....................139

SF2.1.5

Features of today’s LICs ....................................................................141

SF2.1.6

Challenges LICs face in reducing poverty ............................................143

1.1

Real GDP ........................................................................................... 4

1.2.1

Low-income country forecasts ............................................................. 25

1.2

Emerging market and developing economies......................................... 44

SF1.1.1

Economies in sample.......................................................................... 61

Annex Table SF1.1.1.1 Correlates of investment growth ........................................ 64
SF1.2.1

Countries and sample periods ............................................................. 83

2.1.1

East Asia and Pacific forecast summary................................................. 94

2.1.2

East Asia and Pacific country forecasts.................................................. 94

2.2.1

Europe and Central Asia forecast summary ......................................... 100

2.2.2

Europe and Central Asia country forecasts .......................................... 101

2.3.1

Latin America and the Caribbean forecast summary ............................ 107

2.3.2

Latin America and the Caribbean country forecasts ............................. 108

2.4.1

Middle East and North Africa forecast summary ................................. 113

2.4.2

Middle East and North Africa economy forecasts ................................ 114

2.5.1

South Asia forecast summary............................................................. 119

2.5.2

South Asia country forecasts.............................................................. 120

2.6.1

Sub-Saharan Africa forecast summary................................................. 126

2.6.2

Sub-Saharan Africa country forecasts ................................................. 127

SF2.1.1

Low-income countries ...................................................................... 144

IX

Foreword
Global growth has continued to weaken andmomentum remains fragile. As this edition of the
Global Economic Prospects report documents,
investment is sluggish. Downside risks to growth
predominate, including rising trade barriers, abuild-up of government debt, and deeper-thanexpected slowdowns in several major economies.
Substantial challenges are clouding the global
economic outlook in both the near and long term.
For emerging market and developing economies(EMDEs), lackluster investment is particularly
concerning. Investment growth in these economies
is expected to remain weak and below historical
averages, held back by sluggish global growth;
limited fiscal space; and structural constraints thatmisallocate or discourage investment such as poor
business environments, labor and product market
controls, and weak governance. Subdued
investment weakens the foundations for thesustained growth that is needed to alleviate extreme
poverty and advance shared prosperity.
In an era of low interest rates, government
borrowing might appear to be an attractive option
to finance growth-enhancing investment projects.
Debt is often an important tool for development
and poverty reduction, and sustainable borrowing
can help countries finance investments ininfrastructure, health, education, and otheressential areas. To be additive to growth, however,debt has to be transparent and well managed.
Otherwise, it becomes more of a burden than abenefit by increasing vulnerability to crises, eroding

the effectiveness of macroeconomic policy, andweighing on investment and growth.
Unsustainable debt levels have become increasingly
troublesome in the last few years, with incentives
often working against transparency. As this reporthighlights, EMDE government debt is higher than
before the global financial crisis by an average of 15
percentage points of GDP. The bottom line is that
EMDEs need to strike a careful balance between
acquiring debt to promote investment growth andavoiding risks associated with excessive levels andhidden forms of debt.
This report also details the difficulties low-income
countries face in the effort to improve living
standards. A number of these countries achieved
middle-income status between 2000 and 2018, butcurrent low-income countries face a steeper road todeliver the same progress. Relative to countries thatmade the earlier leap to middle-income ranks,
many of today’s low-income countries are poorer,more fragile, constrained geographically, andheavily reliant on subsistence agriculture. It willtake comprehensive policy changes to tackle these
difficulties.
Policymakers have a wide range of options tobolster investment and growth. In light of theformidable challenges, big policy adjustments areurgently needed, including decisive action toundertake structural reforms for growth that willlead to stronger development outcomes forcountries.
David Malpass
President
The World Bank GroupXI

Acknowledgments
This World Bank Group Flagship Report is a product of the Prospects Group in the Equitable Growth,
Finance and Institutions (EFI) Vice Presidency. The project was managed by M. Ayhan Kose and Franziska
Ohnsorge, under the general guidance of Ceyla Pazarbasioglu.
Global and regional surveillance work wascoordinated by Carlos Arteta. The primaryauthors of this report were Jongrim Ha, Patrick
Kirby, Rudi Steinbach, Marc Stocker, Naotaka
Sugawara, Temel Taskin, Ekaterine Vashakmadze,
Dana Vorisek, Collette M. Wheeler, and Lei
Sandy Ye.
Other contributors included John Baffes, Csilla
Lakatos, Peter Nagle, Franz Ulrich Ruch, andHakan Yilmazkuday.
Research assistance was provided by Liu Cui,
Ishita Dugar, Mengyi Li, Maria Hazel
Macadangdang, Claudia Marchini, Julia R.R.
Norfleet, Jinxin Wu, and Heqing Zhao. Modelingand data work were provided by Rajesh Kumar
Danda and Julia R.R. Norfleet.
The online publication was produced by Graeme
Littler and Mikael Reventar. Mark Felsenthal
managed media relations and dissemination.
Mark Felsenthal and Graeme Littler provided

editorial support, with
Adriana Maximiliano.

contributions

fromRegional projections and write-ups were producedin coordination with country teams, country
directors, and the offices of the regional chief
economists.
The print publication was produced by Maria
Hazel Macadangdang, Adriana Maximiliano, andQuinn Sutton, in collaboration with Luiz H.
Almeida, Andrew Charles Berghauser, Adam
Broadfoot, Aziz Gökdemir, Michael Harrup, andJewel McFadden.
The analysis benefited from comments andsuggestions by staff members from World Bank
Group country teams and other World Bank
Group Vice Presidencies as well as Executive
Directors in their discussions of the report on
May 23, 2019. However, both forecasts andanalysis are those of the World Bank Group staff
and should not be attributed to Executive
Directors or their national authorities.

XIII

Executive Summary
Global growth has continued to soften this year. Momentum remains weak and policy space is limited. A
subdued recovery in investment growth in emerging market and developing economies (EMDEs) dampens
potential growth prospects and hampers progress toward achieving the Sustainable Development Goals. Risks
remain firmly on the downside, including the possibility of escalating trade tensions, sharper-than-expected
slowdowns in major economies, and renewed financial stress in EMDEs. Meanwhile, rising debt constrains theability of EMDE governments to support economic activity in the event of adverse developments, as well as
finance growth-enhancing investments. This highlights the need for policy actions to undertake reforms to boost
private investment and productivity growth. These reforms are particularly urgent in low-income countries,
which face more significant challenges today than they did in the early 2000s.
Global Outlook. Global growth in 2019 has been
downgraded to 2.6 percent, 0.3 percentage point
below previous forecasts, reflecting weaker-thanexpected international trade and investment at
the start of the year. Growth is projected togradually rise to 2.8 percent by 2021, predicatedon continued benign global financing conditions,as well as a modest recovery in emerging market
and developing economies (EMDEs) previously
affected by financial market pressure. However,
EMDE growth remains constrained by subdued
investment, which is dampening prospects and
impeding progress toward achieving development
goals. Risks are also firmly on the downside, inpart reflecting the possibility of destabilizing
policy developments, including a further
escalation of trade tensions between major
economies; renewed financial turmoil in EMDEs;
and sharper-than-expected slowdowns in major
economies. It is therefore urgent for EMDEs toreinforce policy buffers and build resilience topossible negative shocks, and to implement
reforms that promote private investment andimprove public sector efficiency. Efforts tostrengthen access to markets and technology
while boosting the quality of infrastructure andgovernance should be prioritized and be
implemented through cost-effective and privatesector-led solutions. Structural reforms aimed at
improving the business climate would also boost

growth prospects. Well-designed social safety nets
and active labor market policies are key tomanaging risks and protecting vulnerable groups.
This edition of Global Economic Prospects includes
analytical essays on the benefits and risks of government borrowing, recent investment weakness
in EMDEs, the pass-through of currency
depreciations to inflation, and the evolution of
growth in low-income countries (LICs).
Debt: No Free Lunch. Government debt has
risen substantially in EMDEs, by an average of 15
percentage points of GDP since 2007 to 51
percent of GDP in 2018. The current
environment of low global interest rates and weakgrowth may appear to mitigate concerns about
elevated debt levels. Considering currently
subdued investment additional government
borrowing might also appear to be an attractive
option for financing growth-enhancing initiatives
such as investment in human and physicalcapital. However, history suggests caution: thecost of rolling over debt can increase sharply
during periods of financial stress and result in
financial crises; high debt levels can limit theability of governments to provide fiscal stimulus
during downturns; and high debt can weigh on
investment and long-term growth, especially at atime when investment momentum is alreadyweak. Hence, EMDEs need to strike a carefulbalance between taking advantage of low interest

XVrates and avoiding the potentially adverse
consequences of excessive debt accumulation.
This is particularly critical at present given the setof risks facing the global economy, which will
require EMDEs to have adequate fiscal policy
space and build resilience to financial market
disruptions.
Investment: Subdued Prospects, Strong Needs.
Investment growth in EMDEs over the next three
years is expected to be subdued and below
historical averages. This continues a prolonged,
broad-based slowdown after the global financial
crisis, notwithstanding a modest recovery between
2016 and 2018. During the forecast period,
EMDE investment growth is expected to be heldback by weak global growth, limited fiscal spaceagainst the backdrop of elevated debt, and thepresence of several structural constraints. Weakinvestment is a concern because it will further
dampen potential growth, and make achieving the
Sustainable Development Goals more difficult.
Depending on country circumstances, the use of
appropriate fiscal and structural reforms could
generate upside potential for investment in themedium and long term. For EMDEs with limited
fiscal space, institutional reforms to improvebusiness conditions could help attract private
investment. In light of elevated debt levels,
policymakers should also ensure resources areallocated to high quality investment projects andimprove the transparency and efficiency of public
investment management systems where necessary.
Currency Depreciations, Inflation and Central
Bank Independence. Financial market turbulencein 2018 illustrated, once again, that EMDEs
continue to face the risk of destabilizing exchange
rate movements. These stress episodes often
compel central banks to tighten policy to lessen
currency pressures and fend off inflationarypressures despite slowing growth. To design
appropriate policies it is important to quantify the

XVI

exchange rate pass-through to inflation associatedwith different shocks and with different country
characteristics. The pass-through to inflation
tends to be largest when currency movements are
triggered or amplified by monetary policy action.
In contrast, the pass-through is significantly
smaller when central banks pursue a credible
inflation target, operate in a flexible exchange rate
regime, and are independent from fiscal
authorities. This highlights the critical importanceof central bank credibility, given the selfreinforcing feedback loop between credibility,
the exchange rate and price stability. These
episodes also serve as a reminder of the risks posedby excessive levels of foreign currency debt, and
EMDEs can foster resilience to periods offinancial stress by issuing debt contracted atlonger maturities, at fixed interest rates, anddenominated in local currency, where possible.
Growth in Low-Income Countries: Evolution,
Prospects and Policies. There are currently 34
countries classified as low-income, about half thenumber in 2001. Rapid growth in low-income
countries from 2001-18 allowed many to progress
to middle-income status, supported by a pre-crisis
commodity price boom, the MDRI and HIPC
debt relief initiatives, increased investment in
human and physical capital, improved economic
policy frameworks, and recoveries from the deep
recessions in transition economies during the
1990s. However, the prospects for today’s LICs
appear much more challenging. Compared to the
LICs in 2001 that became middle-income
countries, today’s LICs are further below the
middle-income threshold and more often fragile
than were LICs in 2001. Their heavy reliance on
agriculture makes them vulnerable to climatechange and extreme weather events, and theirscope to boost external trade is limited bygeography. Coordinated and multi-pronged
policy efforts are required to address thesechallenges.

Abbreviations
ACP

African, Caribbean and Pacific Group of StatesAEadvanced economy

CDS

credit default swap

CPTPP

Comprehensive and Progressive Agreement for Trans-Pacific Partnership

DR-CAFTA

Central America-Dominican Republic Free Trade Agreement

EAP

East Asia and Pacific

ECA

Europe and Central Asia

ECB

European Central Bank

ECI

Economic Complexity Index

EMBI

Emerging Market Bond Index

EMDE

emerging market and developing economies

ERPTR

exchange rate pass-through ratio

EU

European Union

FAVAR

Bayesian factor-augmented vector autoregression

FCVfragility, conflict, and violence

FDI

foreign direct investment

GCC

Gulf Cooperation Council

GDPgross domestic product

GEP

Global Economic Prospects

GMM

generalized methods of moments

GNFS

goods and nonfactor services

GNI

gross national income

GST

goods and services tax

GVCs

global value chains

HIPC

Heavily Indebted Poor Countries

ICE

Intercontinental Exchange

ICRG

International Country Risk Guide

IMF

International Monetary FundIT

inflation targeting

LAC

Latin America and the Caribbean

LFPR

Labor force participation rateLIC

low-income country

LSAP

Large-Scale Asset Purchase

MDRI

Multilateral Debt Relief Initiative

MENA

Middle East and North Africa

MEP

Maturity Extension Program

MIC

middle-income country

XVII

XVIII

NEER

nominal effective exchange rate

NPL

nonperforming loan

ONI

Oceanic Niño Index

OPEC

Organization of the Petroleum Exporting Countries

PMI

Purchasing Managers’ Index

PPP

purchasing power parity

REER

Real Effective Exchange Rate

RHS

right-hand side (in figures)

RMB

renminbi

SAR

South Asia Region

SSA

Sub-Saharan Africa

SSE

Shanghai Stock Exchange

TFP

total factor productivity

TiVA

Trade in Value Added

USMCA

United States-Mexico-Canada Agreement

VAT

Value-added tax

WAEMU

West African Economic and Monetary Union

WGIWorld Governance Indicators

WTO

World Trade Organization

CHAPTER 1

GLOBAL OUTLOOKWeak Momentum, Heightened Risks

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

CHAPTER 1

Global growth in 2019 has been downgraded to 2.6 percent, 0.3 percentage point below previous forecasts,
reflecting weaker-than-expected international trade and investment at the start of the year. Growth is projected
to gradually rise to 2.8 percent by 2021, predicated on continued benign global financing conditions, as well asa modest recovery in emerging market and developing economies (EMDEs) previously affected by financial
market pressure. However, EMDE growth remains constrained by subdued investment, which is dampening
prospects and impeding progress toward achieving development goals. Risks are also firmly on the downside, inpart reflecting the possibility of destabilizing policy developments, including a further escalation of trade tensions
between major economies; renewed financial turmoil in EMDEs; and sharper-than-expected slowdowns inmajor economies. It is therefore urgent for EMDEs to reinforce policy buffers and build resilience to possible
negative shocks, and to implement reforms that promote private investment and improve public sector efficiency.
Efforts to strengthen access to markets and technology while boosting the quality of infrastructure andgovernance should be prioritized and be implemented through cost-effective and private-sector-led solutions.
Structural reforms aimed at improving the business climate would also boost growth prospects. Well-designedsocial safety nets and active labor market policies are key to managing risks and protecting vulnerable groups.

Summary
Global economic activity continued to soften at
the start of 2019, with trade and manufacturing
showing signs of marked weakness (Figures 1.1.A
and B). Heightened policy uncertainty, includinga recent re-escalation of trade tensions between
major economies, has been accompanied by adeceleration in global investment and a decline inconfidence (Figure 1.1.C). Activity in majoradvanced economies—particularly in the Euro
Area—as well as in some large emerging market
and developing economies (EMDEs) has been
weaker than previously expected. Recent highfrequency indicators suggest this period of
weakness may be receding; however, global
activity remains subdued.
Amid low global inflation and a deterioration of
the growth outlook, the prospect that the U.S.
Federal Reserve and other major central banks willtighten monetary policy in the near term has
faded, leading to an easing in global financing
conditions and a recovery of capital flows to
EMDEs. However, weakening external demandhas weighed on export growth across EMDE
regions. Although demand for industrial
commodities has generally softened, prices have
Note: This chapter was prepared by Carlos Arteta, Patrick Kirby,
and Marc Stocker, with contributions from Ekaterine Vashakmadze
and Collette M. Wheeler. Additional inputs were provided by John
Baffes, Csilla Lakatos, Peter Nagle, Franz Ulrich Ruch, and Rudi
Steinbach. Research assistance was provided by Liu Cui, Ishita
Dugar, Claudia Marchini, Julia R.R. Norfleet, and Jinxin Wu.

partially recovered because of tightening supply
conditions. EMDE growth momentum continues
to be generally subdued, as slowing global tradeand persistent policy uncertainty in key economies
are only partially offset by recent improvements inexternal financing conditions.
Global growth in 2019 has been downgraded to
2.6 percent—0.3 percentage point below previous
projections—reflecting the broad-based weakness
observed during the first half of the year,
including a further deceleration in investment
amid rising trade tensions. In particular, global
trade growth in 2019 has been revised down a fullpercentage point, to 2.6 percent—slightly below
the pace observed during the 2015-16 trade
slowdown, and the weakest since the global
financial crisis.
As recent softness abates, global growth isprojected to edge up to 2.7 percent in 2020 andto 2.8 percent in 2021. Slowing activity inadvanced economies and China is expected tobe accompanied by a modest cyclical recovery
in major commodity exporters and in a number
of EMDEs affected by recent pressure related
to varying degrees of financial market stressor idiosyncratic headwinds such as sanctions(Figure 1.1.D).
EMDE growth is projected to pick up from afour-year low of 4 percent in 2019—0.3
percentage point below previous projections—to
4.6 percent in 2020-21. This recovery is
predicated on the waning impact of earlier

3

4

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 1.1 Real GDP1

Percentage point differencesfrom January 2019 projections(Percent change from previous year)
2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

2.6

3.1

3.0

2.6

2.7

2.8

-0.3

-0.1

0.0

1.7

2.3

2.1

1.7

1.5

1.5

-0.3

-0.1

0.0

United States

1.6

2.2

2.9

2.5

1.7

1.6

0.0

0.0

0.0

Euro Area

2.0

2.4

1.8

1.2

1.4

1.3

-0.4

-0.1

0.0

Japan

0.6

1.9

0.8

0.8

0.7

0.6

-0.1

0.0

0.0

4.1

4.5

4.3

4.0

4.6

4.6

-0.3

0.0

0.0

Commodity-exporting EMDEs

1.5

2.1

2.2

2.1

3.1

3.0

-0.4

0.1

0.0

Other EMDEs

6.0

6.1

5.8

5.2

5.5

5.5

-0.3

-0.1

-0.1

5.1

5.4

4.9

4.2

4.8

5.0

-0.5

-0.1

-0.1

6.3

6.5

6.3

5.9

5.9

5.8

-0.1

-0.1

0.0

China

6.7

6.8

6.6

6.2

6.1

6.0

0.0

-0.1

0.0

Indonesia

5.0

5.1

5.2

5.2

5.3

5.3

0.0

0.0

0.0

Thailand

3.4

4.0

4.1

3.5

3.6

3.7

-0.3

-0.3

-0.2
0.0

World
Advanced economies

Emerging market and developing economies

Other EMDEs excluding China
East Asia and Pacific

Europe and Central Asia

1.9

4.1

3.1

1.6

2.7

2.9

-0.7

0.0

Russia

0.3

1.6

2.3

1.2

1.8

1.8

-0.3

0.0

0.0

Turkey

3.2

7.4

2.6

-1.0

3.0

4.0

-2.6

0.0

-0.2
0.0

PolandLatin America and the Caribbean
Brazil

3.1

4.8

5.1

4.0

3.6

3.3

0.0

0.0

-0.3

1.7

1.6

1.7

2.5

2.7

-0.4

-0.2

0.0

-3.3

1.1

1.1

1.5

2.5

2.3

-0.7

0.1

-0.1

Mexico

2.9

2.1

2.0

1.7

2.0

2.4

-0.3

-0.4

0.0

Argentina

-2.1

2.7

-2.5

-1.2

2.2

3.2

0.5

-0.5

0.1

5.1

1.2

1.4

1.3

3.2

2.7

-0.6

0.5

0.0

Saudi Arabia

1.7

-0.7

2.2

1.7

3.1

2.3

-0.4

0.9

0.1

Iran

13.4

3.8

-1.9

-4.5

0.9

1.0

-0.9

-0.2

-0.1

Middle East and North Africa

Egypt2

4.3

4.2

5.3

5.5

5.8

6.0

-0.1

0.0

0.0

South Asia

8.1

6.7

7.0

6.9

7.0

7.1

-0.2

-0.1

0.0

India3

8.2

7.2

7.2

7.5

7.5

7.5

0.0

0.0

0.0

Pakistan2

4.6

5.4

5.8

3.4

2.7

4.0

-0.3

-1.5

-0.8

Bangladesh2

7.1

7.3

7.9

7.3

7.4

7.3

0.3

0.6

0.5

Sub-Saharan Africa

1.3

2.6

2.5

2.9

3.3

3.5

-0.5

-0.3

-0.2

Nigeria

-1.6

0.8

1.9

2.1

2.2

2.4

-0.1

-0.2

0.0

South Africa

0.6

1.4

0.8

1.1

1.5

1.7

-0.2

-0.2

-0.1

Angola

-2.6

-0.1

-1.7

1.0

2.9

2.8

-1.9

0.3

0.0

High-income countries

1.7

2.3

2.1

1.8

1.6

1.6

-0.2

-0.1

0.0

Developing countries

4.4

4.8

4.6

4.2

4.7

4.8

-0.3

-0.1

0.0

4.8

5.6

5.6

5.4

6.0

6.1

-0.5

-0.2

-0.2

BRICS

4.6

5.3

5.4

5.1

5.3

5.3

-0.1

0.0

0.0

World (2010 PPP weights)

3.3

3.7

3.7

3.3

3.5

3.6

-0.3

-0.1

0.0

2.8

5.5

4.1

2.6

3.1

3.2

-1.0

-0.4

-0.2

Oil price

-15.6

23.3

29.4

-3.4

-1.5

0.7

-0.5

-1.5

0.7

Non-energy commodity price index

-2.8

5.5

1.7

-2.1

-0.1

1.4

-3.1

-1.3

0.2

Memorandum items:
Real GDP1

Low-income countries

World trade volume4
Commodity prices5

Source: World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information. Consequently, projections presented here may
differ from those contained in other World Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. Country classifications and lists ofemerging market and developing economies (EMDEs) are presented in Table 1.2. BRICS include: Brazil, Russia, India, China, and South Africa. Due to lack of data, the World Bank hasceased producing a growth forecast for Venezuela and has removed Venezuela from all growth aggregates in which it was previously included.
1. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights.
2. GDP growth values are on a fiscal year basis. Aggregates that include these countries are calculated using data compiled on a calendar year basis. Pakistan's growth rates are based on
GDP at factor cost. The column labeled 2019 refers to FY2018/19.
3. The column labeled 2018 refers to FY2018/19.
4. World trade volume of goods and non-factor services.
5. Oil is the simple average of Brent, Dubai, and West Texas Intermediate. The non-energy index is comprised of the weighted average of 39 commodities (7 metals, 5 fertilizers, 27
agricultural commodities). For additional details, please see http://www.worldbank.org/en/research/commodity-markets.
Click here to download data.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019financial pressure currently weighing on activity insome large EMDEs, and on more benign global
financing conditions than previously expected. It
also assumes no further escalation in trade
restrictions between major economies and stability
in commodity prices. Despite this projected
recovery, per capita growth in a large number of
EMDEs will remain insufficient to narrow income
gaps with advanced economies—including in SubSaharan Africa, a region with a high concentrationof poverty (Figure 1.1.E).
Moreover, EMDE investment growth will remain
soft, particularly in commodity exporters andcountries affected by recent pressures (Figure
1.1.F). Factors contributing to the weak pace of
EMDE investment growth include elevated debt
levels, limited fiscal space, lack of clarity about
policy direction, and inadequate business climates.
Subdued investment will weigh on EMDE growthprospects directly through slower capital
deepening and indirectly through its dampening
impact on productivity, which will make achieving
the Sustainable Development Goals more difficult.
Amid a low probability of substantial near-term
policy improvements in major economies, risks
remain firmly on the downside (Figure 1.2.A).
Confidence and investment could be markedly
impacted by a sudden rise in policy uncertainty—
triggered, for instance, by substantial new tradebarriers between major economies resulting incascading trade costs and a lack of clarity about
future trading rules (Figure 1.2.B). If this rise ispersistent, the impact on global investment andactivity could be severe. An increase in uncertainty
could also be related to a heightened possibility ofa disorderly exit of the United Kingdom from theEuropean Union (EU). Similarly, a sustained
dissipation of these uncertainties—for instance,
due to a comprehensive resolution of tradetensions between the United States and China—
could significantly buttress global growthprospects. The potential gains associated with sucha resolution highlight the large opportunity costs
that additional trade tensions would entail.
A weakening of financial market sentiment could
lead to sudden increases in risk premiums and be
amplified by high and rising debt levels, corporate
sector vulnerabilities, and increasing refinancing

CHAPTER 1

5

FIGURE 1.1 Global growth prospects
Global growth softened further in the first half of the year, as trade andmanufacturing decelerated. Amid heightened policy uncertainty,
confidence has declined. A more dovish stance by major central banks
has led to some easing in financing conditions. After weakness in 2019,
EMDE growth is expected to recover in 2020-21, as headwinds in key
economies fade. In many EMDEs, this recovery will not be enough tonarrow per capita income gaps with advanced economies. Subdued
investment will continue to weigh on EMDE growth prospects.
A. Global growth

B. Global manufacturing and newexport orders

C. Global business confidence

D. Growth in EMDEs

E. Per capita growth and share of
EMDEs with widening income gaps
in 2019

F. Investment growth in EMDEs

Source: Haver Analytics, J.P. Morgan, Organisation for Economic Co-operation and Development,
World Bank.
Note: EMDEs = emerging market and developing economies.
A.D.F. Shaded areas indicate forecasts. Aggregate growth rates calculated using constant 2010 U.S.
dollar GDP weights. Data for 2018 are estimates.
B. Manufacturing and new export orders are measured by Purchasing Managers’ Index (PMI). PMI
readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction.
Black horizontal line indicates expansionary threshold. Last observation is April 2019.
C. Average business confidence across major advanced economies and EMDEs, including Brazil,
Canada, France, Germany, Italy, Japan, Russia, Turkey, the United Kingdom, and the United States.
Last observation is April 2019.
D.F. EMDEs under recent pressure include: a) countries that have had an increase in their J.P.
Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any timesince April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa,
Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia).
E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the
Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa.
Countries with widening income gaps are those with per capita GDP growth at least 0.1 percentage
point lower than advanced-economy per capita GDP growth.
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6

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.2 Global risks and policy challenges
Downside risks continue to dominate. A further escalation of trade tensions
involving major economies could lead to a sharp increase in trade barriers
and weigh on confidence and investment. The risk of financial stress in
EMDEs could be exacerbated by increasing debt-refinancing needs. A
sharp deceleration in major economies would have large spillover effects
for EMDEs and increase the probability of a marked global downturn.
Rising public debt levels are reducing the effectiveness of fiscal policy in
EMDEs. Structural reforms, such as improvements in institutional quality,
can help boost growth and reduce poverty.
A. Probability distribution aroundglobal growth forecasts

C. International bond redemptions in
EMDEs

E. Fiscal multipliers in EMDEs

B. Average import tariffs in G20
countries

D. Impact of 1 percentage point
growth slowdown in the UnitedStates, Euro Area, and China

F. Poverty, by regulatory quality

Source: Bloomberg; Dealogic; International Monetary Fund; World Bank.
A. The fan chart shows the forecast distribution of global growth using time-varying estimates of thestandard deviation and skewness extracted from the forecast distribution of three underlying risk
factors: Oil price futures, S&P 500 equity price futures, and term spread forecasts. Each of the risk
factor’s weight is derived from the model described in Ohnsorge, Stocker, and Some (2016). Values
for 2019 are computed from the forecast distribution of 6-month-ahead oil price futures, S&P 500
equity price futures, and term spread forecasts. Values for 2020 are based on 18-month-ahead
forecast distributions. Last observation is May 21, 2019.
B. Blue bars are the trade-weighted averages for 2017 tariffs. “Considered” reflects announcementsof possible tariffs as of May 23, 2019, including an additional 25 percent tariff on U.S. imports from
China not subject to 2018 tariff hikes and on selected U.S. imports of motor vehicles and parts.
C. Data are as of May 22, 2019.
D. Bars are impulse responses to a 1 percentage point decline in the United States, Euro Area, andChina. Yellow lines are 16-84 percent confidence intervals. Based on the vector autoregression
model in World Bank (2016). Sample includes 22 advanced economies and 19 EMDEs.
E. Bars are the median conditional fiscal multipliers after two years. Fiscal multipliers are thecumulative change in output relative to cumulative change in government consumption to a 1-unit
government consumption shock. Orange lines are 16-84 percent confidence bands.
F. Poverty rate is the unweighted average in each group. “Best” indicates quartile of EMDEs with thestrongest regulatory quality (2017 or for year with latest poverty data); “Worst” indicates the weakest
regulatory quality. The back data for regulatory quality are from the World Governance Indicators.
Click here to download data and charts.

pressures in many EMDEs (Figure 1.2.C). The
risk of a sharper-than-expected deceleration in
major economies—such as the Euro Area, theUnited States, or China—would result in
considerably weaker global and EMDE growth(Figure 1.2.D). Meanwhile, climate change poses
ever-growing risks to various EMDE regions.
Moderating global activity and heightened
downside risks highlight the need for policymakers
in advanced economies and EMDEs to reinforce
policy buffers against possible negative shocks, andto shore up both short-term and long-term growthprospects.
For advanced economies, the associated challenges
include the appropriate use of automatic fiscal
stabilizers and discretionary spending, when
feasible, as well as clear and credible monetary
policy guidance that reduces the risk of abrupt
market adjustments. Productivity-enhancing
reforms are also crucial to deal with slowing labor
force growth.
In EMDEs, policymakers need to use theopportunity provided by still benign financing
conditions to rebuild fiscal and monetary policy
buffers to confront future shocks. Even if
borrowing costs are currently low, countries withconstrained fiscal positions may find that risingdebt levels limit the effectiveness of public
spending and make them more vulnerable to crises(Box 1.1; Figure 1.2.E). Amid adverse debt
dynamics and narrowing fiscal space, authorities
need to urgently strengthen domestic resource
mobilization,prioritize
growth-enhancing
spending, and improve debt management andtransparency.
While growth prospects are subdued, there is a
substantial upside potential from the implementation of structural reforms that improve thebusiness climate and encourage job creation.
Increased public sector efficiency and measures tofoster private sector investments will be key tomeet large infrastructure needs in electricity,transport, water supply and sanitation, and climatechange prevention and mitigation. Estimates of
the infrastructure spending required to meet the
Sustainable Development Goals in those areas by2030 range between 4.5 to 8.2 percent of EMDEG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

GDP, depending on policy choices. Improving
access to reliable and affordable electricity,enhancing the quality of logistics and transport
infrastructure, leveraging digital technologies, andimproving institutional quality could help unlock
a large untapped growth potential and contributeto poverty alleviation (Figure 1.2.F).
Raising agricultural productivity could also help
boost development opportunities and increase
resilience to extreme weather events in regionswith large exposed populations. Strengthening therole of social safety nets and active labor market
policies is also key to manage risks and promote
access to productive employment.
Finally, amid soft growth prospects andheightened risks, both advanced economies and
EMDEs need to be prepared to undertake
coordinated policy action in the event of a severe
global slowdown that threatens to inflict major
economic losses and set back progress on poverty
alleviation. International coordination would
magnify the effectiveness of available fiscal andmonetary policy buffers. International financial
institutions and the G20 can play an importantrole in fostering such coordination.

CHAPTER 1

FIGURE 1.3 Advanced economies
Trade and investment in advanced economies have lost momentum. In
contrast, rising real wages are supporting consumption in most countries.
A. Trade and investment growth,volumesB. Wage growth and inflation in early2019

Source: Haver Analytics, World Bank.
A. Trade calculated as the average of imports and exports of goods and services. Shaded area
indicates forecasts.
B. Last observation is April 2019 for U.S. wages and Consumer Price Index, and Euro Area
Harmonized Index of Consumer Prices; March 2019 for Japan wages and Consumer Price Index; and2018Q4 for Euro Area wages. Wages are average hourly earnings of private nonfarm employees for
the United States, average monthly earnings for Japan, and nominal hourly wages and salaries for
the Euro Area.
Click here to download data and charts.

FIGURE 1.4 United States
U.S. activity is still being bolstered by government spending and corporate
tax cuts, but the boost is fading. Unemployment recently reached its lowest
level in nearly five decades. Amid heightened trade tensions, exports haveslowed, especially those to Europe and Asia. Rising productivity and labor
force participation are supporting activity.
A. Private investment and government
spending

B. Unemployment rate and previous
troughs

C. Contribution to export growth, bytrading partner

D. Productivity and labor force
participation

Major economies: Recent
developments and outlook
Activity in advanced economies is slowing, especiallyin the Euro Area, in part due to weakening exports
and investment. Amid subdued inflation anddecelerating activity, major central banks havesignaled a more dovish stance. In the United States,
the effects of recent fiscal stimulus are waning. In
China, growth appears to be stabilizing following
weakness at the start of the year, but it faces
heightened risks.
Recent data for advanced economies point todecelerating activity, especially in the Euro Area.
Investment has lost momentum and trade growthhas declined markedly (Figure 1.3.A). Private
consumption has so far been resilient, however,supported by ongoing job creation and higher real
wages (Figure 1.3.B). In response to subdued
inflation and decelerating activity, monetary
policy has become more accommodative.

7

Source: Bureau of Economic Analysis, Federal Reserve Bank of St. Louis, Haver Analytics, U.S.
Census Bureau, World Bank.
A. Government spending is government consumption and investment spending. Last observationis 2019Q1.
B. Data for civilian unemployment rate are seasonally adjusted. Last observation is April 2019.
C. EU = European Union, EAP = East Asia and Pacific. Last observation is 2019Q1.
D. LFPR = Labor force participation rate. LFPR refers to civilian labor force participation rateof people aged 25 to 54 years. Data for 2019 are Q1 for Productivity and April for LFPR.
Click here to download data and charts.

8

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.5 Euro Area
Euro Area economic conditions have deteriorated rapidly since early 2018,
particularly in manufacturing and industrial activity. Exports have fallen
sharply. Domestic demand has also slowed, but to a lesser degree. Fiscal
policy is expected to be modestly stimulative in coming years.

A. Industrial production growth andmanufacturing PMI

C. Domestic demand contribution to
GDP growth

B. Contribution to export growth, bytrading partner

D. Fiscal impulse in the Euro Area

Source: Eurostat, Haver Analytics, International Monetary Fund, World Bank.
A. PMI = Purchasing Managers’ Index. Readings above 50 indicate expansion in economic activity;
readings below 50 indicate contraction. Last observation is April 2019 for PMI and March 2019 forindustrial production.
B. ECA = Europe and Central Asia, EAP = East Asia and Pacific. Data are seasonally and working
day adjusted. Last observation is 2019Q1.
C. Final domestic demand is GDP less net exports of goods and services, less changes ininventories. Last observation is 2019Q1 for GDP growth and 2018Q4 for consumption andinvestment.
D. Changes versus previous year. A positive (negative) number indicates expansionary(contractionary) fiscal policy. Country contributions are calculated using nominal GDP weights. Fiscal
impulse indicates the change in cyclically adjusted primary balance, namely the estimate of the
fiscal balance that would apply under current policies if output were equal to potential. Data on thegeneral government cyclically adjusted primary balance are published in the April 2019 edition of
the Fiscal Monitor (IMF 2019).
Click here to download data and charts.

(Figure 1.4.B). Export growth has slowed further,with an especially acute deceleration in goods
going to the European Union and the East Asia
and Pacific region (Figure 1.4.C). By raising costs
on a variety of goods, recent tariff increases haveso far modestly weighed on U.S. real incomes(Fajgelbaum et al. 2019; Amiti et al. 2019). In
light of muted inflation, heightened risks from theexternal environment, and unresolved policy
issues, the Federal Reserve has signaled a more
gradual pace of tightening.
U.S. growth is expected to slow to 2.5 percent in2019 and further decelerate to 1.7 percent in 2020
and 1.6 percent in 2021, as the effects of recent
fiscal stimulus wane. These projections areunchanged from the previous forecast due tooffsetting factors. On the one hand, recent tariffincreases and associated retaliatory actions are
expected to weigh on activity. On the other,growth is being supported by more
accommodative monetary policy than previously
assumed and by sustained increases in productivity
growth and labor force participation (Figure
1.4.D). A continuation of these positive structural
trends could result in higher medium- and longterm growth than currently predicted. In contrast,
further increases in trade restrictions or policy
uncertainty could hinder activity.
Euro Area

United States

Economic conditions in the Euro Area havedeteriorated rapidly since mid-2018, particularlyin the manufacturing sector (Figure 1.5.A). This
slowdown mainly reflects a decline in exports,
especially to China and the Europe and Central
Asia region (Figure 1.5.B). Domestic demand has
also softened, albeit to a lesser degree, as it remains
buoyed by declining unemployment and solid real
wage growth (Figure 1.5.C).

Growth in the United States remains solid. The
Tax Cuts and Jobs Act of late 2017 and the
Bipartisan Budget Act of early 2018 aresupporting near-term growth, but theircontribution is diminishing (Barro and Furman
2018; Figure 1.4.A). Unemployment is at its
lowest level in nearly five decades, and inflation ishovering slightly below the 2-percent target

In response to slowing activity, Germany, France,and Italy have announced plans for limited tax
cuts and spending increases, equivalent to a
combined 0.2 percent of Euro Area GDP per year
during 2019-21 (Figure 1.5.D). In addition, theEuropean Central Bank (ECB) has announced itwill provide banks with additional low-cost credit,
starting in September. Core inflation remains

Aggregate activity in advanced economies is
expected to decelerate over the forecast horizon.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019around 1 percent, and the ECB is not expected to
begin raising its main refinancing rate above zero
until at least 2020.
Growth is projected to slow from 1.8 percent in2018 to 1.2 percent in 2019 and to edge up to an
average of 1.4 percent in 2020-21. Relative toprevious projections, this represents a downgradeof 0.4 percentage point in 2019 and 0.1
percentage point in 2020, reflecting weakness intrade and domestic demand that will not be fully
offset by more accommodative fiscal and monetary
policy support.

CHAPTER 1

9

FIGURE 1.6 China
Following several quarters of broad-based deceleration, growth appears to
be stabilizing. However, trade flows remain weak. Bank credit is stableand bond issuance has picked up, but other non-bank lending has
moderated due to regulatory tightening. Equity prices, which recovered inearly 2019 thanks in part to stimulus measures, have faced downward
pressures amid the recent re-escalation of trade tensions.
A. Growth and manufacturing PMI

B. Export and import growth, volumes

C. Credit growth

D. Equity prices and exchange rate

Japan
Activity in Japan benefited from government
support in the first half of 2019, as well as arebound following natural disasters last year, but
remains lackluster. Trade—particularly exports to
China—has been especially weak. A value-addedtax (VAT) hike in October is likely to dampen
activity further. Nonetheless, unemployment islow, labor force participation continues to climb,
and the services sector remains relatively healthy.
Growth in 2019 is expected to be 0.8 percent,down from previous projections due to weakerthan-expected external demand. A variety of fiscal
measures are expected to soften the near-term
impact of the VAT hike toward the end of theyear. With the economy at close to full
employment and potential output constrained bylow labor force growth, capacity constraints willslow activity to a projected 0.7 percent in 2020
and 0.6 percent in 2021.
China
Following several quarters of broad-based deceleration, growth appears to be stabilizing (Figure
1.6.A). Trade flows have been weak, however,weighed down by softness in manufacturing
output, trade tensions with the United States, andlackluster global growth (Figure 1.6.B).
Recent activity has been supported by monetaryand fiscal stimulus. Bank credit and bond issuance
have picked up, but other non-bank lending has
moderated due to regulatory tightening (Figure
1.6.C). Equity prices and the renminbi, which

Source: Haver Analytics, World Bank.
A. Purchasing Managers’ Index (PMI) readings above 50 indicate expansion in economic activity;
readings below 50 indicate contraction. Last observation is April 2019 for manufacturing PMI and
2019Q1 for GDP.
B. Figure shows 3-month moving averages. Data include only goods. Export and import volumes arecalculated as export and import values deflated by export and import price deflators. Export andimport indices for some missing values and for April 2019 are estimates. Last observation is April
2019.
C. Figure shows average of monthly data for periods indicated. Bonds include local government
special bonds and net financing of corporate bonds. Other instruments include entrusted loans andtrust loans. Last observation is March 2019.
D. NEER = nominal effective exchange rate. An increase in the NEER denotes an appreciation.
Equity index is represented by the Shanghai Stock Exchange Composite. Last observation is May 20,
2019 for equity prices and May 21, 2019 for NEER.
Click here to download data and charts.

rebounded in early 2019 partly due to policy
support measures, have faced downward pressuresamid the recent re-escalation of trade tensions(Figure 1.6.D). Consumer price inflation has
picked up but remains below target.
Growth is projected to decelerate from 6.6 percent
in 2018 to 6.2 percent in 2019, primarilyreflecting softening manufacturing activity andtrade. The recent increase in tariffs on trade with
the United States is projected to weigh on growthin 2020, which has been revised down to 6.1
percent. This outlook is predicated on no further
escalation of trade disputes with the United States.

10

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.7 Global trade
Global goods trade growth weakened substantially in late 2018 and early2019. While trade in Asia was markedly affected, the slowdown inindustrial activity was widespread across countries. The softness reflectedin part slowing demand for capital goods amid elevated trade policy
uncertainty. Exports in most EMDE regions are expected to decelerate thisyear. Global trade growth is projected to slow to 2.6 percent this year, theweakest pace since the global financial crisis.
A. Goods trade volume, container
shipping, and export orders

B. Share of countries with negative or
below-average industrial production
growthIt also assumes that policy actions partly mitigate
domestic and external headwinds to activity(SCPRC 2019).

Global trends
Global trade has weakened amid slowing investment
growth and elevated trade policy uncertainty. As theshort-term growth outlook has softened, international
financing conditions have eased, providing a respite
to countries with large external financing needs.
Industrial commodity prices have partially recovered,with weaker demand offset by supply cuts.
Global trade

C. Nominal merchandise import
growth in China and export growthin Asia

D. Capital goods production andsemiconductor sales growth

E. Export volume growth, by region

F. Global GDP and trade growth

Source: CPB Netherlands Bureau for Economic Policy Analysis; Haver Analytics; Institute of Shipping
Economics and Logistics; Semiconductor Industry Association; World Bank.
A. Data are 3-month moving averages. New export orders measured by Purchasing Managers’ Index(PMI). PMI readings above 50 indicate expansion in economic activity; readings below 50 indicate
contraction. Last observation is March 2019 for goods trade and April 2019 for container shipping andnew export orders.
B. Share of countries for which industrial production growth (3-month on 3-month change) was
negative or below their 2012-17 average for two consecutive quarters. Sample includes 39 EMDEs
and 29 advanced economies. Last observation is March 2019.
C. Import and export data are merchandise imports and exports in U.S. dollars, respectively, and isexpressed as 3-month moving averages. “Asia” comprises Bangladesh, India, Indonesia, Japan,
Malaysia, Mongolia, Pakistan, Philippines, Republic of Korea, Singapore, Sri Lanka, Thailand, andVietnam. Last observation is March 2019 for Asia exports and April 2019 for China imports.
D. Capital goods index weighted by gross domestic product at constant 2010 U.S. dollars. Sample
includes the G20 countries for capital goods for which data are available. Semiconductor index is 3month moving averages of global billings by semiconductor equipment manufacturers, including frontend and final manufacturing equipment. Last observation is March 2019.
E.F. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded area
indicates forecasts.
E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the
Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa.
F. Trade is the average of export and import volumes.
Click here to download data and charts.

Global industrial activity and goods trade have lost
considerable momentum in 2019. Goods trade
growth and new export orders fell to levels
comparable to those prevailing at the start of2016, when concerns about the global economy
were elevated (Figure 1.7.A). The deceleration was
broad-based—the share of countries withindustrial production in technical recession has
tripled since the start of 2018, reaching nearly 25
percent in early 2019 (Figure 1.7.B). Trade in
Asia—whichcontains
major,
tightlyinterconnected, global manufacturing hubs—wasparticularly affected, although recent indicators
suggest some stabilization (Figure 1.7.C).
Weakness in global trade was concentrated inheavily traded capital goods, including electronic
components such as semiconductors (Figure
1.7.D). These products are deeply embedded ininternational production networks and illustrate
the links between global investment and trade(Bussière et al. 2013; Buelens and Tirpák 2017).
Increased tariffs by the United States andretaliatory actions by China and other trading
partners that were implemented last year haveaffected bilateral trade flows and prices of thetargeted products; however, they resulted inlimited effects on aggregate trade volumes andactivity in these countries (Constantinescu,
Mattoo, and Ruta 2019; Fajgelbaum et al. 2019).
Nevertheless, the increase in tariffs by the UnitedStates and China that was announced in May
represents a substantial re-escalation in tradetensions and is likely to have more severe effects.
Beyond economic losses for the affected exporters,

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CHAPTER 1

BOX 1.1 Debt: No free lunch“[In the United States], if the future is like the past, this implies that debt rollovers, that is the issuance of debt without alater increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost.” Olivier Blanchard (2019)“High debt levels make it more difficult for governments to respond aggressively to shocks.” Kenneth Rogoff (2019)

Government debt has risen substantially in emerging market and developing economies (EMDEs), by an average of 15 percentage
points of GDP since 2007 to 51 percent of GDP in 2018. The current environment of low global interest rates and weak growth
may appear to mitigate concerns about elevated debt levels. Considering currently subdued investment, additional government
borrowing might also appear to be an attractive option for financing growth-enhancing initiatives such as investment in humanand physical capital. However, history suggests caution: the cost of rolling over debt can increase sharply during periods of financial stress and result in financial crises; high debt levels can limit the ability of governments to provide fiscal stimulus during
downturns; and high debt can weigh on investment and long-term growth, especially at a time when investment momentum isalready weak. Hence, EMDEs need to strike a careful balance between taking advantage of low interest rates and avoiding thepotentially adverse consequences of excessive debt accumulation.

Introduction
Government debt has risen sharply in advanced
economies, reaching levels not seen in the past six decades.
Yet, low interest rates and subpar growth have led to an
intense debate about whether the rapid increase in debt isreason for concern.1 Some argue that countries, especiallythose that issue reserve currencies, should take advantage
of low interest rates to borrow more to finance priority
expenditures. Others caution that high debt weighs on
long-term growth, by increasing the risk of crises, limiting
the scope for countercyclical fiscal stimulus, anddampening private investment.
Although the focus of this debate has been mainly on
advanced economies, many EMDEs have also borrowedheavily and their hard-won cuts in public debt ratios prior
to the global financial crisis have largely been reversed. The
tradeoffs EMDEs face are even starker, in light of their
history of severe debt crises and their more pressing
current spending needs to achieve development goals andimprove living standards.
This box seeks to provide a basis for assessing the merits ofadditional debt accumulation in EMDEs by addressing
two specific questions. First, how has EMDE debt evolved

Note: This box was prepared by M. Ayhan Kose, Franziska Ohnsorge,and Naotaka Sugawara.
1 Blanchard (2019), Blanchard and Summers (2019), Furman andSummers (2019), and Krugman (2019) provide reasons for additionalborrowing in advanced economies, and the United States in particular,
whereas Auerbach, Gale, and Krupkin (2019), Mazza (2019), Riedl(2019), and CRFB (2019) caution against adding to debt, citing inparticular the example of the United States. For a detailed discussion ofthese issues, see Kose, Ohnsorge, and Sugawara (forthcoming).

since 2000? Second, what are the benefits and costs
associated with rapid debt accumulation?

Evolution of EMDE debt since 2000
Pre-crisis improvements in fiscal positions. Prior to theglobal financial crisis, rapid growth helped narrow fiscal
deficits and reduce government debt ratios, especially in
EMDEs (Figure 1.1.1.A and B; Kose, Kurlat, et al. 2017).
In addition to robust growth, debt relief in the Multilateral
Debt Relief Initiative (MDRI) and the Highly Indebted
Poor Countries initiative (HIPC) contributed to thedecline in debt in low-income countries (LICs) and lower
middle-income countries. Fiscal deficits that reached 3
percent of GDP in EMDEs, on average, in 2001 turned
into fiscal surpluses amounting to 0.7 percent of GDP, on
average, by 2007. Over the same period, EMDE
government debt fell by 13 percentage points of GDP to
36 percent of GDP.
Post-crisis debt accumulation. EMDE fiscal positions
have weakened partly because of sharp growth slowdowns
that pushed government debt up by an average of 15
percentage points to 51 percent of GDP by 2018. This
deterioration was broad-based—by 2018, government
debt was 10 or more percentage points of GDP higher
than in 2007 in about 60 percent of EMDEs, with
commodity exporters, which account for almost two-thirdsof EMDEs, being hit the hardest (World Bank 2015,2018a). In LICs, government debt rose by 14 percentage
points of GDP, to 46 percent of GDP in 2018 after fallingto a trough of 32 percent of GDP in 2012.
Post-crisis shifts in debt composition. In many EMDEs,
financing of debt has shifted toward higher-risk sources,

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BOX 1.1 Debt: No free lunch (continued)
including debt held by nonresidents, issued on nonconcessional terms, or at shorter maturity (Figure 1.1.1.C).
Debt held by nonresidents accounted for about 50 percent
of government debt in the median EMDE in 2018,
making these countries more vulnerable to a deteriorationin global investor sentiment. As a result, sovereign ratings
have been downgraded for many EMDEs, and 40 percentof LICs are now classified as at high risk of debt distress(World Bank 2019a). The composition of LIC debt has
become increasingly non-concessional as they haveaccessed capital markets and borrowed from non-Paris
Club creditors (World Bank 2018a, 2019a).
Simultaneous buildup of private and public sector debt.
Whereas the private sector has deleveraged in mostadvanced economies since the crisis, private sector debt has
risen in EMDEs in tandem with mounting government
debt. As a result, total debt in EMDEs has risen to 169
percent of GDP, on average, in 2018, from 98 percent of
GDP in 2007 and its highest level in two decades(Borensztein and Ye 2018; World Bank 2018b). Even in
EMDEs excluding China, where corporate debt has soared
post-crisis, total debt has risen to a near-record 107
percent of GDP in 2018. Although the increase in EMDE
private debt partly reflects growth-enhancing financial
deepening, elevated private debt represents a fiscal risk.
Past experience illustrates that private sector debt may shiftonto government balance sheets during financial crises as
governments provide support to private institutions indifficulty (Kose, Ohnsorge, and Sugawara 2018; WorldBank 2017a). For example, government debt rose by morethan 30 percentage points of GDP in Indonesia andThailand during the Asian financial crisis in the late 1990s(Figure 1.1.1.D; World Bank 2015, 2017a).

Debt: How much is too much?
Several strands of literature have attempted to identify how
much debt is “too much”—a threshold level of debt below
which it is sustainable or not harmful to growth (Kose,
Ohnsorge, and Sugawara forthcoming). For example, one
strand of the literature has estimated the sustainable levelof debt in advanced economies if fiscal deficits remain
consistent with past performance or if sovereign bondyields move consistent with past movements. Some studies
have identified debt thresholds above which the likelihoodof a financial crisis increases. A third strand of theliterature has explored the debt levels above which debt
burdens become detrimental to long-term growth.2
2 For studies on the sustainable level of debt, see Ghosh et al. (2013)
and Greenlaw et al. (2013). For studies that examine debt as an early

In a nutshell, the empirical evidence suggests that the
optimal level of debt depends on a wide range of tradeoffs. This in part reflects a broader theoretical challenge inthe literature. The basic insight from theory is that debt
increases output in the short-run but reduces it in thelong-run (Elmendorf and Mankiw 1999). Debt can bebeneficial in the short-run to smooth macroeconomic
fluctuations and, in the long-run, to finance long-term
investments that yield a higher rate of return than the costof debt. However, elevated debt levels can lead tosustainability challenges, increase vulnerability to crises,
erode the size and effectiveness of fiscal expansion, andweigh on investment and growth (Figure 1.1.1.E and F).
When weighing benefits against cost of debt, politicaleconomy forces may tilt the scale towards underestimating
the cost of borrowing while overestimating its benefits.
Disagreements over spending preferences or short-lived
government tenures generate incentives to expand
government spending envelopes, financed by debt (Alesina
and Tabellini 1990; Drazen 2000; Aguiar and Amador
2011). Especially ahead of elections, the absence of full
information may create a conflict of incentives thatencourages political incumbents to employ debt-financed
fiscal stimulus to improve short-term growth prospects(Shi and Svensson 2006; Aidt, Veiga, and Veiga 2011). As
a result, government expenditures, public debt and deficits
tend to increase statistically significantly albeit modestly
around elections (Philips 2016). Such political cycles inbudget pressures tend to be stronger in countries withweaker fiscal transparency (Alt and Lassen 2006 a,b;
Klomp and De Haan 2011), without balanced-budget
requirements (Alt and Rose 2009; Cioffi, Messina, andTommasino 2012) and with poorer governance (Shi andSvensson 2006; Streb, Lema, and Torrens 2009).
Benefits of debt
Additional debt accumulation by EMDEs could bejustified because of their need to invest in growthenhancing projects, such as infrastructure, health andeducation, and to protect vulnerable groups. During
periods of weak growth, it may also be appropriate toemploy expansionary fiscal policy to stimulate activity.
warning indicator, see Manasse and Roubini (2009) and Kraay and
Nehru (2006). For a discussion of safe debt thresholds, see Reinhart,
Rogoff, and Savastano (2003). Some studies report that higher debt isassociated with lower growth when government debt is larger than
80-100 percent of GDP (Reinhart and Rogoff 2010; Cecchetti,
Mohanty, and Zampolli 2011; Baum, Checherita-Westphal, and Rother2013). That said, others found no such effects (Panizza and Presbitero2014).

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BOX 1.1 Debt: No free lunch (continued)
FIGURE 1.1.1 Government debt, deficits, and multipliers
Government debt has risen from pre-crisis levels, and fiscal balances have deteriorated. It has shifted toward financing
sources that are more vulnerable to exchange rate and interest rate risks, as well as changes in global investor sentiment.
Higher debt levels are associated with larger interest payments and they tend to render fiscal policy less effective.
A. Government debt

B. Fiscal balance

C. Average maturity and share of
non-concessional debt

D. Government debt during past banking
crises

E. Government debt and interest
payments in EMDEs, 2018

F. Fiscal multipliers after 2 years

Source: Huidrom et al. (2019); International Monetary Fund; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscal-space);
Laeven and Valencia (2018).
A.B. Averages computed with current U.S. dollar GDP as a weight.
A. Sample includes 37 advanced economies, 151 EMDEs, and 32 LICs.
B. Sample includes 38 advanced economies, 154 EMDEs, and 32 LICs.
C. Median of up to 65 EMDEs for average maturity and 122 EMDEs for non-concessional debt, though the sample size varies by year.
D. “Before” and “after” denote, respectively, one year before and after the onset of banking crisis, as shown by numbers below the corresponding country names, takenfrom Laeven and Valencia (2018). Indonesia refers to central government debt only.
E. General government gross debt on the horizontal axis and interest payments on the vertical axis. Sample includes 104 EMDEs, excluding small states as definedby the World Bank.
F. Bars show the conditional fiscal multipliers for different levels of government debt after two years. Fiscal multipliers are defined as cumulative change in output
relative to cumulative change in government consumption in response to a 1-unit government consumption shock. They are based on estimates from the interacted
panel vector autoregression model, where model coefficients are conditioned only on government debt. Values shown on the x-axis correspond to the 10th to 90th
percentiles in the sample. Bars represent the median, and vertical lines are the 16-84 percent confidence bands.
Click here to download data and charts.

Promoting long-term growth. Government investment inphysical and human capital can provide an important
foundation for stronger growth over the long-term. These
investments have taken on greater urgency in light of the
expected slowdown in potential growth—the rate of
growth an economy can sustain at full employment andcapacity—over the next decade (World Bank 2018c). In
EMDEs, in particular, potential growth is expected to slow
by 0.5 percentage point to 4.3 percent during 2018-27,
well below the average rate of 6.7 percent during 2002-07.

Moreover, EMDEs have large investment needs to meet
the Sustainable Development Goals (SDGs): low- andmiddle-income countries face aggregate investment needsof $1.5–$2.7 trillion per year—equivalent to 4.5–8.2
percent of GDP—between 2015 and 2030 to meet
infrastructure-related SDGs, depending on policy choices(Rozenberg and Fay 2019). Infrastructure investment canhave particularly large growth benefits if it connects
isolated communities with input and output markets,allows companies to realize economies of scale by

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BOX 1.1 Debt: No free lunch (continued)
increasing market size, and increases competitive pressures(Égert, Kozluk and Sutherland 2009; Calderón and Servén
2010). To the extent that debt-financed investment
spending stems the slowdown in potential growth, it also
helps preserve the revenues required to service this debt
(Fatas et al. 2018).3

rates in advanced economies, continuing this multi-year
trend (Holston, Laubach, and Williams 2017). However,an increase in global borrowing cost, for example becauseof a decline in global savings rates, could test thesustainability of high debt in some countries (Henderson
2019; Rogoff 2019).

Stabilizing short-term macroeconomic fluctuations.
Temporary debt accumulation also plays an important roleto stabilize short-term macroeconomic fluctuations.
During recessions, borrowing for government spending or
tax cuts can provide the necessary fiscal stimulus to
support activity (World Bank 2015; Yared 2019; Figure
1.1.1.F). A large literature has estimated the output effects(fiscal multipliers) of additional government spending or
tax cuts (Huidrom et al. 2016, 2019; Ramey 2019). The
estimates vary widely—from a 1.1-dollar output decline toa 3.8-dollar output increase for every dollar of additional
government spending or reduced revenues—depending on
the cyclical position of the economy; structural country
characteristics, including the coherence of fiscal
frameworks; and the fiscal instrument employed. Broadly
speaking, output effects tend to be larger during recessions
than expansions, and larger for advanced economies thanfor EMDEs (Kraay 2012, 2014). In EMDEs, lack of fiscal
space has often constrained fiscal policy during recessions,but there is some evidence that fiscal policy has becomeless procyclical during the 2000s (Frankel, Vegh, andVuletin 2013).

The recent discussion on debt has focused on the
differential between interest rates and nominal GDP
growth. If interest rates (the cost of capital) are below
nominal output growth (the presumed rate of return on
capital), then the real burden of the debt declines overtime because the rate of return on debt-financed
investment is more than sufficient to service the debt.
However, the interest rate-growth differential has to beweighed against the accumulation of new debt—the
primary fiscal deficit. If, every year, primary deficits add
more to the debt than is repaid on past debt (even if highrates of return are more than sufficient to service the debt),
then the debt stock will be on a rising trajectory.4

Costs associated with debt
The main arguments against heavy borrowing, which may
outweigh the benefits of borrowing in some countries, arethat rollover costs can increase sharply during periods offinancial stress and perhaps even trigger a financial crisis;and high debt levels can limit the size and effectiveness offiscal stimulus during downturns. In addition, they canconstrain growth by crowding out productivity-enhancing
private investment over the long term, especially if thecosts of debt outweigh its benefits.
Deteriorating debt sustainability. During the post-crisis
period, the cost of government borrowing has been
historically low, for both advanced economies and EMDEs(Figure 1.1.2.A and B). Looking ahead, demographic shifts
and slowing productivity growth are expected tocontribute to a further secular decline in both real interest
3 In EMDEs, debt can also play an important role in financial
deepening by establishing a safe asset for use as collateral and as
benchmark for non-government debt (Hauner 2009; World Bank and
IMF 2001).

During 1990-2018, the interest-rate-growth differential
has been negative in just over half (57 percent) of countryyear pairs (54 percent of country-year pairs among 36
advanced economies and 60 percent of country-year pairs
among 63 EMDEs). However, even in about one-quarterof these instances, the differential was not large enough tooffset the increase in debt from primary balances andmaintain the government debt ratio on a stable ordeclining path. As a result, during 1990-2018, primarybalances, long-term interest rates and nominal GDP
growth have been such that debt has been on a steadilyrising trajectory about half of the time—in 44 percent ofcountry-year pairs among 34 advanced economies and 49
percent of country-year pairs among 62 EMDEs.
Increasing vulnerability to financial crises. Higher
spending on debt service implies some combination offurther borrowing, or increased taxes, or less spending on
critical government functions (Figure 1.1.1.E; Debrun andKinda 2016). The challenge of mounting borrowing isthat a growing debt-to-GDP ratio could erode investor
confidence, requiring a government to pay a rising risk
premium on its debt. Eventually, these pressures canculminate in a debt crisis if investors fear that theaccumulation of government debt is no longer sustainable(Henderson 2019; Rogoff 2019; Blanchard 2019).

4 The balance between these two forces is captured in the sustainability
gap, defined as the difference between the primary balance and the debt
stabilizing primary balance at specific interest rates and growth rates(Kose, Kurlat, et al. 2017).

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BOX 1.1 Debt: No free lunch (continued)
FIGURE 1.1.2 Borrowing costs and fiscal positions
Borrowing costs in advanced economies and EMDEs have been historically low since the global financial crisis, despite aslight increase in 2018. However, the spread between investment and non-investment grade borrowing cost has widened in
2018. Financial stress events, especially sovereign debt crises, worsen debt dynamics, lead to credit downgrades, and tend
to be associated with higher borrowing costs.
A. EMDE long-term government bondyieldsB. Advanced-economy government andcorporate bond yields

C. Long-term sovereign debt ratings
during crises

D. Long-term interest rates during crises

E. Government debt during crises

F. Fiscal balances during crises

Source: Bloomberg; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscal-space); Laeven and Valencia (2018).
A. Average long-term government bond yields (with maturity of 10 years or close) for EMDEs with long-term foreign-currency sovereign ratings below investment grades
and above investment grades in each year. Dotted lines show averages over 2002-07. Sample includes 61 EMDEs.
B. Average long-term government bond yields (with maturity of 10 years) for 36 advanced economies, and corporate bond yields computed as simple averages of U.S.
high yield, U.S. investment grade, Euro high yield, and Euro investment grade corporate bond yields.
C.-F. Simple averages, as well as interquartile ranges, based on balanced samples. Crises refer to debt crises, as defined in Laeven and Valencia (2018). When there
are multiple crises identified within five years, the one with the lowest real GDP growth is counted as an event. Sample includes 16 crisis episodes (Panels C and E), 11
episodes (Panel D), and 21 episodes (Panel F).
C. The sovereign ratings are converted to a numerical scale ranging from 1 to 21 (higher = better rating).
D. Long-term interest rates refer to nominal 10-year government bond yields, or bond yields with similar maturities.
Click here to download data and charts.

For reserve currency-issuing advanced economies, like theUnited States, it has been argued that such a spike in risk
premia is unlikely, since these countries are often viewed assafe havens during periods of market turbulence (Furman
and Summers 2019; Krugman 2014). For EMDEs,
however, this risk is more acute. History has shown that
EMDE borrowing costs tend to rise sharply during
episodes of financial stress, and higher debt servicing costs
can cause debt dynamics to deteriorate (Figure 1.1.2.C to
F). A recent example is the case of Argentina, where its
five-year U.S. dollar-denominated sovereign bond yields
more than doubled during 2018 to over 11 percent inearly September. Indeed, every decade since the 1970s has

witnessed debt crises in EMDEs, often combined withbanking or currency crises (Kose and Terrones 2015;
Laeven and Valencia 2018).
Constraining government action during downturns.
High debt constrains governments’ ability to respond to
downturns, in part because debt service crowds out otherimportant government spending needs, including growthenhancing public investment or social safety nets (Obstfeld
2013; Reinhart and Rogoff 2010; Romer and Romer
2018). This was also the case during the global financial
crisis: fiscal stimulus during 2008-09 was considerably
smaller in countries with high debt than in those with low

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BOX 1.1 Debt: No free lunch (continued)
government debt (World Bank 2015). Moreover, weakfiscal positions tend to be associated with deeper andlonger recessions, a situation that worsens if the private
sector also falls into distress and its debt migrates togovernment balance sheets.
Reducing the effectiveness of fiscal policy. Highgovernment debt tends to render fiscal policy lesseffective (Figure 1.1.1.F). High government debt can
reduce the size of fiscal multipliers through two channels.
First, when a government with a high level of debt
implements fiscal stimulus, consumers expect that tax
increases will soon follow (Sutherland 1997). This
expectation leads consumers to cut consumption and savemore (the “Ricardian” reaction to government dis-saving).
Second, when the level of debt is higher, fiscal stimulus
can increase creditors’ concerns about sovereign credit
risk. This raises sovereign bond yields and, hence,borrowing costs across the whole economy (Corsetti et al.
2013). This, in turn, crowds out private investment andconsumption, reducing the size of the fiscal multiplier(“interest rate channel”). Indeed, empirical evidence
suggests that, regardless of the time horizon considered,fiscal multipliers are smaller when government debt ishigher (Figure 1.1.1.F; Huidrom et al. 2016, 2019).
Similarly, evidence points to less effective monetary
policy in the presence of high debt because of poorly
anchored inflation expectations in high-debt countries(Kose et al. 2019).
Slowing investment and growth. High and rising
government debt may eventually raise long-term interest
rates (Rubin, Orszag, and Sinai 2004; Laubach 2009).
High debt could also create uncertainty aboutmacroeconomic and policy prospects, including thepossibility that governments may need to resort todistortionary taxation to rein in debt and deficits (IMF
2018; Kumar and Woo 2010). Higher interest rates anduncertainty would tend to crowd out productivityenhancing private investment and weigh on output
growth.5 The empirical evidence for the association
between debt and growth is, however, mixed (Panizza andPresbitero 2014).

Conclusion
EMDE governments need to put in place frameworks that
help them strike a careful balance between taking
5 Auerbach, Gale, and Krupkin (2019); Gale and Orszag (2003); Croce
et al. (2018); Huang, Pagano, and Panizza (2017); and Panizza, Huang,
and Varghese (2018).

advantage of the present low interest rate environment andavoiding the risks posed by excessive debt accumulation.
For countries with sound fiscal positions and withframeworks that help ensure long-term sustainability, thebalance may tip toward debt-financed spending to boost
growth prospects if the cyclical position is appropriate. But
for those countries with constrained fiscal positions,alternative policies exist to expand the fiscal resources
needed to finance growth-friendly policies.
These alternatives include better spending and tax policies,
in an improved institutional environment. Spending canbe shifted toward areas that lay the foundation of future
growth, including education and health spending as well asclimate-smart investment to strengthen economic
resilience. Government revenue bases can be broadened byremoving special exemptions and strengthening tax
administration (Gaspar, Ralyea, and Ture 2019; IMF
2019; World Bank 2017b). Business climates andinstitutions can be strengthened to support vibrant private
sector growth that can yield productivity gains and expand
the revenue base.
Greater debt transparency and better debt management
can mitigate some of the costs associated with debt
buildups and some of the political-economy pressures for
rapid debt accumulation. The buildup in LIC debt has notbeen accompanied by necessary improvements in thequality of debt management. Better debt management andtransparency can help reduce borrowing costs, enhancedebt sustainability, and dampen fiscal risks. For example, asound debt management system would keep short-term
and foreign currency exposures to prudent levels. Greatertransparency—as well as institutional constraints on fiscal
policy, including robust fiscal rules, and better
governance—can mitigate some of the political-economy
forces that are biased towards rapid debt accumulation.6
Over time, improved debt management and transparency
would help foster macroeconomic stability.
Regardless of the desired level of debt, prudent debt
management favors debt contracted on terms that preserve
macroeconomic and financial resilience—preferably at
longer maturities, at fixed (and favorable) interest rates, aredenominated in local currency and transparently disclosed.
A debt composition that is less vulnerable to market
disruptions reduces the likelihood that a decline in market

6 Alt and Lassen (2006 a,b); Klomp and De Haan (2011); Alt and Rose(2009); Cioffi, Messina, and Tommasino (2012); Shi and Svensson(2006); and Streb, Lema, and Torrens (2009).

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BOX 1.1 Debt: No free lunch (continued)
sentiment, sharp depreciations, or interest rate spikes erodedebt sustainability. This is particularly important in
EMDEs, which tend to suffer sharp capital flow stops orreversals during times of financial stress.
EMDEs should avoid the temptation of the “this-time-isdifferent” syndrome in the current period of low interest
rates (Reinhart and Rogoff 2009). Even if the cost of debt
is currently low, the historical record suggests that it could

increase sharply during periods of financial stress, as some
EMDEs have painfully learned once again in recent years.
Excessive debt burdens may make governments more
vulnerable to crises, limit the size and effectiveness of fiscal
stimulus during future cyclical downturns, and weigh on
investment and longer-term growth. As the long history offinancial crises in EMDEs has repeatedly shown, debt
cannot be treated as a free lunch.

these new tariffs are contributing to heightened
policy uncertainty, which is expected to dent
confidence and investment.

The post-crisis decline in the income elasticity oftrade reflects slower value chain integration andtrade liberalization (UNCTAD 2018).

As demand from major economies continues tomoderate, export growth is expected to decelerate
across EMDE regions in 2019. An exception is
Sub-Saharan Africa, where export growth isexpected to recover modestly from supply
disruptions in key commodity-producing sectors
in 2018 (Figure 1.7.E). The weakness in export
growth this year is projected to be particularly
pronounced in the Middle East and North Africa,
reflecting oil production cuts in OPEC countries
and U.S. sanctions on the Islamic Republic of
Iran. Overall, export growth in 2019 is expected
to be below historical averages in more than 80
percent of EMDEs.

While the global trade growth forecast assumes
that new tariffs imposed continue to apply
throughout the forecast horizon, trade relations
between the United States and China remainfragile and could deteriorate further. Meanwhile,trade agreements that recently entered into force,such as the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership and the
EU-Japan Economic Partnership Agreement,
could help boost trade and foster deeper
integration between signatory countries. The
recently signed, but yet to be ratified, UnitedStates-Mexico-Canada Agreement (USMCA)
could impact trade in agricultural products,
automobiles, textiles and apparel; however, it isexpected to have limited effects on economic
activity (Chepeliev, Tyner and van der
Mensbrugghe 2018; Burfisher, Lambert, andMatheson 2019). Potential tariffs on U.S. imports
from Mexico announced in late May—not
included in baseline forecasts—could weigh on
North American trade.

In all, global trade growth is projected to weakenfrom 4.1 percent in 2018 to 2.6 percent thisyear—a full percentage point below previous
forecasts, slightly below the pace observed during
the 2015-16 trade slowdown, and the weakest
since the global financial crisis (Figure 1.7.F). As
the weakness in manufacturing abates, global trade
is expected to stabilize to an average of 3.2 percent
in 2020-21. This assumes no further escalation intrade tensions between major economies; newstimulus measures implemented in China and, toa lesser degree, the Euro Area; and firming
domestic demand in some EMDEs. However,global trade is projected to be weaker thanpreviously envisaged over the forecast horizon.
This reflects a softer outlook for global investment
and evidence of a lower income elasticity of trade.

Financial markets
Amid signs of deterioration in global economic
prospects and persistently low inflation, major
central banks have adopted more accommodative
monetary policy stances for the near term. The
U.S. Federal Reserve has placed its tightening
cycle on hold, while the European Central Bank
has delayed the end of its negative interest rate

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.8 Global finance
Major central banks have adopted a more dovish stance as a response to
low inflation and deteriorating growth prospects. As a result, advancedeconomy bond yields have fallen, and the share of debt trading at negativeinterest rates has increased. Search for yield has supported a recovery in
EMDE portfolio flows, a compression of bond spreads, and robust bondissuances; however, renewed trade tensions are weighing on risk appetite.
A. Federal funds rate expectations

B. U.S. and German 10-year
government bond yields

C. Share of bonds trading withnegative interest rates

D. EMDE portfolio flows

E. EMDE bond yields and spreads

F. EMDE international bond issuances

Source: Bloomberg, Dealogic, Institute of International Finance, J.P. Morgan, World Bank.
A. Last observation is May 23, 2019.
B. Figure shows weekly data. Last observation is May 23, 2019.
C. Last observation is May 2019, which includes data through May 23, 2019.
D. Cumulative weekly flows since January 1, 2018. Equity flows include Brazil, India, Indonesia,
Pakistan, Philippines, Qatar, Sri Lanka, South Africa, Thailand, Turkey, and Vietnam. Debt flows
include Hungary, India, Indonesia, Mexico, Poland, South Africa, Thailand, and Turkey. Post-crisis
average over January 1, 2010, to December 29, 2017. Last observation is May 23, 2019.
E. Bond yields are computed summing the J.P. Moran Emerging Market Bond Index (EMBI) spreadand the U.S. 10-year bond yield. Dashed lines represent post-crisis average over period January 1,
2010, to December 31, 2018. Last observation is May 23, 2019.
F. Figure shows cumulative sum. Last observation is May 2019, which is estimated using
month-to-date volume as of May 23, 2019.
Click here to download data and charts.

policy and implemented new measures tostimulate credit and activity. Shifting market
expectations about monetary policies contributed

to a drop in long-term yields—to their lowest
levels since mid-2017 in the United States, and to
below zero in Germany for the first time since late
2016 (Figures 1.8.A and B).
In this context, the share of bonds yielding
negative market interest rates increased to its
highest level since end-2017, reaching more than
20 percent globally and around 40 percent inEurope and Japan (Figure 1.8.C). While bankprofitability does not appear to have been unduly
affected so far, a long-lasting period of negativeinterest rate policies in the Euro Area and Japan
could eventually pose challenges for bankprofitability and financial intermediation (Arteta
et al. 2016).
As long-term yields in advanced economies haveeased, external financing conditions for EMDEs
have improved, supporting a recovery in portfolio
flows into EMDEs following persistent net
outflows over most of 2018 (Figure 1.8.D).
Notwithstanding recent reversals related to trade
policy uncertainty, equity market valuations haverisen, and aggregate EMDE sovereign bondspreads have dropped about 50 basis points since
the start of 2019 (Figure 1.8.E). International debt
issuance has been robust this year, as manyborrowers have taken advantage of more favorable
market conditions to meet growing refinancing
needs (Figure 1.8.F). Some easing of externalfinancing pressures, combined with moderating
inflation, allowed many EMDE central banks to
cut interest rates, or put their tightening cycles on
hold.
Gains in both equity and bond portfolio flows thisyear may be partly offset by subdued bank-related
flows, including in trade finance amid thedeceleration in global trade (BIS 2014). Foreign
direct investment (FDI) trends remain mixed,with a rebound in flows to China, and some Latin
American countries, including Brazil, offset byweak flows in Europe and Central Asia, Middle
East and North Africa, and Sub-Saharan Africa.
Global financing conditions are expected toremain supportive in the near term and tighten
only gradually later in the forecast period. This
assumes that monetary policy accommodation in
major advanced economies will be gradually

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

removed, but at a slower pace than previously
expected. The eventual rise of advanced-economy
yields would, however, have a negative effect on
capital flows to EMDEs. In Sub-Saharan Africa,
persistent governance and regulatory impediments
on investment, together with relatively subdued
growth prospects, are expected to continue toweigh on FDI flows (Laudicina, Peterson, andMcCaffrey 2018). Policy uncertainty, geopoliticalrisks, and security concerns could also continue toadversely impact EMDE capital inflows (WorldBank 2018d).

CHAPTER 1

19

FIGURE 1.9 Commodity markets
Most industrial commodity prices have recovered in 2019 following notabledeclines late last year. Against a backdrop of weaker global growth andgrowing U.S. production, crude oil prices have been supported byproduction cuts, mostly in Saudi Arabia, and the United States’ decision toterminate waivers for its sanctions on Iran. Amid low inventories, metals
prices have been supported by supply disruptions, notably in iron ore
production in Brazil. Agricultural supply continues to rise, with U.S. farmers
reducing plantings of soybeans in favor of corn.

A. Commodity price indexes, monthly

B. Crude oil production

C. Metals stocks

D. Global iron ore production anddisrupted production

E. Supply growth of main grains

F. Area harvested in the United States

Commodity markets
Prices of most industrial commodities picked up
in the first half of 2019, but remained well below
peak values from last year, while agricultural prices
were mostly flat (Figure 1.9.A). Supply constraints
and production cuts have supported prices since
the start of the year; however, heightened tradetensions have recently weighed on prices of somecommodities, particularly metals. Price forecasts
for the year as a whole have been downgraded due
to weaker-than-expected global growth.
Crude oil prices recovered over the first half of theyear, averaging $64 per barrel (bbl), supported byproduction cuts among OPEC and its non-OPEC
partners, as well as the United States’ decision toterminate waivers for its sanctions on Iran. Saudi
Arabia has contributed the most to the fall in
supply, reducing output by 1 million barrels perday (mb/d) relative to late-2018 levels, while theRussian Federation has cut production by 0.2 mb/
d (Figure 1.9.B). In contrast, production in the
United States has continued to grow, and thecountry maintained its position as the world’s
largest oil producer. Venezuela’s crude oil output
has dropped further, to about 0.8 mb/d by mid2019, from 1.4 mb/d in 2018 (IEA 2019).
Oil prices are expected to average $66/bbl in 2019
and $65/bbl in 2020, a slight downward revision
relative to January reflecting softening global
activity. The outlook remains highly uncertainand dependent on policy decisions, particularly
whether the production cuts among OPEC and its
partners will be extended into the second half of2019. However, the supply cuts by OPEC

Source: Bloomberg, International Energy Agency, London Metals Exchange, Vale S.A., U.S.
Department of Agriculture, World Bank, World Steel Association.
A. Indexes are based on nominal U.S. dollars. Last observation is April 2019.
B. Last observation is April 2019.
C. Last observation is April 19, 2019.
D. Red bars show the percent of disrupted iron ore production that has occurred in 2019 so far. In
Australia, the disrupted production has resulted from adverse weather events. In Brazil, production
has been restricted following the Vale mining disaster.
E. Supply is the sum of beginning stocks and production. Years represent crop seasons (for example,
2018 refers to 2018-19 crop season). Data reflect the May 10, 2019 USDA update.
F. Data for 2019 are estimates and as of May 9, 2019.
Click here to download data and charts.

members have resulted in substantial spare
production capacity, which lessens the likelihoodof spikes in oil prices in the near term.

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.10 Activity in EMDEs
EMDEs experienced broad-based weakness in manufacturing at the startof 2019, followed by some recent signs of stabilization. Growth in countries
recently affected by financial stress or sanctions has been particularly
subdued, weighing on aggregate EMDE growth. In those countries, export
growth has slowed and import compression is underway due to weakdomestic demand—particularly investment. In other EMDEs, growth isgenerally near potential. In many countries, especially commodity
exporters, activity has been weaker than previously expected.

A. Manufacturing and services PMIs

B. Contribution to EMDE growth
excluding China

C. Contribution to growth

D. Investment growth

E. Projected and potential growth in2019

F. Growth

Source: Haver Analytics, International Monetary Fund, J.P. Morgan, Organisation for Economic
Co-operation and Development, World Bank.
A. Horizontal line is the expansionary threshold for the Purchasing Managers’ Index (PMI). Lastobservation is April 2019.
B.-E. EMDEs under recent pressure include: a) countries that have had an increase in their J.P.
Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any timesince April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa,
Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia).
“Others excl. China” is EMDEs excluding China and EMDEs under pressure.
B.-F. Aggregate growth rates are based on constant 2010 U.S. dollar GDP weights. Shaded areas
indicate forecasts.
C. Domestic demand includes government consumption, private consumption, and gross capitalformation, which includes the changes in inventories. Net exports are export minus import volumes.
C.D.F. Data for 2015-16 are simple averages. Data for 2018 are estimates.
E. Potential growth estimates based on eight different methodologies (production function approach;multivariate filter; three univariate filters, including Hodrick-Prescott filter, Christiano-Fitzgerald filter,and Butterworth filter; IMF World Economic Outlook; and OECD Economic Outlook and Long-Term
Baseline Projections), as in the January 2018 Global Economic Prospects report. Blue bars show
minimum-maximum range of potential growth. Orange diamonds show average projected growth.
F. Yellow diamonds are projections from the January 2019 Global Economic Prospects report.
Click here to download data and charts.

Supply bottlenecks for metals such as copper,
nickel, lead, and zinc supported prices in the firsthalf of 2019, which was accompanied by sharp
declines in inventories (Figure 1.9.C). Iron ore
prices rose sharply at the start of the year due totemporary mine closures following the Valemining disaster in Brazil and weather-related
disruptions in Australia (Figure 1.9.D). Morerecently, however, the re-escalation of tradetensions have contributed to declining prices formost base metals. Overall, metals prices are
expected to decline slightly in 2019 and 2020, a
downward revision relative to the January forecastreflecting a weaker outlook for global metals
demand.
Agricultural prices were stable, on average, in thefirst half of 2019, amid high stock levels andfavorable crop conditions for the fourthconsecutive year (Figure 1.9.E). Wheat prices,which had risen relative to other agricultural
prices, fell sharply on positive supply news,
particularly in Europe and Russia. Soybean prices
also dropped amid rising trade tensions and the
spread of African Swine Fever to pig populationsin China, which are a key source of demand. In
response to weaker soybean prices, U.S. farmers
reduced plantings of soybeans and increased
plantings of corn (Figure 1.9.F; World Bank
2018e). Agricultural prices are expected to decline
in 2019 and stabilize in 2020.

Emerging market anddeveloping economies:
Recent developments
and outlook
EMDE activity has been weaker than expected amid
softening external demand and investment. As aresult, EMDE growth is expected to slow further, to 4
percent this year, before regaining some strength in2020-21. This forecast depends on a rebound in thelarge EMDEs that have been recently affected byfinancial market pressures. In Sub-Saharan Africa,
where extreme poverty is increasingly concentrated,
per capita income growth remains insufficient to leadto substantial poverty alleviation.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

Recent developments
EMDEs experienced broad-based weakness in
manufacturing and exports at the start of the year,
followed by some recent signs of stabilization(Figure 1.10.A). Activity in the services sector has
remained resilient, reflecting continued growth inconsumer spending.
Countries that experienced recent pressures related
to varying degrees of financial market stress oridiosyncratic headwinds such as sanctions—agroup that includes many commodity exporters—
have faced a particularly sharp deceleration in
activity this year (Figure 1.10.B).1 Private
consumption growth appears stable, but it remains
weak. Investment growth has moderated further aspolicy uncertainty persists, dampening imports(Figures 1.10.C and D). Economic slack remains
elevated in many countries in this group.
In EMDEs that did not suffer recent pressures—agroup that includes many commodity importers aswell as the more diversified commodity
exporters—growth is stable or moderating.
Activity in these countries is being restrained by a
combination of capacity constraints and softening
external demand. As a result, exports and domestic
demand are decelerating in tandem, with private
consumption still resilient but investment growth
remaining subdued (Special Focus 1.1). Import
growth is slowing as well, partly due to the highimport content of many capital goods. Economic
slack in this group of countries is generally
limited, and growth is near its potential in manycases (Figure 1.10.E).
Commodity-exporting EMDEs
Growth in commodity exporters has been weaker
than expected and remains lackluster (Figure
1.10.F). Notwithstanding a modest recovery fromits 2015 low, investment growth in commodity
exporters remains weak and below its long-term

1 EMDEs under recent pressure include: a) countries that have had
an increase in their J.P. Morgan EMBI credit spread of at least one
standard deviation above the 2010-19 average at any time since April
2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico,
Nigeria, South Africa, Sri Lanka, Tunisia, Turkey); or b) countries
that have been subject to recent sanctions (Iran, Russia).

CHAPTER 1

average. Notably, investment has deteriorated
substantially in Argentina, where confidence andpublic spending retreated after severe financial
stress, and Iran, where economic sanctions areweighing heavily on capital spending (Special
Focus 1.1).
Slower-than-expected mining and oil production,
combined with domestic policy uncertainties, hasdelayed the recovery in activity in some of thelargest commodity exporters in Sub-SaharanAfrica (Angola, Nigeria, South Africa; WorldBank 2019b). Amid oil production cuts agreed by
OPEC members and some key non-OPEC
producers, growth in Saudi Arabia and Russia ismoderating, while sanctions or political crises are
expected to lead to sharp contractions in other oil
exporters (Iran, Sudan; World Bank 2019c and2019d).
Conditions are improving or stable elsewhere.
Momentum in Brazil is gradually firming,
although at a slower pace than previously
expected. Rising commodity prices this year, alongwith improving business confidence, have helped
lift investment and private consumption in somelarge economies. In several commodity exportersin East Asia and Pacific and Latin America, where
earlier terms-of-trade shocks were less acute,
growth is stable or only gradually deceleratingfrom high levels (Chile, Malaysia, Peru; WorldBank 2019e).
Commodity-importing EMDEs
Growth in commodity importers continues todecelerate, reflecting moderating external demand,increasing capacity constraints, and the lingering
effects of financial stress in some countries—mostnotably Turkey. Among European EMDEs,
slowing activity is particularly pronounced ineconomies with close ties to the Euro Area orfacing ongoing domestic challenges (Belarus,
Serbia, Turkey). In some countries, diminishingslack is putting a lid on growth (Hungary,
Poland).
In Asia, activity is gradually decelerating but
remains robust, with output in many countries
expanding at a rate of 6-7 percent (Bangladesh,
Cambodia, China, India, the Philippines,

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BOX 1.2 Short-term growth prospects for LICs
Growth in low-income countries (LICs) is projected to remain robust in 2019, at 5.4 percent. It is, however, more moderate thanpreviously forecast, as weaker external demand has been accompanied by devastating extreme weather events and by anormalization of agricultural production in some large economies. Growth is projected to rise to 6.0 percent in 2020 and 6.1
percent in 2021, as domestic demand continues to strengthen and as increased oil and metals production supports activity amongindustrial-commodity exporters. These growth rates are, however, insufficient to markedly reduce poverty, particularly in LICs
affected by fragility, conflict, and violence. Risks to the outlook include slower-than-expected growth in major trading partners, a
resumption in the tightening of international financial conditions, adverse weather, and health crises.

Recent growth and prospects for 2019
Economic activity. Growth has remained robust in LICs,
but lost some momentum. It is projected to decelerate to
5.4 percent in 2019—from 5.6 percent 2018—and is
below previous forecasts (Figure 1.2.1.A). The downward
revision reflects, in part, unexpectedly weak external
demand from major trading partners, extreme weather
events that dampened activity in several countries, as wellas an earlier-than-expected normalization of agricultural
production in some large LICs (Uganda, Tanzania) afterstrong recoveries from drought in previous years.
In non-resource-intensive LICs, growth has been
supported by robust construction activity related toinvestment in infrastructure (Rwanda, Senegal) and
rapidly growing services sectors amid continued
urbanization (Ethiopia, Uganda). On the demand side,
growth reflects strong household consumption supported
by solid harvests (Benin, Burkina Faso) and expansionary
monetary policy (The Gambia, Uganda), as well assustained public investment (Comoros, The Gambia,
Madagascar, Nepal, Uganda). Among some exporters ofindustrial commodities, growth has strengthened—despite
weaker external demand—as oil and mining production
has continued to benefit from investment in new capacity(Chad, Democratic Republic of Congo, Guinea).
However, several economies are facing severe strains.
Output in Zimbabwe is expected to contract in 2019 witha sharp rise in inflation reducing real incomes and foreignexchange shortages constraining activity. The Southernand East African region was hit by two devastating tropical
cyclones—Idai and Kenneth—in March and April 2019that took a heavy human toll and caused severe damage tosocial and economic infrastructure in the Comoros,
Malawi, Zimbabwe and, in particular, Mozambique. In
this country, cyclone Idai in particular damaged asignificant part of the port city of Beira and its
surrounding area—affecting one of Mozambique’s key
export terminals.
Note: This box was prepared by Rudi Steinbach. Research assistance
was provided by Maria Hazel Macadangdang and Mengyi Li.

Progress in poverty reduction. Despite declines in poverty
rates over the past decade, more than 40 percent of the
population in LICs still live in extreme poverty, andcontinued progress in poverty reduction in these countries
remains challenging. The poverty headcount is rising ineconomies affected by fragility, conflict, and violence. In
countries where progress is being made in reducing
poverty, economic growth is concentrated in urban areas,yielding little benefit to the rural poor.
External positions. Current account deficits are widening
in almost half of LICs, with the average deficit expected toincrease to 9.3 percent of GDP in 2019 from 8.4 percent
in 2018 (Figure 1.2.1.B). In some LICs (Afghanistan,
Burundi, Guinea, Guinea-Bissau), widening external
deficits reflect weaker external demand and slower export
growth. Elsewhere (Mozambique, Nepal, Niger, Uganda),
imports of capital goods related to large infrastructure
investment projects have been contributing to larger
deficits. The deficit in Mozambique will rise further during
the cyclones’ aftermath by weaker agricultural exports andwith elevated imports of aid and reconstruction materials.
In a few LICs (Benin, Ethiopia), current account deficits
are narrowing despite weak external demand because past
investments in export-oriented industries are supportingstronger export growth. While FDI inflows have been
largely sufficient to finance current accounts deficits—
especially in countries with large infrastructure investment
programs—they have weakened somewhat amid last year’s
tighter external financing environment. This has
contributed to a decline in LICs’ international reserves
relative to their imports. They now stand further below thecommonly recommended minimum of three months’
cover (Figure 1.2.1.C).
Fiscal positions. Fiscal deficits are gradually narrowing in
LICs, with the average deficit expected to decline from 4
percent of GDP in 2018 to 3.4 percent in 2019 (Figure
1.2.1.D). Narrower deficits among many fast-growing
LICs reflect fiscal consolidation (Benin, Ethiopia, Togo),
as well as greater public spending efficiency and improved
revenue collections (Benin, Togo). Among industrialcommodity-exporting LICs, rising government revenues
related to increased oil and metals production (Chad),G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

CHAPTER 1

BOX 1.2 Short-term growth prospects for LICs (continued)
FIGURE 1.2.1 Short-term economic prospects for LICs
Growth in LICs is projected to remain robust in 2019, at 5.4 percent, albeit more moderate than previously forecast. It is
expected to rise to 6.0 percent in 2020 and 6.1 percent in 2021. Growth is being spurred by new oil and mining production
capacity coming on stream among some large industrial-commodity exporters; public investment and strong agriculture
performances should support growth in non-resource-intensive LICs. Per capita income growth will not be sufficient tomarkedly reduce poverty. Current account deficits are widening, amid weaker external demand and strong capital goods
imports, while financing of these deficits has been under pressure. Fiscal deficits remain large, contributing to elevatedgovernment debts.
A. GDP growth

B. Current account deficits

C. International reserves in months ofimports

D. Fiscal deficits

E. Government debt

F. Per capita GDP growth

Source: Haver Analytics; International Monetary Fund, World Economic Outlook; World Bank; World Development Indicators.
Note: LICs = low-income countries. Industrial-commodity exporting countries include energy- and metal-exporting economies, and the sample includes 8 countries.
Non-resource-intensive countries include agricultural-exporting countries and commodity importers, and the sample includes 22 countries.
A. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights.
B.D.E. Simple averages of country groups.
C. Simple averages. Sample includes 23 countries.
F. FCV = fragility, conflict, and violence. FCV and Non-FCV LICs samples each include 14 countries. Weighted averages of country groups.
Click here to download data and charts.

greater tax revenue mobilization (Sierra Leone), and fiscal
consolidation (Tajikistan) are improving fiscal balances.
However, in some LICs, fiscal deficits are widening, amid
weak economic growth that weighs on government
revenues (Liberia), election-related fiscal pressures(Mozambique), and scaled up public consumption andinvestment by a new government (Democratic Republic ofCongo).
After increasing sharply in recent years, government debt
ratios are elevated among LICs, with debt expected toreach 52 percent of GDP, on average, in 2019—a 15
percentage point increase since 2013 (Figure 1.2.1.E).

However, in some LICs, increased fiscal discipline andmore effective revenue mobilization have begun to stabilize
debt ratios.
Among non-resource-intensive LICs,
indebtedness has remained broadly unchanged, or evendeclined somewhat, in Benin, the Comoros, Ethiopia,
Haiti, and The Gambia. Similarly, increases in debt appear
to have come to a halt in some industrial-commodity
exporters, where revenues have been lifted by increased
resource production (Chad, Democratic Republic ofCongo). Nevertheless, debt continues to rise in many
countries, driven by strong public investment (Rwanda,
Tanzania, Uganda) and larger current spending, in somecases related to elections (Burundi, Mozambique).

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BOX 1.2 Short-term growth prospects for LICs (continued)
In addition to elevated levels of debt, the composition of
government debt has changed in recent years, as nonconcessional and foreign-currency-denominated borrowing
has increased amid greater access to international capital
markets and increased non-resident participation indomestic debt markets (World Bank 2019a, 2019b).
While international financial conditions have eased inrecent months, they are still tighter than in 2017, keeping
debt-servicing costs elevated and making fiscal
consolidation in countries with large debt burdens morechallenging.

Outlook for 2020-21
Economic growth. Growth in LICs is expected tostrengthen to 6.0 percent in 2020 and 6.1 percent in
2021. This projected pickup assumes that the recovery
among oil and metals exporters will be bolstered by higher
production as new capacity comes on stream, while
domestic demand continues to strengthen (Chad,
Democratic Republic of Congo, Guinea). In the
Democratic Republic of Congo—the largest industrial
commodity-exporting LIC and the country estimated tohave the most cobalt reserves in the world—mining
production accounts for more than 80 percent of exports
and 25 percent of government revenues. Mining
production is expected to increase by around 10 percent a
year over the forecast horizon, driven by strong growth incobalt demand from the expanding global electric vehicleindustry (Alves Dias et al. 2018; Campbell 2019).
Growth is also expected to remain robust in several nonresource-intensive LICs. In particularly fast-growing LICs
(Rwanda, Uganda, and Tanzania), expansions will besupported by public investment in infrastructure andcontinued strong agricultural growth. Similarly,
agricultural production in Malawi is assumed to recover as
the Fall Armyworm infestation of recent years recedes.
Reconstruction efforts in the cyclone-affected countries inSouthern and East Africa—the Comoros, Malawi,
Mozambique, and Zimbabwe—are also expected tosupport activity over the next two years. In Afghanistan,greater political stability following an assumed peacefultransition after the upcoming election in July is expected
to improve the business environment and deliver a growth
spurt. Improved political stability is also expected tosupport the outlook for Guinea-Bissau and Zimbabwe.
While growth in Ethiopia is expected to remain strong, it
will be held back by a tighter fiscal stance, as thegovernment continues its efforts to stabilize public debt.

Prospects for per capita income convergence. The growthrecovery will help lift per capita GDP growth in LICs from
2.6 percent in 2019 to 3.2 percent in 2020 and 3.3
percent in 2021 (Figure 1.2.1.F). However, among LICs
affected by fragility, conflict, and violence—which hostabout 56 percent of the LIC poor and 43 percent of the
LIC population—prospects for convergence to middleincome country income levels are limited, as per capita
income growth is expected to be significantly lower,
averaging 1.9 percent in 2020-21. For these economies,
growth is thus expected to remain insufficient tosignificantly reduce poverty rates, and the number ofpeople in LICs living in extreme poverty (below theinternational poverty line for income of $1.90 per day) is
expected to remain elevated.
Risks. Risks to the economic outlook for LICs are
predominantly on the downside. Slower-than-expected
growth in major economies—China, the United States,
and the Euro Area—could set back LIC growth. These
three countries account for 31 percent of LIC exports, 41
percent of LIC FDI, and 23 percent of remittances to
LICs, leaving LICs highly exposed to developments intheir economies. A slowdown in China would hit
industrial-commodity-exporting LICs particularly hard, as
China accounts for more than one-half of global metals
demand (World Bank 2016 and 2018b).
Unexpected shifts in investor sentiment, or in economic
developments or policies in major economies, could leadto a re-tightening of financial conditions. The impact
would be amplified in LICs with larger debt burdens,
weaker macroeconomic fundamentals, or elevated politicalrisks. The disruptions to capital inflows and sharp
currency depreciations that could result from a sudden
deterioration in market sentiment would raise debtservicing costs further—especially on debt denominated inforeign currency—and undermine fiscal consolidation
efforts while constraining critical poverty-reducing
expenditures.
Many LICs are vulnerable to weather-related shocks as
climate change increases the frequency of extreme weather
events such as tropical storms, floods, heatwaves, andsevere and prolonged drought episodes. Crop damage
events caused by a greater incidence of insect pests (e.g.,
the Fall Armyworm) could become more severe as warmer
conditions fuel their population growth and metabolic
rates (Deutsch et al 2018). In the average LIC, agriculture
accounts for 29 percent of GDP. LICs that are mosthighly dependent on agricultural activity are most at risk

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

CHAPTER 1

BOX 1.2 Short-term growth prospects for LICs (continued)
TABLE 1.2.1 Low-income country forecastsa

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

Low Income Country, GDP
Afghanistan

b

2016

2017

2018e

2019f

2020f

2021f

2019e

2020f

2021f

4.8

5.6

5.6

5.4

6.0

6.1

-0.5

-0.2

-0.2

2.3

2.7

1.0

2.4

3.2

3.6

-0.3

0.0

0.4

Benin

4.0

5.8

6.5

6.5

6.5

6.5

0.3

0.0

-0.1

Burkina Faso

5.9

6.3

6.8

6.0

6.0

6.0

0.0

0.0

0.0

Burundi

-0.6

0.5

1.6

1.8

2.1

2.0

-0.5

-0.4

-0.8

Chad

-6.3

-3.0

2.6

3.4

5.6

4.8

-1.2

-0.5

-0.1

Comoros

2.2

2.7

2.8

3.1

3.2

3.2

0.0

0.1

0.1

Congo, Dem. Rep.

2.4

3.7

5.8

5.9

6.5

6.8

1.3

1.0

0.9

Ethiopiac

7.6

10.2

7.9

7.9

8.2

8.2

-0.9

-0.7

-0.7

Gambia, The

0.4

4.6

6.6

5.4

5.2

5.0

0.0

0.0

-0.2

Guinea

10.5

10.6

5.8

5.9

6.0

6.0

0.0

0.0

0.0

Guinea-Bissau

6.3

5.9

3.8

4.3

4.8

5.5

0.1

0.4

1.0

Haitic

1.5

1.2

1.5

0.4

1.6

1.3

-1.9

-0.8

-1.2

Liberia

-1.6

2.5

1.2

0.4

1.6

1.3

-4.1

-3.2

-3.5

Madagascar

4.2

4.3

5.2

5.2

5.3

5.1

-0.2

0.0

-0.2

Malawi

2.5

4.0

3.5

4.5

4.7

5.1

0.2

-0.6

-0.4

Mali

5.8

5.3

4.9

5.0

4.9

4.8

0.0

0.0

0.0

Mozambique

3.8

3.7

3.3

2.0

3.5

4.2

-1.5

-0.6

0.1

Nepalc

0.6

8.2

6.7

7.1

6.4

6.5

1.2

0.4

0.5

Niger

4.9

4.9

5.2

6.5

6.0

5.6

0.0

0.0

0.0

Rwanda

6.0

6.1

8.6

7.8

8.0

7.5

0.0

0.0

-0.5

Senegal

6.2

7.2

6.8

6.8

7.0

7.0

0.2

0.2

0.1

Sierra Leone

6.4

3.8

3.7

5.4

5.4

5.2

0.3

-0.9

-1.1

Tajikistan

6.9

7.1

7.3

6.0

6.0

6.0

0.0

0.0

0.0

Tanzania

6.9

6.8

6.0

5.4

5.7

6.1

-1.4

-1.3

-0.9

Togo

5.2

4.3

4.9

5.0

5.2

5.1

0.2

0.1

0.0

Uganda

4.6

3.9

5.9

6.1

6.5

5.8

0.1

0.1

-0.7

Zimbabwe

0.8

4.7

3.5

-3.1

3.5

4.9

-6.8

-0.5

0.9

c

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ fromthose contained in other World Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. Central African Republic, Democratic People’s Republic of Korea, Somalia, Syria, and Yemen are not forecast due to data limitations.
b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
c. GDP growth based on fiscal year data. For Nepal, the year 2019 refers to FY2018/19.
Click here to download data.

of increases in poverty rates as a result of these factors(World Bank 2019a).
Health crises remain a constant concern among LICs. The
latest Ebola epidemic in the northeastern Democratic

Republic of Congo has been ongoing since mid-2018 andcould weigh heavily on activity in the country and the subregion, especially if it were to spread to major urban
centers and to neighboring countries (Burundi, Rwanda,
South Sudan, Tanzania, Uganda).

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.11 EMDE growth prospects

Low-income countries

Following a further deceleration in 2019, growth in EMDEs is expected torecover in 2020-21, as headwinds are assumed to dissipate in a number ofkey economies. However, investment growth will remain subdued. In thelonger run, productivity and demographic trends point to weakening
growth potential across EMDEs, further weighing on investment prospects.

Growth remains robust in low-income countries(LICs; Box 1.2; Special Focus 2.1); however, it has
lost some momentum amid weaker external
demand from major trading partners and extreme
weather events. Among non-resource-intensive
countries, rising consumption growth andsustained public investment in infrastructure aresupporting activity, offset by a modest slowdown
in agricultural output (Uganda, Tanzania).
Growthamong
exportersof industrial
commodities has generally firmed due toinvestment in new resource production capacity(Chad, Democratic Republic of Congo, Guinea).
In contrast, the Comoros, Malawi, Zimbabwe,and particularly Mozambique are facing severe
strains after two devastating tropical cyclones—
Idai and Kenneth—hit Southern and East Africa
in March and April, taking a heavy human tolland causing severe economic damage. Current
account deficits across LICs have widened, on
average, due to strong capital goods imports
related to public investment projects and slower
export growth among some metals exporters(Guinea, Nepal, Niger). Strong public investment
spending has, in part, kept fiscal deficits elevated;
however, they have narrowed in some countries
amid continued fiscal consolidation and improved
revenue collection (Benin, Ethiopia, Sierra Leone).

A. Growth

B. Investment growth

C. Contribution to potential growth

D. 10-year ahead investment growthforecasts

Source: Consensus Economics, J.P. Morgan, Penn World Tables, World Bank.
A.-C. Aggregate growth rates are calculated using constant 2010 U.S. dollar GDP weights. Shaded
areas indicate forecasts.
A.B. EMDEs under recent pressure include: a) countries that have had an increase in their J.P.
Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any timesince April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa,
Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia).
C. TFP = total factor productivity. Sample includes 50 EMDEs. Potential growth estimates are basedon production function approach. For further details on potential growth estimates, refer to theJanuary 2018 edition of the Global Economic Prospects report.
D. 10-year-ahead forecasts surveyed in indicated year. Constant 2010 U.S. dollar investmentweighted averages. Sample includes 23 advanced economies and 20 EMDEs (indicated by † inTable SF1.1.1). For 2010-18, the average of four projections during the year is shown; for 2019, theaverage of two projections during the first half of the year is shown.
Click here to download data and charts.

Vietnam), despite moderating export growth. In
India, growth remains solid, supported by
improved confidence, slowing inflation, and stillrobust investment (World Bank 2019e, 2019f).
Other economies continue to benefit from panAsian infrastructure investments and expanding
intra-regional
trade(Bhutan,
Cambodia,
Vietnam). Activity is weaker in countries where
policy uncertainty continues to discourage private
investment (Mexico, Sri Lanka), and in countries
that have tightened fiscal and monetary policies toreduce fiscal and current account deficits (Haiti,
Pakistan, Tunisia).

Outlook
Growth outlook
EMDE growth is expected to slow from 4.3
percent in 2018 to 4 percent this year—0.3
percentage point lower than previously projected,
with notable heterogeneity across regions (Box1.3; Chapter 2). Almost 40 percent of EMDEs are
expected to decelerate in 2019 relative to last year.
Moreover, forecasts for 2019 growth have been
downgraded for more than 40 percent ofcountries. For many countries, a substantial partof the forecast downgrade is attributable tocontinued weakness in investment, which remains
well below historical averages.
Growth in EMDEs facing the lingering impact ofearlier financial stress (Argentina, Brazil, Nigeria,
South Africa, Turkey) and idiosyncratic head-G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

CHAPTER 1

BOX 1.3 Regional perspectives: Recent developments and outlook
Growth in all EMDE regions has been weaker than expected amid softening external demand and, in some countries, persistentdomestic headwinds. Activity in the East Asia and Pacific and South Asia regions remains buoyant, while growth in other EMDE
regions is expected to recover in 2020-21.
East Asia and Pacific. Growth in the region is projected toslow from 6.3 percent in 2018 to 5.9 percent in 2019-20,
and to ease further to 5.8 percent in 2021. This will markthe first time since the 1997-98 Asian financial crisis that
EAP growth dropped below 6 percent. In China, growth isexpected to decelerate from 6.6 percent in 2018 to 6.2
percent in 2019, and gradually decline to 6.0 percent by
2021, reflecting softening manufacturing activity and tradeamid domestic and external headwinds. In the rest of theregion growth is also expected to moderate to 5.1 percent
in 2019, before rebounding modestly to 5.2 percent in
2020-21, as global trade stabilizes. Risks to regional
growth remain tilted to the downside and have intensified
with the re-escalation of trade tensions. They include a
sharper-than-expected slowdown in major economies,
including China; an intensification of global tradetensions; and an abrupt change in global financing
conditions and investor sentiment.
Europe and Central Asia. Growth in the region is
projected to fall sharply from 3.1 percent in 2018 to 1.6
percent in 2019. The slowdown partly reflects a sharp
weakening of activity in Turkey, which fell into recession
in the wake of acute financial market stress in 2018.
Regional growth is projected to pick up in 2020-21 as
Turkey recovers and Russian strengthens. Excluding these
economies, the rest of the region is expected to moderate.
In particular, growth in Central Europe is projected tosoften as economies grapple with the slowdown in theEuro Area and binding domestic capacity constraints. Key
external risks to the region include spillovers from weakerthan-expected activity in the Euro Area and fromescalation of global policy uncertainty, particularly in
relation to trade tensions and the United Kingdom’s exitfrom the European Union. Renewed financial pressures in
Turkey could also disrupt regional growth.
Latin America and the Caribbean. Growth in the region is
expected to be subdued in 2019, at 1.7 percent, reflecting
challenging conditions in several of the largest economies.
Gradually building momentum in Brazil and a recovery inArgentina are projected to contribute to a pickup in

Note: This box was prepared by Patrick Kirby, with contributions
from Rudi Steinbach, Temel Taskin, Ekaterine Vashakmadze, Dana
Vorisek, Collette Wheeler, and Lei Ye. Research assistance was provided
by Hazel Macadangdang.

FIGURE 1.3.1 Regional growth
Growth in all EMDE regions has been weaker than
expected, hindered by a combination of policy
uncertainties, weak external demand, and the lingering
impact of past financial stress. Activity is expected torecover in 2020-21.
A. Regional growth, weighted average

B. Regional growth, unweighted average

Source: World Bank.
A.B. Bars denote latest forecast; diamonds correspond to January 2019
forecasts in the Global Economic Prospects report. Average for 1990-2018
is constructed depending on data availability. For Europe and Central Asia,
the long-term average uses data for 1995-2018 to exclude the immediate
aftermath of the collapse of the Soviet Union.
A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP
weights. Since largest economies account for about 50 percent of GDP insome regions, weighted averages predominantly reflect the developments inthe largest economies in each region.
B. Unweighted average regional growth is used to ensure broad reflection ofregional trends across all countries in the region.
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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

BOX 1.3 Regional perspectives: Recent developments and outlook (continued)
regional growth to 2.5 percent in 2020 and 2.7 percent in
2021. Financial conditions in the region have eased
markedly since early 2019. Despite soft global trade,
regional export growth has picked up, boosted by trade
diversion in response to bilateral tariffs by the UnitedStates and China, and by solid growth in the UnitedStates. As these effects wane and global trade decelerates
further, export growth in the region is projected to slow.
Risks to the growth outlook remain tilted to the downside.
Sharper-than-projected slowdowns in the United States
and China could have negative spillovers on regional
growth through trade, financial, and commodity market
channels. Adverse market responses to weak fiscal
conditions and disruptions from natural disasters are otherimportant risks. The crisis in Venezuela also presents risks.
Middle East and North Africa. Growth in the region is
projected to remain subdued in 2019, at 1.3 percent.
Activity in oil exporters has slowed due to weak oil sector
output and the effects of intensified U.S. sanctions on
Iran, despite an easing of the fiscal stance and positive
prospects for non-oil sectors in some countries. Many oil
importers continue to benefit from business climate
reforms and resilient tourism activity. Regional growth isprojected to pick up to around 3 percent in 2020-21,
supported by capital investment and policy reforms. Risks
to the outlook are tilted to the downside, including
geopolitical tensions, reform setbacks, and a further
escalation of global trade tensions.

South Asia. The region continued to enjoy solid economic
activity in 2018, posting 7 percent GDP growth due torobust domestic demand. Pakistan was a notable
exception, with a broad-based weakening of domestic
demand against the backdrop of tightening policies aimed
at addressing the country’s macroeconomic imbalances.
Regional growth is projected to remain close to 7 percent
over the forecast horizon, as it benefits from strong private
consumption and investment. The main risks to theoutlook include a re-escalation of political uncertainty andregional tensions, financial sector weakness due tononperforming assets, fiscal challenges, and a sharperthan-expected weakening of growth in major economies.
Sub-Saharan Africa. The recovery in the region has
disappointed, with weakening external demand, supply
disruptions, and elevated policy uncertainty weighing on
activity in major economies. Growth in the region is
projected to pick up from 2.5 percent in 2018 to 2.9
percent this year and an average of 3.4 percent in 2020-21,
as domestic demand gathers pace and oil production
recovers in large exporting economies. However, thisexpected recovery is significantly slower than previously
projected, reflecting persistent headwinds in major
economies, and it is largely insufficient to make progress inpoverty reduction. Downside risks to the outlook include
weaker-than-expected external demand, lower commodity
prices, renewed stress in global financial markets, fiscal
slippages, political uncertainty, armed conflicts, andadverse weather conditions.

winds such as sanctions (Iran, Russia) is expected
to remain subdued this year (Figure 1.11.A).
Projections for 2019 were revised down in most ofthese countries, with particularly sizable
downgrades for Brazil, Mexico, and Turkey.
Forecasts for countries facing oil production cuts
this year (Bahrain, Russia, Saudi Arabia, andUnited Arab Emirates) were also downgraded. In
contrast, growth in EMDEs that did not facerecent pressures is expected to remain solid.
EMDE growth is projected to firm to 4.6 percent
in 2020-21, in line with previous forecasts. This
assumes a waning drag from earlier financialpressures in some large countries, that global
financing conditions remain generally benign, andthat global trade growth stabilizes. In Argentina

and Turkey, the impact of severe financial market
turmoil is expected to diminish over the forecasthorizon as investor confidence returns (WorldBank 2019c). In Brazil, Russia, and South Africa,
headwinds associated with elevated policy
uncertainty are also expected to moderate. In Iran,the impact of U.S. sanctions is projected to peakthis year, with growth resuming in 2020 (WorldBank 2019d).
In EMDEs that did not suffer recent pressures,growth is expected to remain stable in 2020-21.
Resilient domestic demand and still favorable
global financing conditions should largely offset
the negative impact of decelerating exports.
However, there are some large divergences.
Growth in India and Indonesia is expected toG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

remain steady and above EMDE averages, while
capacity constraints and the projected decelerationin the Euro Area will slow activity in Poland andHungary.
EMDE investment growth is expected todecelerate in 2019, primarily because of contractions in countries affected by recent pressures(Figure 1.11.B). While investment growth isprojected to recover somewhat in 2020-21, it isexpected to remain below long-term averages,
reflecting elevated debt levels, limited fiscal space,lack of clarity about policy direction, andinadequate business climates (Special Focus 1.1).
Growth in LICs is expected to recover to an
average of 6.1 percent in 2020-21, from 5.4
percent in 2019 (Box 1.2). In non-resourceintensive countries, the pickup assumes stronger
private investment amid improving businessenvironments (Rwanda, Uganda), continued
robust public infrastructure spending, solid
agricultural output (The Gambia, Malawi,
Tanzania), and greater political stability(Afghanistan, Guinea-Bissau, Zimbabwe). Amongexporters of industrial commodities, the recovery
is predicated on rising oil and mining productionamid continued investment in new capacity(Chad, Democratic Republic of the Congo,
Guinea), and on stronger domestic demand.
Despite the pickup in growth, LICs’ prospects for
progression to middle-income status will bechallenged by a greater incidence of fragility; aheavy reliance on agriculture, which is vulnerable
to climate change and extreme weather events; andthe fact that many are land-locked, limiting thescope of involvement in global trade (Special
Focus 2.1).
Over the medium term, challenges associated withdemographics, productivity, and investment point
to weakening growth potential in EMDEs (Figure
1.11.C; World Bank 2018c). Slowing labor force
growth will be most pronounced in key economies
in East Asia and Pacific and in Europe and Central
Asia, while it is projected to be broadly neutral for
growth in Latin America and the Caribbean, in
the Middle East and North Africa, and in SouthAsia, and to remain supportive in Sub-SaharanAfrica. Many of the drivers of the productivity

CHAPTER 1

slowdown seen across EMDEs in the post-crisis
period are likely to persist, notwithstanding thepromise of new technologies. Over the next
decade, investment is expected to remain subdued,
which will exacerbate the decline in potential
growth directly through slower capital deepening
and indirectly through its dampening impact on
productivity (Figure 1.11.D).
Per capita income growth and poverty
Sustained per capita income growth has
historically been the main driver of global poverty
reduction (World Bank 2018f). Softening growthin EMDEs since the global financial crisis has
been associated with a slower pace of global
poverty reduction, as well as an increased
concentration of extreme poverty in Sub-SaharanAfrica. While extreme poverty has fallen
substantially in some regions, such as East Asia
and Pacific, addressing broader measures ofpoverty still remains an acute challenge (WorldBank 2019f).
Near-term growth prospects will be insufficient toresult in significant progress toward global poverty
alleviation, with per capita income growth thisyear remaining below its long-term average inmore than half of EMDEs. In about a third of
EMDEs, per capita growth in 2019 will be belowthat of advanced economies, resulting in widening
income gaps.2 These EMDEs are mainly incommodity-reliant regions such as Sub-SaharanAfrica, Latin America and the Caribbean, and the
Middle East and North Africa (Figure 1.12.A).
There are significant differences within regions,however. In the case of Sub-Saharan Africa, percapita growth is weak in the largest three
economies (Nigeria, South Africa, and Angola), insome metals exporters, and in countries affectedby fragility, conflict, and violence. In contrast,some non-resource-intensive countries in theregion are experiencing solid per capita income
growth rates (Côte d’Ivoire, Ethiopia, Rwanda,
Senegal).
2 Median per capita income growth is also expected to be weak, as
the correlation between median household income growth and per
capita GDP growth is 0.75 for those countries for which householdincome data are available.

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.12 EMDE per capita income growth andpoverty
Weakening growth this year suggests that, in many EMDEs, per capita
income gaps with advanced economies will continue to widen. Per capita
income in countries with the largest number of extreme poor is expected to
grow at a somewhat faster clip than other EMDEs, but at less than half thepace needed to reduce global extreme poverty to 3 percent by 2030.

A. GDP per capita growth and share of
EMDEs with widening income gaps,
2019

C. Extreme poverty scenarios

B. Per capita growth in EMDEs

D. Share of EMDEs with per capita
growth at or above 8 percent per
annum

Source: World Bank.
A. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the
Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa.
Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Countries with awidening income gap are those with per capita GDP growth of at least 0.1 percentage point lower
than advanced-economy per capita GDP growth.
B.-D. Shaded areas indicate forecasts.
B. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights (“GDP-weighted”)
or number of extreme poor living at or below $1.90 a day (“poverty-weighted”). The poverty-weighted
estimate of per capita GDP growth excludes countries for which poverty head counts are notavailable. Sample includes 104 EMDEs for poverty-weighted and 117 EMDEs for GDP-weighted per
capita growth.
C. Data for 2016-18 are estimates. The blue line shows the poverty rate assuming that income percapita of the bottom 40 percent of the income distribution grows at the historical average from2005-15; the red line shows this but assuming a rate of 8 percent per year. The yellow horizontal line
indicates the 3 percent extreme poverty rate goal set for 2030. See World Bank (2018f) for details.
D. Share of EMDEs that reach or exceed 8 percent GDP per capita growth. Sample includes
146 EMDEs.
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Aggregate per capita income in countries with thelargest numbers of extreme poor is expected to
grow at a somewhat faster clip than that of other
EMDEs over the forecast horizon (Figure 1.12.B).
That pace will nevertheless remain well below
what is needed to achieve poverty alleviation goals.
To reduce global extreme poverty to 3 percent by
2030, income per capita growth in countries
where extreme poverty concentrates would need tobe sustained at about 8 percent per year (Special
Focus 2.1; Figure 1.12.C). This is more than twice
the rates projected over the next two years—and
only a small and declining proportion of EMDEs
have achieved such growth in any given year since
the global financial crisis (Figure 1.12.D).

Risks to the outlook
Risks continue to be tilted to the downside. A further
escalation in trade tensions and rising policy
uncertainties could weigh on investment andcontribute to financial market volatility. New
financial stress episodes in EMDEs could be
amplified by rising debt levels, corporate sector
vulnerabilities, and increasing refinancing pressures.
Sharper-than-expected
slowdowns
in majoreconomies could have substantial spillover effects for
EMDEs. These risks are compounded in some regions
by the possibility of intensifying conflict and by theincreased frequency of extreme weather events.
Baseline forecasts point to a deceleration of global
growth from 3 percent in 2018 to 2.6 percent
this year—0.3 percentage point below previous
projections, amid a more broad-based slowdown
in manufacturing activity and trade thanpreviously anticipated. More accommodative
monetary policy stances in major advanced
economies, new fiscal stimulus measures in China,
and the diminishing effect of financial pressuresin some major EMDEs are assumed to help
stabilize activity and prevent a further deterioration in global growth. On balance, global
growth is predicted to edge up to a slightly
weaker-than-expected 2.7 percent in 2020 and to
2.8 percent in 2021.
There is considerable uncertainty surrounding
global growth projections, and risks to the global
outlook continue to be firmly tilted to thedownside (Figure 1.13.A). Intensifying policy andpolitical uncertainty, including a further escalationof trade disputes between major economies, could
weigh on sentiment and dampen investment andtrade. Relative to the baseline assumption of no
additional escalation going forward, a renewed
deterioration in trade relations could therefore
result in substantially lower global growth. The
potentially large adverse effects associated with

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019such escalation highlight the opportunity costs of
the absence of a comprehensive trade deal between
the United States and China. A mutually
beneficial resolution of trade disputes between theworld’s two largest economies would lead to asustained dissipation of global policy uncertainty,
support confidence and investment, and bolster
the near- and long-term global growth outlook.
A renewed deterioration of EMDE financial
market sentiment could be amplified by highlevels of debt and spread through financial sector
exposure to sovereign risk. A sharper-thanexpected deceleration of activity in systemicallylarge economies—such as China, the Euro Area,
and the United States—could also have broadranging repercussions for EMDEs. The
probability of growth in 2020 being at least 1
percentage-point below current projections isestimated at close to 20 percent (Figure 1.13.B).
Such slowdown would be comparable to the 2001
global downturn.
Renewed trade tensions
and policy uncertainty
Rising policy uncertainty in major advanced
economies and EMDEs has already contributed
to weakening confidence and delayed investment
plans (Figure 1.14.A). An intensification of such
uncertainties—including a sharp escalation intrade tensions between the United States andChina, a disorderly exit of the United Kingdom
from the EU, and more fractious politicallandscapes after elections in major economies—
could contribute to a continued deteriorationin global activity, with particularly significant
consequences for trade and investment. For
instance, a sustained increase of 10 percent in an
index of U.S. economic policy uncertainty could,
after one year, reduce EMDE output growthby 0.2 percentage point and EMDE investment
growth by 0.6 percentage point (World Bank
2017c).
Trade relations between the United States andseveral of its major trading partners remain fragile
and could deteriorate further, leading to a
proliferation of new tariffs and other trade barriers
with broad-ranging consequences. An increase in
U.S. tariffs on all remaining imports from China,

CHAPTER 1

31

FIGURE 1.13 Balance of risks
The balance of risks to global growth remains tilted to the downside. The
probability of global growth being 1 percentage point below forecast in2020 is close to 20 percent.
A. Probability distribution around
growth forecasts

B. Probability of global growth being 1
percentage point below baseline

Source: Bloomberg, World Bank.
A.B. The fan chart shows the forecast distribution of global growth using time-varying estimates of thestandard deviation and skewness extracted from the forecast distribution of three underlying risk
factors: oil price futures, the S&P 500 equity price futures, and term spread forecasts. Each of the risk
factor’s weight is derived from the model described in Ohnsorge, Stocker, and Some (2016). Values
for 2019 are computed from the forecast distribution of 6-month-ahead oil price futures, S&P 500
equity price futures, and term spread forecasts. Values for 2020 are based on 18-month-ahead
forecast distributions. Last observation is May 21, 2019.
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and retaliatory responses by China, would result insignificant economic losses for exporters of thetargeted products and lead to cascading trade costs
to other sectors. While some countries could
benefit from trade diversion in the short run,adverse effects from weakening growth and rising
policy uncertainties involving the world’s twolargest economies would have predominantly
negative repercussions (Freund et al. 2018). In
addition, the risk of higher tariffs on U.S. imports
of automobiles and parts remains elevated, andcould cause severe disruptions to tightly integrated
global value chains (GVCs; Figure 1.14.B).
The complex and discretionary nature of tariffmeasures and a lack of clarity about future trading
rules could also be a notable barrier to firms’
decisions to invest and export. In particular, U.S.
policy uncertainty is found to significantly erode
growth and investment prospects across EMDEs(Kose, Lakatos, et al. 2017). In the presence ofGVCs, protectionist measures have widespread
adverse implications not only on targeted sectors
and countries but also on downstream industries
and other trading partners (Bellora and Fontagne
2019; Blanchard, Bown, and Johnson 2016). If all
proposed tariff increases were to be implemented,
the average U.S. tariff rate would increase to levels
not seen since the late 1960s and substantially

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.14 Risk of renewed trade tensions and policy
uncertainty
Global policy uncertainty is close to record highs, reflecting increased risks
of further escalation in trade tensions and rising political uncertainty.
Additional U.S. tariff hikes, including in the automobile sector, could
significantly disrupt tightly-integrated value chains and raise average U.S.
tariffs substantially above those of most G20 countries. Amid increasingly
divided political landscapes, elections in countries accounting for morethan a third of global GDP could contribute to unpredictable policychanges.
A. Global policy uncertainty

B. U.S. auto imports, by economy

C. Average import tariffs in G20
countries

D. Share of global GDP accounted forby countries with general elections

Source: Baker, Bloom, and Davis (2016); Election Guide; Haver Analytics; International Foundation
for Electoral Systems; National Sources; Peterson Institute for International Economics; U.S. Census
Bureau; World Bank.
A. The global policy uncertainty index is computed by Baker, Bloom, and Davis (2016), and is basedon the frequency of words in domestic newspapers mentioning geopolitical tensions, including
military, nuclear, war, and terrorism. Last observation is April 2019.
B. Data are as of May 23, 2019.
C. Blue bars are the trade-weighted averages for 2017 tariffs. “Considered” reflects announcementsof possible tariffs as of May 23, 2019, including an additional 25 percent tariff on U.S. imports from
China not subject to 2018 tariff hikes and on U.S. imports of motor vehicles and parts from non-North
American trading partners.
D. Bars represent the share of global GDP accounted for by countries that held or are expected tohold general elections in the years 2017-21. Sample includes 33 advanced economies and 142
EMDEs. Share calculated using constant 2010 U.S. dollars GDP. Shaded area indicates forecasts.
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surpass the average tariff among G20 countries(Figure 1.14.C).
Intensifying trade tensions involving major
economies could increase the likelihood of global
escalation in protectionist measures. An escalationof tariffs up to legally allowed bound rates could
translate into a decline in global trade flows
amounting to 9 percent, similar to the drop observed during the global financial crisis (KutlinaDimitrova and Lakatos 2017; Devarajan et al.

2018). This could eventually jeopardize progressin international cooperation and undermine pastgains from the multilateral trading system.
A no-deal Brexit from the EU could have a severe
impact on the United Kingdom and, to a lesser
extent, on its European trading partners, in theevent of large disruptions and delays at bordercrossings (Crowley, Exton and Han 2019;
Graziano, Handley, and Limão 2018). It could
also be a source of financial stability risks if it leads
to an abrupt interruption in financial relationships
and cross-border financial flows (Bank of England2018). While actions have been taken to mitigate
some of these risks, including regulatory
agreements to avoid disruption in the derivatives
markets, significant financial market stress in a nodeal event is still possible (ECB 2018). In
addition, the United Kingdom accounts for a large
share of cross-border lending to some EMDEs,
which could be negatively impacted by a sudden
retrenchment.
More generally, increasingly divided politicallandscapes in key countries and rising support for
more inward-looking policies could contribute toheightened policy uncertainty and geopoliticalrisks over time. Countries holding general or
parliamentary elections this year account for 35
percent of global GDP (Figure 1.14.D). These
include major advanced economies (all EU
member states, Canada) and EMDEs (Argentina,
India, Indonesia, South Africa).
Financial stress episodes
Renewed episodes of substantial financial market
stress could have increasingly pronounced andwidespread effects, in view of rising levels ofindebtedness (Figure 1.15.A). Such episodes could
be triggered or amplified by several factors.
First, an increase in corporate default rates amid
slowing activity in major economies could lead toa rapid deterioration in financial market
sentiment, a re-pricing of risks, and a spike inbond spreads for more vulnerable borrowers. The
share of lower-rated corporate bond issuers has
increased substantially in both advanced
economies and EMDEs in recent years, indicatinga drop in the quality of outstanding bond stocks

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

(Figure 1.15.B). A broad-based loss of investmentgrade status could potentially trigger sudden
pullbacks by investors (BIS 2019). Both corporate
and sovereign borrowers could come under stress,
especially given low interest coverage and large
volumes of bond refinancing scheduled in coming
years (Figure 1.15.C). A substantial re-escalationof trade tensions involving major economies could
amplify this risk by dampening financial market
sentiment, global trade, and investment prospects.
Second, shifting expectations about monetary
policy across major economies could lead to
disruptions in capital flows to EMDEs,
particularly if accompanied by an appreciation of
the U.S. dollar. This could be prompted, forinstance, by markets repricing the possibility ofadditional U.S. interest hikes in the next couple ofyears, in contrast to current market expectations ofinterest rate cuts later this year and in 2020. While
the risk of an abrupt increase in U.S. long-termyields has abated amid concerns about slowing
activity, a faster-than-expected acceleration in U.S.
wage growth or signs of an unexpected pickup in
global growth could contribute to a sudden
tightening of borrowing conditions. Reduced
confidence in central banks’ ability to deliver pricestability, or perceived threats to their independence, could also contribute to greater financial andmacroeconomic volatility (Berger, de Haan andEijffinger 2001; Draghi 2018; Tucker 2018).
Third, large currency depreciations in EMDEs
could amplify credit default risks. Although such
events have become less frequent over time, they
can still be triggered by shifts in U.S. monetary
policy expectations, sharp commodity pricemovements, or concerns about debt sustainabilityor domestic policy uncertainties (Figure 1.15.D).
Rising foreign ownership of local-currency bonds,
and sizable shares of local-currency lending
originating from foreign banks, have helped
reduce immediate currency risks in somecountries. However, foreign participation in localcurrency debt markets can also amplify thetransmission of external financing shocks todomestic borrowing conditions if liquidity dries
up as investor risk sentiment deteriorates (Agur etal. 2018). A lack of central bank independence
and rigid currency regimes also make it more

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33

FIGURE 1.15 Risk of renewed financial stressElevated global debt levels and declining credit quality increase thelikelihood of financial stress episodes in EMDEs, which could be amplified
by mounting refinancing needs and the possibility of dislocating currency
depreciations. Growing interconnections between financial sector andsovereign risks make banks in EMDEs increasingly vulnerable to distressof their sovereigns—and vice versa.
A. Credit to non-financial sectors

B. Share of global bonds rated BBB
or below

C. International bond redemptions in
EMDEs

D. Number of countries with large
currency depreciations

E. Bank claims on total government
and public non-financial entities

F. Share of EMDEs with above-mediangovernment debt and bank claims on
the government

Source: Bank for International Settlements; Dealogic; International Monetary Fund; Kose, Kurlat, et al.
(2017); World Bank.
A. Aggregates are calculated using debt and GDP in U.S. dollars. Aggregates of advanced
economies and EMDEs are based on 27 countries and 16 countries, respectively, and data for 2018
are for the third quarter. Data for 2018 in low-income countries (LICs) are for the latest available
quarter and sample includes 22 LICs. Total credit is measured as total credit to general government
and non-financial private sector for advanced economies and EMDEs and a sum of general
government debt and domestic claims on the private sector for LICs.
B. Last observation is July 2018.
C. Sovereign bonds include central government and state and local authorities. Data are as of May
22, 2019.
D. Figure shows 3-month moving averages. Depreciations are defined as negative quarterly changes
in the effective exchange rate. The sample is comprised of 138 EMDEs. Last observation is
December 2018.
E. Data published in the October 2018 edition of the World Bank Macro Financial Review.
F. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the
Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. Bluebars indicate the share of EMDEs within each region for which general government debt and totalbank claims are simultaneously above the EMDE median of the respective indicators. The EMDE
median statistic for 2007 and 2017 is 34.6 and 50.7 percent for general government debt and 4.1 and8.5 percent for bank claims on government. Sample includes 147 EMDEs.
Click here to download data and charts.

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difficult to adjust to sharp exchange rate
movements, amplifying fluctuations in domestic
prices and activity in the affected countries(Special Focus 1.2; Ha, Kose, and Ohnsorge2019). Renewed financial stress in large EMDEs,
such as Argentina or Turkey, could lead tosignificant contagion effects if accompanied byheightened investor risk aversion and portfolio
relocations among broad asset classes.
Fourth, government guarantees to the financial
system, alongside large bank holdings ofgovernment debt, can create self-reinforcing
feedback effects between the banking sector andsovereign risks (Dell’Ariccia et al. 2018). This
sovereign-bank nexus has become more
pronounced in EMDEs since the global financial
crisis (Figure 1.15.E). The share of countries withboth elevated public debt levels and high banking
sector exposure is particularly elevated in the
Middle East and North Africa and South Asia
(Figure 1.15.F). In Eastern Europe and Central
Asia, as well as in East Asia and Pacific, a greater
source of vulnerability is the level of private sector
debt, and the risk that rising corporate defaults
could weaken bank balance sheets. Public sector
balance sheets would be eroded if the government
were to support the banking sector—that is, if
contingent liabilities become actual liabilities—in
episodes of stress.
Sharper-than-expected slowdowns
in major economies
Around 80 percent of advanced economies—
including major European countries, Japan, andthe United States—are expected to registerslowing growth in 2019 (Figure 1.16.A). China’s
deceleration and rebalancing toward domestic
consumption and services is also expected tocontinue. For all of these economies, however,downside risks have intensified.
In the Euro Area, the risk of a markedly sharperthan-expected slowdown has risen on the back ofsignificant growth disappointments since mid2018, decelerating global trade, and elevatedpolicy uncertainty. A further deceleration could
trigger renewed financial stress in more vulnerable
countries, leading to slower investment, higher
unemployment, and renewed concerns about

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019banking sector health. Negative interest rate
policies could weaken bank profitability over timeand erode financial stability (Arteta et al. 2016).
In the United States, activity could be negatively
affected by weaker-than-expected confidence andinvestment amid trade tensions with major trading
partners. Deteriorating creditworthiness in thecorporate sector could amplify negative shocks. A
recession is unlikely in the short term, but theprobability could increase as the effects of fiscal
stimulus dissipate and trade policy uncertainty
persists. Three of the last four U.S. recessions were
triggered by financial shocks, which revealed
underlying balance sheet weaknesses and led to asudden retrenchment of activity, accentuated by
the government’s inability to agree on theimplementation of countercyclical fiscal measures.
China faces both external risks associated withthreats of rising U.S. tariffs and domestic risks
related to high corporate indebtedness in sectors
with deteriorating profitability. The total stock of
non-financial-sector debt is above levels seen at thepeak of previous credit booms in other major
EMDEs. The materialization of these risks could
have significant adverse repercussions on activity.
Although the authorities hold policy levers to
mitigate such repercussions in the near term,
continued fiscal and monetary stimulus could
become ineffective over time while adding further
leverage to private and public sectors. Providing
stimulus through highly indebted state-owned
enterprises (SOEs) may eventually undermine
economy-wide productivity growth.
A combined deterioration in the outlook for theUnited States, the Euro Area, and China—which
together accounted for about 50 percent of global
GDP and almost two-thirds of global growth in
2018—would have major spillover effects for
EMDEs through trade, financial, commodity, andconfidence channels (Figure 1.16.B). The growing
use of GVCs could contribute to the propagationof shocks across countries (Duval et al. 2016). A
1-percentage-point growth shock for these three
economies would curtail global growth by 1.7
percentage points and EMDE growth (excluding
China) by 1.4 percentage points after one year
(Figure 1.16.C).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

A pronounced slowdown in the Euro Area would
most severely affect countries in Central andEastern Europe and North Africa, because of tighttrade, remittance, and banking system linkages(World Bank 2016). Financial markets in Latin
America could also be adversely affected bydeleveraging and de-risking measures among
weakened Euro Area banks. A substantial
deceleration in China would lower commodity
prices worldwide, with a widespread effect oncommodity exporters (Figure 1.16.D). Exposure torisks in the United States is particularly
pronounced for Latin America and the Caribbean,
since the United States is the single largest export
destination for more than half of the countries in
the region. In addition, U.S. capital markets
supply a substantial share of portfolio flows to
many EMDEs and a drying up of these markets
would cause equity values and exchange rates to
weaken significantly.

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35

FIGURE 1.16 Risk of sharp slowdowns in major
economies
A sharper-than-expected downturn in the United States, Euro Area, orChina would have major spillover effects, with a slowdown in China having
a disproportionate impact on commodity exporters.

A. Share of countries experiencing
growth slowdowns

B. Share of global output and growth
attributable to major economies
in 2018

C. Impact of 1 percentage point
growth slowdown in the United States,
Euro Area, and China

D. Composition of global commodity
demandRegion-specific downside risks
In addition to global risks, a variety of regionspecific risks could dampen growth (Box 1.3;
Chapter 2). Many countries remain vulnerable tofinancial turmoil. Further declines in trade,
whether caused by slowing manufacturing activity
or increased trade barriers, would impact regionsthat are heavily invested in value chains, such as
the manufacturing hubs in East Asia and Central
Europe. A significant decline in commodity prices
would weigh on activity in regions with a large
number of commodity exporters, which accountfor half of the world’s poor.
Renewed conflict in various parts of the world—
the Korean Peninsula, the Middle East and North
Africa, South Asia, the South China Sea, SubSaharan Africa, or Ukraine—could severely disrupt
regional activity. Skirmishes between India andPakistan in February are a reminder that latentgeopolitical tensions can flare up at any time.
Climate change is contributing to a multitude ofrisks for more exposed EMDE regions (IPCC
2018). More extensive droughts and extreme heat
are causing more frequent harvest failures anddesertification. Rapidly spreading forest andgrassland fires increasingly threaten built-up areas
and resource-based industries. Cyclones of unprec-

Source: World Bank.
A. Growth slowdowns are declines of at least 0.1 percentage point change in growth. Sample
includes 36 advanced economies and 146 EMDEs.
B. Figure is calculated using constant 2010 U.S. dollar GDP. Major economies includes China, theEuro Area, and the United States
C. Bars are the impulse response to a 1 percentage point decline in the United States, Euro Area,
and China. Yellow error lines are the 16-84 percent confidence intervals. Based on the vector
autoregression model presented in World Bank (2016). The sample includes 22 advanced economies
and 19 EMDEs.
D. AEs = advanced economies. Figure shows 2010-17 average. Sample for energy and metals
includes 18 advanced economies and 33 "other" EMDEs. Agriculture includes 14 advanced
economies and 117 “other” EMDEs.
Click here to download data and charts.

edented power have already caused catastrophic
floods in agricultural plains and heavily populated
river deltas and mudslides in mountainous
regions. Rising sea levels threaten low-lying islands
and coastal regions.
Due to their location and topography, small island
developing states are particularly vulnerable toextreme weather events, which is exacerbated bylimited infrastructure and a lack of financial
resources (World Bank 2017d). Countries withlarge populations working on agricultural lands
with difficult terrain, poor soil quality, or limited
rainfall, including many in Sub-Saharan Africa

36

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.17 Climate risks and poverty
In several EMDE regions, populations in vulnerable rural and sea levelareas are particularly exposed to climate risks. The extreme poor are more
susceptible to food price shocks.

A. Population in less-favored
agricultural areas or living at sea level

B. Share of income spent on foodproducts in EMDEs

Source: Barbier and Hochard (2018); Laborde, Lakatos, and Martin (2019); World Bank.
A. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the
Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa.
Less-favored agricultural areas are agricultural lands constrained by difficult terrain, poor soil quality,
limited rainfall, or with limited access to markets. “Sea level" identifies areas where elevation is below
5 meters. Data are from 2010.
B. Simple averages across 31 countries. For further details, refer to Laborde, Lakatos, andMartin (2019).
Click here to download data and charts.

and South Asia, face growing risks from changing
weather patterns (Figure 1.17.A). Poor people aredisproportionally affected by climate change as
they tend to live in riskier areas such as lower
terrain in flood plain areas or on steep, eroded,
and unstable hillsides. They also depend heavily
on agriculture for income, and lack the savings
and access to borrowing that can help them copewith disasters (Hallegate et al. 2016; World Bank
2019g). The poor also spend higher shares of theirincome on food, making them more vulnerable tofood price spikes that follow local harvest failures(Figure 1.17.B; Laborde, Lakatos, and Martin2019).

Policy challenges
Challenges in advanced economies
Many advanced economies have limited fiscal ormonetary policy space to respond to a severe
downturn. Low policy rates leave little room forfurther conventional monetary loosening. Elevateddebt tends to limit the magnitude and effectiveness offiscal stimulus. Coordinated policy action may beneeded in the event of a severe slowdown. Policies toboost investment and productivity would bolster longterm growth prospects, and over time help restore
space for effective macroeconomic policy.

Monetary and financial policies
With the notable exception of the United States,
the room for conventional monetary policy easing
is limited in most advanced economies, as policy
rates remain at or near zero (Figure 1.18.A).
Indeed, central banks have responded to recent
weakness in growth principally by providing
additional forward guidance, making inexpensive
credit available to banks, and adjusting theirbalance sheets.
After the financial crisis, such unconventional
policies were a necessary complement to central
banks’ conventional policy rate cuts amid weakaggregate demand and declining neutral interest
rates (Christensen and Rudebusch 2019). Now,
given the lack of conventional policy space in mostadvanced economies, central banks may again beforced to respond to a negative shock mostly or
entirely with unconventional policies. It is notclear that they will be as effective as conventional
policies in such a scenario. There is evidence of
decreasing returns to scale in quantitative easing(Figure 1.18.B; Reza, Santor, and Suchanek2015). Over time, negative interest rates can alsopose problems for bank profitability, and hence
for the availability of bank credit (Arteta et al.
2016). The effectiveness of forward guidance may
be significantly reduced in the presence ofborrowing constraints and uninsurable risks(McKay, Nakamura, and Steinsson 2016).
Furthermore, any perceived loss of central bankindependence could substantially reduce theeffectiveness of monetary policy. Maintaining clear
and credible monetary policy is key for
macroeconomic and financial stability.
Protracted periods of low interest rates could
encourage excessive risk taking which, combinedwith declining creditworthiness, may result in
financial instability (Figure 1.18.C). Rigorous
macroprudential monitoring and regulation isessential to prevent such outcomes.
Fiscal policy
Even though public debt is high and rising inmost advanced economies, many governments canborrow money at near-zero or negative rates.
Persistently low borrowing costs provide credit-G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019worthy countries with additional fiscal space—
they can sustain small deficits without increasing
debt-to-GDP ratios (Figure 1.18.D; Blanchard
2019; Rachel and Summers 2019; Kose, Kurlat, etal. 2017).
Fiscal space may, however, be eroded by a sudden
fall in nominal growth or rise in borrowing costs.
Moreover, even in the present low-interest-rateenvironment, many advanced economies have
deficits that would put the ratio of government
debt to GDP on a persistent upward path, a trendthat is exacerbated by weak potential growth.
The debt-to-GDP ratio that is sustainable varies
considerably by country and over time. A
persistently rising debt ratio exposes publicfinances to the risk of a sharp rise in borrowing
costs. It also reduces policymakers’ ability torespond to a slowdown with deficit spending, bothbecause there is less room for additional borrowing
and because stimulus tends to be less effective
when countries have weak fiscal positions(Huidrom et al. 2019).
A severe slowdown in activity may require astrong, timely, and well-coordinated response,
reminiscent to that undertaken during the global
financial crisis. Simultaneous fiscal expansion can
speed the recovery from crisis, as the positive
impact of fiscal stimulus in one country spills over
into its neighbors, thus magnifying the impact oflimited fiscal space.
Structural policies
Expectations for long-term growth in advanced
economies have fallen sharply in recent years due
to a combination of demographic headwinds,
weak productivity, and slowing investment (Figure
1.19.A; World Bank 2018c, 2018b). On the fiscal
front, the prospect of slower growth implies lessfiscal space to respond to shocks since government
revenues will be reduced, and the primary balanceneeded to stabilize debt will be increased (Figure
1.19.B). For monetary policy, weak long-term
investment growth lowers the underlying demand
for funds, reducing equilibrium interest rates andproviding less space for conventional monetary
policy to respond to an economic slowdown(Laubach and Williams 2016).

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37

FIGURE 1.18 Monetary and fiscal policies in advanced
economies
Policy rates in most advanced economies remain at or near zero, limiting
the conventional response to a downturn. Unconventional responses may
exhibit diminishing returns. A rising share of lower-rated corporate debt
calls for macroprudential vigilance. Many economies have deficits well inexcess of debt-stabilizing levels.
A. Central bank policy rates

B. Estimated impact on yields per
billion U.S. dollar in quantitativeeasingC. U.S. non-financial corporate bondsby rating

D. Fiscal balances

Source: Bloomberg; European Central Bank; Haver Analytics; Krishnamurthy and Vissing-Jorgensen(2013); Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscalspace); National Sources; World Bank.
A. Sample includes 37 advanced economies. Light blue area indicates Euro Area countries. Lastobservation is April 2019.
B. Estimates from Krishnamurthy and Vissing-Jorgensen (2013). LSAP = Large-Scale Asset
Purchase. LSAP1: December 2008-March 2010; LSAP2: November 2010-June 2011;
LSAP3 = Maturity Extension Program (MEP): September 2011–December 2012.
C. Data are calculated using the ICE (Intercontinental Exchange) Merrill Lynch investment-grade andhigh-yield bond indexes, excluding cash and the issues of financial firms, as of the last trading day ofDecember for each year shown. Face values as percentage of U.S. nominal GDP.
D. The debt-stabilizing primary balance is the primary balance needed to stabilize debt at its current
1+ γ
level and is calculated as (——)
i - γ d* , where i is the nominal long-term interest rate, γ is nominal GDP
growth, and d* is the target debt ratio in percent of GDP. The nominal long-term interest rate is thecountry ten-year treasury bond yield at the cut-off date; nominal GDP growth is the seasonallyadjusted year-on-year percentage change of GDP in local currency in 2018; the target debt ratio isthe 2018 level of debt for each country.
Click here to download data and charts.

Governments can promote stronger long-term
activity, and restore policy space, by pursuing
growth-enhancing structural reforms that improvethe business climate, build physical and humancapital, promote labor market flexibility,
encourage labor force participation, and foster the
adoption of new technologies. A free, fair, andrules-based global trade system boosts global
potential by allowing capital to flow to its mostproductive locale, lowering costs for both

38

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.19 Structural policies in advanced economies
Declining labor force growth and weak productivity are reducing long-term
growth expectations. Weak growth magnifies the burden of previously
issued debt, eroding fiscal space.

A. Potential growth in advanced
economies

B. Deterioration in debt-stabilizing
primary balance caused by a
1 percentage point fall in growth

Source: Haver Analytics; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/
research/brief/fiscal-space); Organisation for Economic Co-operation and Development; World Bank.
A. TFP = total factor productivity growth. Figure shows potential growth estimates based on
production function approach. For further details on potential growth estimates, refer to the January
2018 edition of the Global Economic Prospects report. Aggregates calculated using constant 2010
U.S. dollar GDP weights. Sample includes 30 advanced economies. Shaded area indicates forecasts.
B. The debt-stabilizing primary balance is the primary balance needed to stabilize debt at its current

i-γ

level and is calculated as (——) d* , where i is the nominal long-term interest rate, γ is nominal
1+ γ
GDP growth, and d* is the target debt ratio in percent of GDP. Calculations assume a country with 2
percent interest rates and nominal growth falling from 4 to 3 percent.
Click here to download data and charts.

businesses and consumers. By allowing economies
to produce the goods and services in which they
have a comparative advantage, such a system
encourages the efficient use of resources and thegrowth of real incomes.
Challenges in emerging market anddeveloping economies
EMDEs need to reinforce macroeconomic frameworks
to improve resilience to shocks, particularly incountries with high debt levels. Given limited fiscal
space and large investment needs to meet criticaldevelopment goals, policymakers need to ensure thatpublic spending is cost effective and growthenhancing and that policy environments are
conducive to private-sector-led solutions. Structuralreforms aimed at bolstering the business climate could
also significantly bolster prospects. Improving access toreliable and affordable infrastructure, leveraging
productivity-enhancing technologies, and buttressing
institutional quality can help remove key bottlenecks
to activity. Building resilience to extreme weather
events, and boosting agricultural productivity is also
a key priority in countries with large and poor rural
populations. China’s main policy challenges are to

manage disruptions associated with heightened tradetensions and to gradually shift to a more balanced
and sustainable growth path and support an orderly
deleveraging process.
Policy challenges in China
In response to trade tensions with the UnitedStates, as well as softening exports and domestic
demand, authorities have provided monetary andfiscal support, while stepping up structural reform
efforts. Monetary policy loosening has mainly
taken the form of cuts to bank reserve
requirements. On the fiscal front, the authorities
have reduced value added and social security tax
rates, and boosted public investment spending byincreasing the ability of local governments to issue
bonds. The business environment is likely tobenefit from new laws protecting foreign investors
and strengthening intellectual property rights. The
authorities’ commitment to macroeconomic
stability and structural reforms was reaffirmed in
March (SCPRC 2019).
China’s immediate policy challenge is to manage
disruptions caused by trade tensions with theUnited States without exacerbating domestic
vulnerabilities. In the longer term, the country’s
key challenge is to continue its gradual shift tomore balanced growth, while reducing thefinancial stability risks stemming from high levelsof corporate debt (World Bank 2019e).
Continued reforms toward more sustainablegrowth need to be combined with efforts toimprove the business environment, support
innovation, strengthen intellectual property rights,
enhance competition and financial discipline,
reduce barriers to entry, boost productivity, andfoster household consumption (World Bank
2018g). These reforms would also contribute toachieving a comprehensive resolution of tradedisputes with the United States and bolster
China’s growth prospects.
The opening of China’s financial system tointernational investors—as illustrated by thecountry’s inclusion in various global bond andequity benchmark indexes—will require prudent
management. Slowing growth in the working-age
population is becoming an increasing drag on

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019long-term growth; however, this could be offset byproductivity-enhancing investments in health,education, and research and development (WorldBank 2018c).
EMDE monetary and financial policies
The waning impact of previous currency
depreciations and of the 2017-18 rebound inenergy prices has helped tame inflation in early2019 (Figure 1.20.A). Monetary policy tightening
has, therefore, paused in many EMDEs, and somehave eased their policy stance (Figure 1.20.B).
However, underlying inflationary pressures are stillpresent in many countries and recent oil priceincreases are expected to add to these pressures. In
addition, while external financing conditions haveeased somewhat, the currently benign market
sentiment could change abruptly. This could
reignite short-term capital outflows and force
procyclical monetary policy tightening.
The most vulnerable EMDEs tend to be highly
indebted, to have borrowed extensively in foreign
currencies, or to rely on short-term capital inflows
to finance their current accounts. Sharp
depreciations that accompany short-term capitaloutflows are often contractionary, particularly incountries
withelevated
foreign-currencydenominated debt, as they both increase debt
burdens and reduce the value of collateral on
corporate balance sheets (Korinek 2018; Serena
and Sousa 2018). The adverse impact of these
disruptions can be amplified further by tightlinkages between sovereign and private sector risks.
Central banks and regulators need to bolster
policy frameworks in order to confront future
shocks, particularly in countries where risingpublic and private debt-to-GDP ratios are
increasing exposure to currency, interest rates, ordebt-rollover risks. The resilience of banking andcorporate sectors can be enhanced by
implementing macroprudential policies thatprevent the buildup of systemic risk. Since theglobal financial crisis, EMDEs have significantly
increased the number and coverage ofmacroprudential measures, such as countercyclicalcapital buffers and limits on foreign-currency
borrowing (Figure 1.20.C; Cerutti, Claessens, andLaeven 2017). Shoring up central bank

CHAPTER 1

39

FIGURE 1.20 EMDE monetary policy
Moderating inflation in EMDEs led some central banks to ease policy rates
in the first half of 2019. Since the global financial crisis, there has been asubstantial increase in the number and coverage of macroprudential
measures across EMDEs. Greater central bank independence andtransparency would help reduce the impact of currency movements on
domestic inflation.

A. Share of EMDEs with inflation
above target

B. EMDE policy rate changes

C. Use of macroprudential tools
in EMDEs

D. Central bank independence andexchange rate pass-throughSource: Cerutti, Claessens, and Laeven (2018); Haver Analytics; World Bank.
A. The 2013-18 average is 41.7 percent. Last observation is 2019Q1, which includes available data
through May 22, 2019. Unbalanced sample includes 48 EMDEs with announced inflation targets.
B. Unbalanced sample includes 70 EMDEs and excludes Argentina and Venezuela. Last observationis 2019Q1, which reflects available data up to May 22, 2019.
C. Data is based on the 2018 update of Cerutti, Claessens, and Laeven (2017). Sample includes 155
EMDEs.
D. Exchange rate pass-through after one year driven by a monetary policy shock. Estimated fromfactor-augmented vector autoregression models for 26 EMDEs over 1998-2017. A positive passthrough means that a currency depreciation associated with an easing of monetary policy leading tohigher inflation after one year. Bars show the interquartile range and markers represent the medianacross countries. The central bank independence index is computed by Dincer and Eichengreen(2014). Low and high central bank independence are defined as below or above the sample average.
Click here to download data and charts.

independence and transparency could also help
boost confidence and enhance the policy room tomaneuver. This can be particularly effective in
limiting the impact of currency depreciations on
inflation (Figure 1.20.D; Carrière -Swallow et al.
2017; Eichler and Littke 2018; Special Focus 1.2).
In turn, this reinforces the shock-absorbing
capacity of market-driven exchange rate
movements.
In LICs, monetary policy transmission channels
are often weaker than in other EMDEs as financial
markets are less deep. This underscores the need

40

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for LIC central banks to provide a credible anchor
in order to maintain price stability (Ha, Kose, andOhnsorge 2019).
EMDE fiscal policy
Fiscal deficits and debt levels are rising in many
EMDEs, increasing their vulnerability to tighter
financing conditions and potentially constraining
their capacity to implement countercyclical fiscal
policy and growth-enhancing investments.
Generally benign external financing conditions inrecent years have allowed EMDE sovereigns andfirms to notably increase the amount of debt
issued on international bond markets (Figure
1.21.A; Fuertes and Serena 2018; Serena andMoreno 2016). However, rising debt is often
associated with growing external vulnerabilities—amajority of countries that recently experienced
pressures had deficits in excess of 4 percent of
GDP (Figure 1.21.B).
Looking forward, EMDEs need to strike a balance
between taking advantage of current low interest
rates and the potentially adverse consequences ofexcessive debt accumulation (Box 1.1). Countries
with sound fiscal positions and with fiscal
frameworks that help ensure long-termsustainability can borrow at low interest rates tosupport growth-enhancing investments. However,countries with constrained fiscal positions should
prioritize measures to reduce fiscal deficits,
lengthen the maturity of existing debt, improve
the quality of spending, and raise tax collection
and compliance, particularly in LICs (World Bank
2019a).
In countries where sovereign default risks are high,undertaking fiscal consolidation to address longterm debt sustainability can help restore market
confidence, and increase the space for future
policy actions (Figure 1.21.C; Ilzetzki, Mendoza,
and Végh. 2013; Aizenman et al. 2019). Just as
stronger bank balance sheets reduce the risk offinancial sector problems affecting the sovereign, astronger government balance sheet can help reduce
the risk that domestic banks are affected bysovereign distress.
While restoring fiscal space is an importantpriority, EMDE governments can minimize the

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

negative consequences of tighter budgets bypreserving growth-enhancing spending andimplementing tax reforms that support investment
and revenue mobilization (Ramey 2019). Suchreforms may include broadening the tax base,eliminating loopholes and unnecessary preferences(for example, avoiding base erosion and profit
shifting), and strengthening tax administrationand collection to reduce avoidance or evasion(OECD 2017). Improving the effectiveness andefficiency of public spending can help
governments provide important services without
sacrificing fiscal space (Herrera and Ouedraogo2018).
Restoring fiscal space ensures that EMDE
policymakers are able to act should downside risksmaterialize. Government stimulus tends to elicit aweaker demand response when fiscal space isnarrow and government debt is elevated (Figure
1.21.D; Brinca et al. 2016; Hagedorn, Manovskii,
Mitman 2019; Huidrom et al. 2019). The
introduction or improvement of fiscal stabilizers
can also help smooth the business cycle (Amra,
Hanusch, and Jooste 2019).
EMDE structural policies
Unless countered by comprehensive structuralreforms, adverse demographic trends in an
increasing number of countries, and weak
productivity growth, are likely to result in afurther deterioration in EMDE growth potential
over the next decade (Figure 1.22.A). Weakening
external demand from major economies andelevated trade policy uncertainty also highlight theneed to address the most pressing impediments todomestic and regional growth and to renew
commitments to trade liberalization. An improved
multilateral rules-based trading system remains thefirst line of defense against protectionist tendencies
and could yield previously untapped development
opportunities for many EMDEs.
The implementation of structural reforms to
improve the business climate and foster private
investment and job creation would substantiallybolster the growth outlook. This is particularly
important given current fiscal constraints and large
investment needs (Special Focus 1.1). Estimates of

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

the infrastructure spending required to meet the
Sustainable Development Goals by 2030 range
between 4.5 to 8.2 percent of EMDE GDP,depending on policy choices and the quality andquantity of infrastructure services (Rozenberg andFay 2019). Business climates and institutions canbe strengthened to support productivity andunlock private investments to meet future needs.
Key priorities include increasing access to reliable
and affordable electricity, improving transport
services, leveraging digital technologies, andimproving business climates. Raising agricultural
productivity could substantially boost development opportunities in countries with large rural
populations, as well as increase the resilience of therural sector to extreme weather events. Effective
social safety nets and active labor market policies
are also key to manage economic, social, andenvironmental risks.
Access to electricity. Limited access to electricity isa drag on economic activity in many EMDEs—
particularly in LICs, as electricity infrastructure iseither inadequate or plagued by frequent outages(Andersen and Dalgaard 2013; Blimpo andCosgrove-Davies 2019; Special Focus 2.1).
Policymakers in the affected countries should
prioritize critical investment to ensure reliable,
cost-effective, and sustainable power generation.
Policy actions need to achieve both access toaffordable electricity for the poor, as well as
adequate profitability for power utilities. Suchreforms include reviewing costly and regressive
energysubsidies,
minimizing
lossesintransmission and distribution, and ensuring
payment of electricity bills (Kojima and Trimble2016). Small-grid solutions and renewable energy
may also expand access to electricity (World Bank
2018h). Moreover, operation and maintenance—
an often-neglected component of effective power
generation—need to be budgeted with a reliable
source of funding (Rozenberg and Fay 2019).
Logistics and transportation. Inefficient logistics
and inadequate transport infrastructure are key
growth bottlenecks in many EMDEs, raising thecost of doing business and reducing the potential
for domestic and international integration.
Reform priorities include the removal of

CHAPTER 1

41

FIGURE 1.21 EMDE fiscal policy
Low borrowing costs and ample availability of credit have allowed
governments to borrow heavily on international markets. Fiscal deficits are
declining, but persist at elevated levels in many countries, especially thosethat have recently faced financial pressures. Government stimulus tends tobe less effective when debt is high.

A. International gross bond issuance,by borrower sector

B. Fiscal deficit

C. Long-term sovereign debt ratings

D. Fiscal multiplier, by debt level

Source: Bank for International Settlements; Huidrom et al. (2019); International Monetary Fund; J.P.
Morgan; Kose, Kurlat, et al. (2017, data available at http://www.worldbank.org/en/research/brief/fiscal-space); World Bank.
A. Figure shows 4-quarter moving averages of gross-bond issuance. “Other” includes central banks
and public and private financial institutions. Last observation is 2018Q4.
B. Shaded area indicates forecasts.
B.C. EMDEs under recent pressure include: a) countries that have had an increase in their J.P.
Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any timesince April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa,
Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia).
C. Sovereign ratings are converted to a numerical scale ranking from 1 to 21, as estimated by Kose,
Kurlat, et al. (2017). A higher ranking indicates a better rating (in other words, less likely to have asovereign default episode).
D. Figure shows fiscal multipliers 2 years from impact based on estimates from the IPVAR model ofHuidrom et al. (2019). An economy is considered to have low debt when government debt is below
40 percent of GDP and high debt when it exceeds 60 percent of GDP. Orange lines represent 16-84
percent confidence bands.
Click here to download data and charts.

regulatory barriers such as impediments to entry intrucking, brokerage, terminal and warehousing
operations; as well as greater reliance on market
mechanisms and private sector participation(World Bank 2018i). Mobility and market accesscan also be bolstered by prioritizing cost-effective
transport infrastructures. Appropriate land-use
planning and urbanization policies cansubstantially reduce the cost of meeting transport
needs, while minimizing carbon footprints(Rozenberg and Fay 2019; Figure 1.22.B).

42

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 1.22 EMDE structural policies
Productivity growth is lackluster in EMDEs. Investment needs in transport
are large but costs can be reduced with appropriate land-use planning inmost regions. Upgrading economic complexity and government
effectiveness closer to advanced-economy levels could yield large growth
dividends, particularly in Sub-Saharan Africa. Weak governance andunfavorable business climates are also associated with significantly higher
poverty rates, highlighting the importance of structural reforms that bolster
the business climate in EMDEs.
A. Total factor productivity growth in
EMDEs

B. Investment needs in urban
transport to meet Sustainable
Development Goals

C. Economic Complexity Index, 2014-16

D. Government effectiveness, 2014-16

E. Poverty, by regulatory quality

F. Poverty, by Ease of Doing Business

Source: Observatory of Economic Complexity, Penn World Tables, Rozenberg and Fay (2019), WorldBank.
Note: TFP = Total factor productivity. AE = Advanced economies, EAP = East Asia and Pacific,
ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East andNorth Africa, SAR = South Asia, and SSA = Sub-Saharan Africa.
A. Shaded area indicates forecasts. GDP-weighted averages of production function-based potential
TFP growth estimates. Sample includes 50 EMDEs.
B. Figure shows estimates from Rozenberg and Fay (2019). Data cover the years 2015 to 2030.
C. The Economic Complexity Index (ECI) measures the relative knowledge intensity of exports.
Higher values indicate higher degree of economic complexity. Sample includes 96 EMDEs
and 31 AEs.
D. The indicator reflects the perceptions of the quality of public services, the quality of civil service
and the degree of its independence from political pressures, the quality of policy formulation andimplementation, and the credibility of the government's commitment to such policies. Higher values
indicate better quality. Sample includes 150 EMDEs and 36 AEs.
E. The poverty rate is an unweighted average in each group. “Best” indicates quartile of EMDEs withthe strongest regulatory quality (based on data for year with latest poverty data). “Worst” indicatesquartile of EMDEs with the weakest regulatory quality. The back data for regulatory quality has beentaken from the World Governance Indicators. The data is for 2017.
F. The poverty rate is an unweighted average in each group. “Best” indicates quartile of EMDEs withthe highest 2019 Ease of Doing Business score (above 67.5). “Worst” indicates quartile of EMDEs
with the lowest 2019 Ease of Doing Business score (below 51.6).
Click here to download data and charts.

Improved cross-border connectivity can also help
foster intraregional trade and diversification, as
well as encourage higher domestic value-added
content in production. This may particularly help
Sub-Saharan Africa—which, together with SouthAsia, has considerably lower export complexity
than other EMDE regions and significantly higher
intraregional trade costs (Figure 1.22.C; UNECA2018).
Digital technologies. More widespread adoptionof digital technologies, including in the delivery offinancial and public sector services, could further
boost productivity by helping spread innovationand improving both private sector andgovernment efficiency (Baldwin 2019). In
countries with large informal sectors, widespread
adoption of these digital technologies could help
expand tax bases through the fiscalization of
informal sector transactions. New technologies are
more likely to be adopted successfully if policies
are in place to mitigate the costs of adjustment for
both workers and firms, and if market failures are
addressed (World Bank 2019h). Policy measuresthat prioritize investment in human capital areneeded to ensure that digital technologies promote
inclusive growth. Digital technologies are also
expected to further contribute to the reduction of
trade costs and an increase in trade flows (WTO
2018). However, the spread of digital technologies
will also likely affect the composition of trade byincreasing the services value-added component,changing patterns of comparative advantage, andaffecting the complexity and length of global value
chains.
Governance and business climate. Better institutional quality—such as control of corruption andrent-seeking, fair application of the rule of law,
protection of property rights, and politicalstability—is associated with more innovation,
increased financial access, and stronger investment
growth (Berkowitz, Lin, and Ma 2015).
Governance reforms can lead to sizableproductivity gains, particularly in countries
furthest away from best practices, many of which
are in Sub-Saharan Africa (Bhattacharyya 2009;
Cusolito and Maloney 2018; Acemoglu, Johnson,
and Robinson 2005; Figure 1.22.D). Improving
the business climate by simplifying tax andG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

regulatory requirements and ensuring clarity andpredictability for investors is another effective way
to support private investment and productivity.
Better governance and business climates can also
help reduce the likelihood of corruption,
informality, and extreme poverty (Demenet et al.
2016; Djankov et al. 2018; Lawless 2013; Paunov
2016; Figures 1.22.E and F).
Agricultural productivity, climate risks, andpoverty. The effects of climate change are
becoming increasingly visible. The poor are
disproportionally affected by climate risks as theytend to live in more vulnerable areas, depend on
income sources such as agriculture that are often
susceptible to climate shocks, and lack the savings
and access to borrowing that can help them copewith natural disasters (World Bank 2019g). Many
EMDEs in Sub-Saharan Africa and South Asia
have large agricultural sectors that are subject toextreme weather events and other environmental
stresses. Agriculture accounts for at least a third of

CHAPTER 1

GDP in most LICs, and climate risks arepresenting severe challenges in many of them(Special Focus 2.1).
Productivity-enhancing
measuresintheagricultural sector—including improved irrigation,better access to markets, effective use of fertilizers
and new technologies—could benefit the twothirds of the global poor who earn their livelihoodfrom farming (World Bank Forthcoming).
Improved institutions and policy buffers canenhance resilience to climate change, as they
provide the resources needed to support victims ofextreme events. Investment in climate-smart
infrastructure, combined with appropriate landuse planning, can help mitigate those risks.
Effective social safety nets and productive
inclusion programs also have an important role toplay in protecting the most vulnerable, acting as acountercyclicalbufferduringeconomic
downturns, and facilitating transitions to
productive employment.

43

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 1.2 Emerging market and developing economies1
Albania*
Algeria*
Angola*Argentina
Armenia
Azerbaijan*
Bahrain*BelizeBenin
Bolivia*
Botswana
BrazilBurkina Faso
BurundiCameroon*
Chad*
Chile
Colombia*
Congo, Dem. Rep.
Congo, Rep.*
Costa Rica
Côte d’Ivoire
Ecuador*Equatorial Guinea*
Ethiopia
Gabon*
Gambia, The
Ghana*
GuatemalaGuineaGuinea-Bissau
GuyanaHonduras
Indonesia*
Iran*
Iraq*
Kazakhstan*
Kenya
KosovoKuwait*Kyrgyz Republic
Lao PDR
Liberia

Commodity exporters2
Madagascar
MalawiMalaysia*
Mali
Mauritania
Mongolia
MoroccoMozambique
Myanmar*Namibia
Nicaragua
Niger
Nigeria*
Oman*
Papua New Guinea
Paraguay
Peru
Qatar*
Russia*RwandaSaudi Arabia*
SenegalSierra Leone
South Africa
Sudan*
Suriname
Tajikistan
Tanzania
Timor-Leste*
Togo
Trinidad and Tobago*
Turkmenistan*
UgandaUkraineUnited Arab Emirates*
Uruguay
Uzbekistan
West Bank and Gaza
ZambiaZimbabwe

Afghanistan
Antigua and Barbuda
Bahamas, The
Bangladesh
Barbados
Belarus
BhutanBosnia and Herzegovina
Bulgaria
Cabo VerdeCambodia
China
Comoros
Croatia
Djibouti
Dominica
Dominican Republic
Egypt
El Salvador
Eritrea
EswatiniFiji
Georgia
GrenadaHaiti
Hungary
India
Jamaica
JordanKiribati
LebanonLesotho
Maldives
Marshall Islands
Mauritius
MexicoMicronesia, Fed. Sts.
Moldova, Rep.
Montenegro
Nepal
North Macedonia
Pakistan
Palau

Commodity importers3
PanamaPhilippines
PolandRomania
Samoa
SerbiaSeychelles
Solomon Islands
Sri Lanka
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
Thailand
Tonga
Tunisia
TurkeyTuvaluVanuatu
Vietnam* Energy exporters.
1. Emerging market and developing economies (EMDEs) include all those that are not classified as advanced economies and for which a forecast is published for this report. Dependent
territories are excluded. Advanced economies include Australia; Austria; Belgium; Canada; Cyprus; the Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong
SAR, China; Iceland; Ireland; Israel; Italy; Japan; the Republic of Korea; Latvia; Lithuania; Luxembourg; Malta; Netherlands; New Zealand; Norway; Portugal; Singapore; the Slovak
Republic; Slovenia; Spain; Sweden; Switzerland; the United Kingdom; and the United States.
2. An economy is defined as commodity exporter when, on average in 2012-14, either (i) total commodities exports accounted for 30 percent or more of total goods exports or (ii) exports ofany single commodity accounted for 20 percent or more of total goods exports. Economies for which these thresholds were met as a result of re-exports were excluded. When data were notavailable, judgment was used. This taxonomy results in the classification of some well-diversified economies as importers, even if they are exporters of certain commodities (e.g., Mexico).
3. Commodity importers are all EMDEs that are not classified as commodity exporters.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

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SPECIAL FOCUS 1.1
Investment: Subdued Prospects,
Strong Needs

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S P EC IAL FO CU S 1.1

55

Investment: Subdued Prospects, Strong Needs
Investment growth in emerging market and developing economies (EMDEs) over the next three years is expected to be
subdued and below historical averages. This continues a prolonged, broad-based slowdown after the global financial crisis,
notwithstanding a modest recovery between 2016 and 2018. During the forecast period, EMDE investment growth isexpected to be held back by weak global growth, limited fiscal space against the backdrop of elevated debt, and the presence ofseveral structural constraints. Weak investment is a concern because it will further dampen potential growth, and makeachieving the Sustainable Development Goals more difficult. Depending on country circumstances, the use of appropriate
fiscal and structural reforms could generate upside potential for investment in the medium and long term. For EMDEs withlimited fiscal space, institutional reforms to improve business conditions could help attract private investment. In light ofelevated debt levels, policymakers should also ensure resources are allocated to high quality investment projects and improve
the transparency and efficiency of public investment management systems where necessary.

Recent developments
and prospects
Investment growth in emerging market anddeveloping economies (EMDEs) is below
historical averages and is expected to remain weakover the forecast horizon (Figure SF1.1.1.A).1 In
absolute terms, EMDE investment amounted to$9.7 trillion (nearly one-third of GDP) in 2018.
This Special Focus updates previous work analyzing the drivers and implications of post-crisis
investment weakness in EMDEs (World Bank
2017; Kose et al. 2017; Vashakmadze et al. 2017).
EMDE investment growth reached a modest 4.7
percent in 2018 and is expected to slow (to 3.9
percent) in 2019, before advancing modestly in2020 and 2021. A modest cyclical recovery incommodity exporters is expected to support theinvestment recovery in 2020-21. The outlook for
EMDE investment has been downgraded since
2018, however, amid weaker-than-expected global
activity and softening investor confidence.
Moreover, EMDE investment growth is projected
to remain below historical averages during theforecast period.

Note: This Special Focus was prepared by Dana Vorisek, Naotaka
Sugawara, and Lei Sandy Ye. Research assistance was provided by Liu
Cui and Mengyi Li.
1 Investment is defined as real gross fixed capital formation. Table
SF1.1.1 lists the countries in the investment sample. Together, the 65
EMDEs and 34 advanced economies represent 96 percent of global
GDP in 2018. The 65 EMDEs represent 92 percent of total EMDE
GDP in 2018.

FIGURE SF1.1.1 Investment trends and prospects
Notwithstanding a modest recovery from its 2015 low, EMDE investment
growth remains weak and below historical averages—in the aggregate aswell as in the majority of countries. Investment growth in EMDEs is
projected to advance modestly in the medium term, reflecting a pickup incommodity exporters, but to a rate still below historical averages. The
sluggishness of investment is expected to persist in the long term.

A. EMDE investment growth

B. Share of EMDEs with investment
growth below 2000-18 average

C. Investment growth

D. Long-term investment growthforecasts

Source: Consensus Economics, Haver Analytics, Oxford Economics, World Bank.
A.-C. Investment refers to real gross fixed capital formation (public and private combined). 2010
investment-weighted averages. Sample includes 65 EMDEs and 34 advanced economies (listed inTable SF1.1.1). Due to limited data availability, this special focus covers a smaller set of EMDEs thanthose for which the WBG projects GDP growth in Global Economic Prospects.
A. Shaded areas indicate forecasts.
B.C. Shaded areas indicate global recessions and slowdowns.
D. 10-year-ahead forecasts surveyed in indicated year. Constant 2010 U.S. dollar investmentweighted averages. Sample includes 23 advanced economies and 20 EMDEs (indicated by † in Table
SF1.1.1). For 2010-18, the average of four projections during the year is shown; for 2019, theaverage of two projections during the first half of the year is shown.
Click here to download data and charts.

56

S P EC IAL FO CU S 1.1

The recent modest recovery in EMDE investment
growth follows a prolonged, broad-based slowdown following the global financial crisis.
Investment growth in these economies fell from
11.8 percent in 2010 to a low of 2.8 percent in2015. In well over half of EMDEs, investment
growth has been below country-specific long-term
averages since 2012 (Figure SF1.1.1.B). Thisdiffers from the experience in advanced
economies, where investment growth recovered
rapidly after the global financial crisis and hassince been around its long-term average of 2.3
percent (Figure SF1.1.1.C). For the world,
investment growth is expected to decelerate to 2.7
percent in 2019, from 3.7 percent in 2018, and toremain subdued through 2021, held back bypersistent sluggishness in investment growth inadvanced economies.
The long-term investment outlook is subdued.
The private sector’s 10-year-ahead outlook forinvestment has steadily weakened over the past
decade, for both EMDEs and the world (Figure
SF1.1.1.D; Kose, Ohnsorge, and Sugawara,
forthcoming).2 In early 2019, the 10-year-ahead
outlook for EMDE investment growth was 3.2
percent, nearly 8 percentage points below the mostrecent high in 2010, and more than half apercentage point lower than projected in 2018.
The long-term outlook for EMDEs excluding
China has also been downgraded relative to 2018.
Against this backdrop, this Special Focus examines
the following questions.
••

What were the main drivers of weak postcrisis investment growth in EMDEs?
What are the implications of weak investment
growth in EMDEs and what policy responses
are available?

This Special Focus extends previous analysis ofinvestment in EMDEs in several dimensions(World Bank 2017; Kose et al. 2017). First, it
updates the investment data and provides revised
projections of investment growth. Second, thestudy examines how the drivers of investment
2 The world sample includes 23 advanced economies and 20
EMDEs that together represent 87 percent of global GDP in 2018.
The 20 EMDEs represent 78 percent of total EMDE GDP in 2018.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

growth have changed during the past decade—comparing the drivers in the immediate post-crisis
years to the most recent years, when investment
growth began to recover. Third, it discusses themedium- and long-term consequences of weak
investment growth.
The Special Focus presents the following main
findings. First, investment growth in EMDEs has
risen modestly since bottoming out in 2015,reflecting a cyclical recovery among commodityexporting EMDEs and a fading of country-specificfactors holding back investment in some large
economies. In the medium term, investment
growth is expected to continue to gain ground,although only modestly, and at a pace still below
long-term historical averages. Second, empiricalestimates suggest that during 2015-18, the main
driver of the acceleration in EMDE investment
growth was the terms of trade improvement incommodity-exporting economies. This contrasts
with the multiple cyclical drivers depressing
investment growth in a large number of EMDEs
during 2011-15. Third, weak investment growth
has contributed to weaker potential growth andwill make meeting the Sustainable Development
Goals (SDGs) more challenging. A sustained
improvement in investment growth in EMDEs
requires the use of fiscal, monetary, and structural
policy tools, with specific priorities depending on
country circumstances.

Drivers of investment
growthPost-crisis slowdown
The slowdown in EMDE investment growth from2010 to 2015 reflected external and domestic
factors.3 For commodity exporters, a steep drop in
oil and metals prices between mid-2014 and early2016 and associated adverse terms-of-trade shocks
3 Studying the trends in investment growth is relevant for shortterm analysis. Trends in investment ratios (i.e., investment relative toGDP) are an important complement to trends in investment growth,and are more relevant for long-term analysis on investment andsavings. For the sample of 65 EMDEs used in this note, theinvestment ratio has moderated somewhat, from a post-2000 high of
34.8 percent in 2013 to 33.4 percent in 2018. Excluding China, theinvestment ratio in EMDEs is substantially lower, but it has also
fallen, from a high of 25.4 percent in 2012 to 23.8 percent in 2018.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019were key factors behind their investment
slowdown (Islamaj et al. 2019; Kose et al. 2017;
World Bank 2017; Stocker et al. 2018;
Vashakmadze et al. 2017). Policy uncertainty,
weak activity in advanced economies, and highcorporate leverage also dampened investment in
EMDEs during this period.
Slowing investment growth in EMDEs reflected
decelerations in both public and private
investment growth during the post-crisis period(Figure SF1.1.2.A).4 The two largest commodityexporting economies, Brazil and Russia, suffereddouble-digit investment contractions in 2015
amid deep economic recessions. Investment
growth in commodity-importing economies has
been less volatile, but also moderated after 2010.
An economic policy shift in China toward moresustainable and balanced growth (i.e., morereliance on consumption and less reliance on
investment) contributed significantly to the
EMDE investment growth slowdown (Figure
SF1.1.2.B). Slowing investment growth in China
may also have dampened investment growth inother EMDEs (World Bank 2017). Yet evenexcluding China, investment growth in EMDEs
has slowed since 2010 (Figure SF1.1.2.C).

S P EC IAL FO CU S 1.1

57

FIGURE SF1.1.2 Decomposition of EMDE investment
trendsSlowing investment growth in EMDEs after 2010 reflected decelerations inboth public and private investment growth. By country composition, China
accounts for a large portion of the investment slowdown in EMDEs after
2010, but commodity-exporting economies also contributed. LICs for whichdata is available showed above-trend investment growth in 2016 and 2017,
after a slowdown in 2014-15.

A. Public and private investment
growth in EMDEs

B. Country contributions to EMDE
investment growth

C. Investment growth

D. Investment growth in LICs

Moderate recovery since 2016
The moderate recovery in investment growth since2016 reflects in part a pickup in global
manufacturing and trade that began in mid-2016
and peaked in late 2017. The recovery has beenfurther supported by a rebound in oil and metals
prices in 2017-18, which encouraged capital
expenditures in the commodity-dependent regionsof Latin America and Sub-Saharan Africa.
Commodity exporters. Investment growth in
EMDE commodity exporters accelerated to 2.2
percent in 2017 and 3.2 percent in 2018, after
two years of contraction. In Russia, investment

4 Among the 11 EMDEs that disaggregate private and public
investment in their national accounts, private investment growth
outpaced public investment growth in 2016-18 in some (Bahrain,
Malaysia, Mexico, South Africa, Thailand), while public investment
growth has been faster in others (Bangladesh, Peru). In still othercountries, the trend is less clear. Private investment has accounted forabout three-quarters of total investment, on average, since 2010, in
the EMDEs that disaggregate the two components.

Source: Haver Analytics, International Monetary Fund, World Bank.
A. 2010 investment-weighted averages. Investment refers to real gross fixed capital formation. EMDE
sample includes 63 economies (listed in Table SF1.1.1, except Jamaica and West Bank and Gaza).
B. C. 2010 investment-weighted averages. Investment refers to real gross fixed capital formation.
Shaded areas indicate forecasts. EMDE sample includes 65 economies (listed in Table SF1.1.1).
D. 2010 investment-weighted averages. Sample includes eight LICs: Benin, Burkina Faso, Mali,
Mozambique, Nepal, Senegal, Tanzania, and Uganda.
Click here to download data and charts.

growth rebounded in 2016 and 2017 from a low
associated with sharply declining oil prices andinternational sanctions in 2015. In Brazil,
investment growth accelerated in 2018 as the
economy slowly recovered from a multiyear
recession. Large infrastructure projects aresupporting solid investment in Indonesia.
Improvements in these countries more than offset
deteriorating investment growth in 2018 in otherlarge economies, such as Argentina, where
investment contracted due to financial turmoil,
policy uncertainty, and a severe drought—and theIslamic Republic of Iran, where U.S. economic
sanctions are inhibiting investment.

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Commodity importers. Investment growth incommodity-importing EMDEs also picked up in
2018, to 5.5 percent. In China, private investment
improved in response to policies, which offset
weakness in public investment. In India,
investment firmed as temporary disruptions, suchas those related to the implementation of a goods
and services tax in 2017, faded and credit growth
picked up. Investment in Mexico recovered
modestly in 2018 as trade uncertainty recededwith the announcement of the United StatesMexico-Canada Agreement. In Turkey, however,investment slumped last year, as the country
experienced high market volatility and economic
stress.
Low-income countries. Low-income countries(LICs) with available data initially (during 201013) did not share the investment slowdown of thebroader group of EMDEs (Figure SF1.1.2.D).
However, investment appears to have fallen
sharply, in line with other EMDEs, during the
global financial crisis and the most recent
commodity price bust starting in 2014. The 201415 slowdown was followed by two years of abovetrend growth. In Nepal and Tanzania, two of thelargest LIC economies, investment expanded
rapidly in 2016-17, on post-earthquake
reconstruction and robust construction sector
activity, respectively. All LICs with available datareported solid investment growth in 2017.
Modest medium-term acceleration
Investment growth in EMDEs is expected to dipslightly in 2019, to 3.9 percent, reflecting theresumption of a trend slowdown in investment
growth in China as it rebalances its economy, as
well as temporary factors in several other largecommodity importers. These factors include
policy uncertainty in Mexico (including for thedomestic oil and gas sector) and a challenging post-crisis investment environment in Argentina andTurkey.
In 2020 and 2021, investment growth is projectedto accelerate moderately, supported by faster
growth in commodity exporters, but still fall shortof trend rates. In Brazil, for instance, investment
growth is expected to recover as confidence

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019improves and credit conditions become graduallyless tight. In Russia, investment is expected toaccelerate moderately as public spending on
infrastructure picks up. The acceleration will not
be universal among the largest economies,
however. Through 2021, investment growth inChina is expected to continue its gradualmoderation, to rates well below those of recent
decades. In India, it is expected to grow a slower
pace than in 2018, although investment growth isexpected to remain robust as benefits of recent
policy reforms further materialize.
In addition to country-specific drivers of the
EMDE investment outlook, several broad factors
are expected to influence EMDE investment
growth in the short and medium term.
Easier financing conditions. In the context of anincreasingly dovish stance by the U.S. Federal
Reserve and the European Central Bank, externalfinancing conditions for EMDEs have improved
since late 2018.5 Sovereign bond spreads havefallen, bond issuance has picked up, and recent
data indicate that capital inflows to EMDEs arerecovering. The easier financing environment may
provide a boost to still sluggish investment, at leastin the short term. However, additional financing
must be channeled toward productive uses, so thatit does not simply add to already high governmentand corporate leverage in many EMDEs.
Limited fiscal space and rising debt. Elevated andrising debt levels in EMDEs, including corporate
debt, will weigh on investment growth, especially
if global financing conditions tighten unexpectedly. Government finances in many EMDEs arein a fragile position, with deteriorating debt
dynamics and limited fiscal space (Figure
SF1.1.3.A). In some cases, reforms to improvefiscal space have stalled, while funding of new orincreasing liabilities, such as public sector wage
bills, has put further strain on domestic revenues

5 Many studies have found strong linkages between the U.S.
monetary policy stance and credit cycles in EMDEs. A recent study
finds that the spillovers between accommodative U.S. monetary
policy and foreign bank lending to emerging markets is strongest forthe most risky countries, and within countries, strongest for the mostrisky firms (Bräuning and Ivashina 2018).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

(Brazil, South Africa). Oil exporters continue toface fiscal sustainability challenges. In metals andagricultural producers, weaker-than-envisaged
commodity prices could put further pressure on
already fragile public finances (South Africa,
Zambia). The relationship between limited fiscal
space and sluggish investment may be particularly
strong for countries, including many LICs, wheredebt levels have increased in recent years andinterest payments are absorbing a rising share ofgovernment revenues (World Bank 2019a).
Inefficient management of public finances may
also constrain investment growth in EMDEs.
Unfavorable external economic outlook. External
conditions for EMDE investment are expected to
become less favorable in the medium term (WorldBank 2019a). Growth is projected to ease in major
economies (China, the Euro Area, the UnitedStates) in 2019-21, which may slow investment
and exports in closely-linked EMDEs.
Commodity prices—both energy and nonenergy—are projected to weaken somewhat in2019 (World Bank 2019b). In addition, global
policy uncertainty, including trade policy
uncertainty, remains elevated. Persistent investor
concerns about possible further protectionist tradeactions could reduce the attractiveness of new
investment projects. Generalized market-related
uncertainty could also reduce capital flows to
EMDEs, potentially hindering investment (Figure
SF1.1.3.B).6
Structural factors. In addition to macroeconomic
factors, institutional and structural factors play arole in determining investment growth andinvestment ratios in EMDEs. These factors
include financial sector development andoversight, trade policy, demographic change, andeconomic diversification, among others (WorldBank 2017).
The economic landscape described above suggeststhat drivers of investment growth in EMDEs are

6 FDI is a key channel through which fixed investment is financedin EMDEs. For the EMDEs included in this Special Focus, FDI
inflows dropped from about 3.3 percent of GDP in 2011 to 1.7
percent of GDP in 2017. The trend is similar when China is
excluded. FDI inflows to EMDEs are estimated to have picked up
moderately in 2018, although to a level below historical averages.

S P EC IAL FO CU S 1.1

59

FIGURE SF1.1.3 Drivers of investment growth in EMDEs
Unfavorable external conditions and weak fiscal positions are expected tocontinue weighing on investment growth. Econometric estimates suggestthat the pronounced investment growth slowdown in 2011-15 was, inalmost equal measure, a reflection of weakening domestic output growth, asharp deterioration in terms of trade for commodity exporters, and elevatedprivate debt burdens. The subsequent moderate recovery largely reflected
improving terms of trade for commodity exporters.

A. Fiscal balances in EMDEs

B. FDI inflows to EMDEs

C. Predicted change in EMDE
investment growth, 2011-15

D. Predicted change in EMDE
investment growth, 2015-18

Source: Haver Analytics, International Monetary Fund, International Country Risk Guide, World Bank.
A. Medians within groups. Shaded area indicates forecast. Sample includes 151 EMDEs.
B. Four-quarter (from t-3 to t) moving sum of FDI inflows, divided by annual GDP. Sample includes 54
EMDEs. Last observation is 2018Q4.
C.D. Unweighted averages for 56 EMDEs. Charts show change in contribution of each explanatory
variable to predicted investment growth (defined as coefficient estimate times the realization of thevariable), based on the regression specification in first column of Annex Table SF1.1.1.1. For
presentational clarity, the charts show only the four explanatory variables with the largest
contributions to the predicted change in investment growth.
Click here to download data and charts.

diverse. An econometric exercise using panel datafor 57 EMDEs suggests that over the past two
decades, higher EMDE investment growth was
associated with macroeconomic factors including
higher output growth, stronger capital inflows,
high political stability, stronger terms of trade
growth, and lower private sector debt burdens(Annex SF1.1.1, Annex Table SF1.1.1.1). The
regression results suggest that the pronounced
investment growth slowdown in 2011-15 was, inalmost equal measure, a reflection of weakening
domestic output growth, a sharp deterioration interms of trade for commodity exporters, andelevated private debt burdens (Figure SF1.1.3.C).

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FIGURE SF1.1.4 Implications of weak investment growthin EMDEs
Decelerating investment growth during the post-crisis period has
dampened the pace of convergence in per capita GDP between EMDEs
and advanced economies and has slowed capital accumulation. Slowing
capital accumulation, together with decelerating productivity and changing
demographic conditions, has contributed to weaker potential growth in
EMDEs. Continued weak investment growth will make filling large
investment gaps in EMDEs more challenging.
A. Difference, EMDE and advancedeconomy per capita growth

B. Contribution to potential growth,
EMDEs

C. Spending needs in infrastructure
sectors related to SDGs, World Bank
estimates

D. Additional spending needs insectors related to SDGs, IMF
estimates

Implications and policy
responses
Weak investment to weigh on potential
growthThe prospect that weak investment growth willremain weak over the longer-term, on the heels of
the sharp slowdown in the first half of this decade,raises fundamental concerns about the economic
health of EMDEs. The earlier period of weak
investment growth in EMDEs dampened the paceof convergence in per capita GDP with advanced
economies (Figure SF1.1.4.A). Slowing capital
accumulation also contributed to a deceleration in
potential growth in EMDEs during the past five
years, and capital is expected to continue
detracting from potential growth during the next
decade (Figure SF1.1.4.B; World Bank 2018). In
addition, sluggish investment may have slowed
potential growth indirectly, by eroding
productivity gains embedded in new equipment
and technologies, or in research and development.
Sustained investment pickup needed tomeet the SDGs

Source: Gaspar et al. (2019), Penn World Tables, Rozenberg and Fay (2019), UN Population
Prospects, World Bank.
A. 2010 investment-weighted averages. Investment refers to real gross fixed capital formation (public
and private combined). Shaded areas indicate global recessions and slowdowns. Sample includes 65
EMDEs and 34 advanced economies (listed in Table SF.1.1.1).
B. GDP-weighted averages. TFP = total factor productivity. Shaded area indicates forecasts. Sample
includes 50 EMDEs.
C. D. SDGs = Sustainable Development Goals.
C. Bars show average annual spending needs during 2015-30. “Preferred scenario” is constructedusing ambitious goals and high spending efficiency, and “maximum spending scenario” using
ambitious goals and low spending efficiency. Country sample includes low- and middle-income
countries. Country sample includes low- and middle-income countries, as defined by the World Bank.
The technical appendix of Rozenberg and Fay (2019) provides information on the lcountry sample.
D. For health and education, estimates are the difference between the share of GDP in spending
consistent with high performance and the current level of spending as a share of GDP. For
infrastructure, estimates show spending needed to close the infrastructure gap (roads, electricity, andwater and sanitation) between 2019 and 2030. Gaspar et al. (2019) and IMF (2018) provide more
information on the low-income developing country sample.
Click here to download data and charts.

Although commodity importers benefited fromthe decline in commodity prices, slowing capital
inflows weighed on investment growth. The
subsequent moderate recovery of investment
growth in 2016-18 largely reflected improving
terms of trade for commodity exporters (Figure
SF1.1.3.D).

Despite weak investment prospects, EMDEs havelarge investment needs. Recent analysis by theWorld Bank finds that achieving the SDGs related
to infrastructure (electricity, transport, watersupply and sanitation) and infrastructure-related
climate change costs (flood protection, irrigation)
in low- and middle-income countries will require
an average of investment of $1.5–$2.7 trillion peryear during 2015–30, or 4.5 to 8.2 percent ofthese countries’ combined GDP, depending
on policy choices and the quality and quantityof infrastructure services (Figure SF1.1.4.C;
Rozenberg and Fay 2019). The results highlightthe importance of spending efficiency (i.e., thequality of spending) in achieving the infrastructure-related SDGs. An IMF study of additional
annual spending needed in sectors related to the
SDGs (i.e., health, education, roads, electricity,
and water and sanitation) arrives at estimate of
approximately $2.5 trillion per year. This figure
represents about 4 percent of emerging market
economies’ 2030 GDP and more than 15 percent
of low-income developing countries’ 2030 GDP

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

S P EC IAL FO CU S 1.1

61

TABLE SF.1.1.1 Economies in sample
Emerging market and developing economies (65)

Advanced economies (34)

East Asia and Pacific

Latin America and the Caribbean

Middle East and North Africa

Australia †Cambodia *China *†
Indonesia †Argentina †BelizeBolivia

Algeria
Bahrain
Iran

Austria
Belgium
Canada †Malaysia †Mongolia
Philippines *†Thailand *†Brazil †Chile †
Colombia †Costa Rica

KuwaitLebanon *MoroccoOman

CyprusCzech Republic †Denmark
Estonia †Vietnam *Europe and Central Asia
Albania

Dominican Republic *EcuadorEl Salvador *Guatemala

Saudi Arabia
United Arab Emirates
West Bank and Gaza

FinlandFrance †Germany †GreeceArmenia
Belarus *Bosnia and Herzegovina
Bulgaria *†Honduras
Jamaica
Mexico *†Nicaragua

South Asia
India *†
Sri Lanka *Hong Kong SAR, China †Iceland
IrelandIsraelCroatia *†Hungary *†Poland *†Romania *†Paraguay
Peru †
Uruguay

Sub-Saharan Africa
Benin
Botswana
Burkina Faso

Italy †
Japan †
Korea, Rep. †Latvia †Cameroon
Côte d'Ivoire
Ghana
Kenya

Lithuania †Malta
Netherlands †New Zealand †Mali
Mauritius *Mozambique
Namibia
Nigeria
SenegalSouth Africa
UgandaNorway †Portugal
Singapore †Slovak Republic †Slovenia †Spain †
Sweden †Switzerland †United Kingdom †United States †Russia †Turkey *†Ukraine †* Commodity importers. Each EMDE is classified as a commodity importer or commodity exporter. An economy is classified as a commodity exporter when, on average in 2012-14, either (i)total commodities exports accounted for 30 percent or more of total goods exports or (ii) exports of any single commodity accounted for 20 percent or more of total goods exports. Economies
for which these thresholds were met as a result of re-exports were excluded. When data were not available, judgment was used. This taxonomy results in the classification of some welldiversified economies as importers, even if they are exporters of certain commodities (e.g., Mexico).
† Countries in Consensus Economics' long-term forecast sample in Figure SF1.1.1.D.

(Figure SF1.1.4.D; Gaspar et al. 2019).8
Mobilization of sufficient financing to close
investment gaps in EMDEs has been challenging(United Nations Inter-Agency Task Force on
Financing for Development 2019).
8 In addition, UNCTAD (2014) estimates that additional
spending of $1.5–2.7 trillion per year between 2015 and 2030 isneeded to achieve the infrastructure-related goals in developing
countries, plus about $400 billion for infrastructure investment
related to the health and education goals. The cost estimates provided
by the World Bank, IMF, and UN studies are not comparable,
however. They reflect differences in country samples, subsectors (e.g.,the World Bank study focuses on low-carbon transportation
systems—rail and bus rapid transit—while the IMF study looks atroads), and inclusion of operation and maintenance costs, among
other factors.

Policy responses
The use of a range of policies—counter-cyclicalstimulus measures as well as structural reforms—
could generate upside potential for investment
growth. A multi-pronged approach could
simultaneously boost both public and private
investment.
Fiscal policy measures could help by directly
expanding public investment, where fiscal space isavailable, by reallocating resources from relatively
unproductive areas, and by increasing spending
efficiency. Addressing shortcomings in fiscal
processes, such as inefficient public investment

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management systems and weak fiscal transparency,
could also boost public investment.
Institutional reforms play a key role in creating
conditions conducive to attracting investment(Vashakmadze et al. 2017). Relevant reforms
could address country-specific impediments suchas business environment constraints, high businessstartup costs, labor and product market
inefficiencies, and weak corporate governance. In
countries where financial development is weak,financial deepening could boost investment,
although risk indicators must be monitored to
avoid financial instability (Kiyotaki and Moore
2005; Sahay et al. 2015). For policymakers,
providing clarity about the direction of policy andrefraining from adopting policies with highly
uncertain outcomes could help support private
investment. Membership in trade and integrationagreements could help improve the business andinvestment climate and boost investment growthin some EMDEs, perhaps particularly so if suchagreements boost integration in global value
chains and help lower the cost of tradable
investment goods (i.e., machinery andequipment), for which EMDEs still facesignificantly higher costs than advanced economies(IMF 2019; UNCTAD 2013).
In the long term, many commodity-exporting
EMDEs need to diversify their economies in orderto reduce the vulnerability of private investment tonatural resource price volatility. EMDEs will alsoneed to develop policies to offset the long-term
investment dampening effects of population aging(Aksoy et al. 2019).

Annex SF1.1.1 EmpiricalanalysisFramework
A fixed effects panel regression that includes anarray of explanatory variables as proxies for thecost and returns to capital is used to estimate thecorrelates of investment growth in EMDEs. The
framework is consistent with an investment modelsuch that the marginal return on capital equals thecost of capital (e.g., Hall and Jorgenson 1967).
Higher costs of capital—whether due to higher

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019risk premia or higher risk-free real interest rates—
would reduce investment, whereas higher
productivity would raise it. The returns to capitalare proxied by output growth and terms of trade
growth. The risk premium is proxied by measuresof political uncertainty. The cost of financing
investment is proxied by capital inflows, private
credit, and the business climate.
The weakness in investment growth has coincidedwith weakness in output growth and adeteriorating growth outlook for EMDEs (Didier
et al. 2015). Weak growth prospects signal
reduced opportunities for firms selling their goods
and services and thus lead to lower investment.
This is captured in the “accelerator model,” whichassumes that firms aim to maintain a constantcapital-to-output ratio, in line with their
expectations of future output growth (Jorgenson1963). Recent work on advanced economies has
shown that output growth captures broad trends
in investment, but actual investment often falls
short of the model predictions (Leboeuf and Fay2016). In the regression framework used in thisspecial focus, weak growth prospects are proxiedby lagged output growth to reduce concerns about
endogeneity.
Sharp decreases in commodity prices may havecaused large post-crisis swings in terms of trade(Baffes et al. 2015). Terms of trade developments
shape growth prospects for both commodity
exporters and importers, and help control for theeffects of commodity prices. In commodityexporting economies, terms of trade movements
are dominated by commodity price fluctuations.
Weaker terms of trade decreases return toinvestment, especially in commodity-related
projects. It also reduces firms’ net worth,tightening their financial constraints.
Elevated private debt may have an adverse impact
on firms’ investment for two reasons. First, since
the benefits from investment are shared between
the owners and creditors of leveraged firms, highdebt can discourage investment. Second, high debt
may reflect misallocation of capital to lessinnovative firms. This is particularly pronounced
for investment in an environment of weak growthprospects and investment in long-lived assets,
including real estate.1 The regression includes theG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019lagged private sector credit-to-GDP ratio to proxyfor household and firm debt burdens and theadverse effects of debt overhang. Although theflow of debt may be used to finance investment,
the level of debt is a measure of leverage and is
expected to be negatively correlated withinvestment. For EMDEs, Borensztein and Ye(2018), Magud and Sosa (2015), and Das andTulin (2017) show that lower debt service capacity
or higher leverage are associated with weaker
investment.
Capital inflows, including foreign direct
investment, can lift growth both by financing
investment and by acting as a catalyst for
additional domestically financed investment. FDI
may also have indirect, productivity-enhancing
collateral benefits (Kose et al. 2009). These
include pressures for better institutions, financial
development, and more stabilizing macroeconomic policies. The absorption by domestic
firms of the new technology or managerial
practices introduced by FDI can stimulatedomestic investment, provided financing isavailable. Forays into new export markets bydomestic firms, encouraged by FDI, may require
up-front investment. Foreign portfolio inflows
may be associated with higher physical investment
by way of risk diversification and lower cost ofcapital (Henry 2007). Although capital flows often
funds purposes other than investment, theregression includes the change in capital inflows
into the reporting economy (in percentage points
of GDP) as a proxy for external financing sources,
among several other financing sources, ofinvestment.
A number of studies have highlighted theimportance of the institutional environment forinvestment (e.g., Lim 2014; Qureshi, DiazSanchez, and Varoudakis 2015). Post-crisis,
private investment recovered faster in countries
withmore developed financial market
infrastructure, and higher institutional quality(e.g., governance quality) has been associated withhigher investment. To capture the businessclimate, a dummy variable is included for large

1

For related studies, see Hennessy (2004) and Borio et al. (2015).

S P EC IAL FO CU S 1.1

reforms (two standard deviation improvements)
captured by one of four governance indicators(regulatory quality, government effectiveness, ruleof law, and control of corruption).
When firms are uncertain about future demandand future policies, their expected risk-adjusted
returns may not exceed the costs of capital or the
returns on liquid financial assets, holding backinvestment (Bloom, Bond, and Van Reenen2007). In macroeconomic studies, the uncertainty
generated by political risk has been shown toweigh on investment (Julio and Yook 2012). The
regression includes, as a proxy for politicalstability, Political Risk Services’ International
Country Risk Guide (ICRG) political stability
rating. A higher index indicates greater politicalstability. The ICRG political risk index is aweighted average of ratings of government
stability, socioeconomic conditions, investment
profile, corruption, the role of military in politics,
law and order, external and internal conflict,religious and ethnic tensions, democratic
accountability, and bureaucratic quality. Lastly,
the regressions control for sudden stops in capital
inflows and for country-fixed effects. Since several
sudden stops occurred during global recessions
and slowdowns, they also capture the impact ofthese episodes.
Data
Investment data are drawn from Haver Analytics
and the World Bank. Investment growth denotes
the annual growth rate of real gross fixed capitalformation. Data on political risk ratings comefrom the ICRG. Data on governance come fromthe World Bank’s Worldwide GovernanceIndicators. Other macroeconomic data used in theeconometric analysis are drawn from the WorldBank and the International Monetary Fund.
Methodology
A fixed effects panel regression is used to estimate
the correlates of investment growth in 57 EMDEs
for the period 1998-2018. The econometricframework is similar to that of Nabar and Joyce(2009). However, the emphasis in this Special
Focus is on investment growth, as a criticalcomponent of overall output growth (ultimately,

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ANNEX TABLE SF.1.1.1.1 Correlates of investment growth(1)(2)
EMDEs:
includingpolitical risk
events

(3)

(4)

(5)

GMM

Advanced
economies

investment

PrivateDependent variable: investment growth

EMDEs

Lagged real GDP growth (percent)

0.453***

0.466***

0.792***

1.074***

0.440**[0.128][0.126][0.179][0.232][0.198]Change in capital inflows (percentage points
of GDP)

0.122***

0.115**

0.116**

0.041

0.192***[0.043][0.044][0.044][0.031][0.046]

Political stability

0.279**

0.218**

0.294*-0.1180.402**[0.107][0.100][0.138][0.099][0.190]-0.284***-0.288***-0.049-0.051***-0.358***[0.038][0.037][0.037][0.015][0.055]0.233***

0.229***

0.255***

0.188

0.336***[0.065][0.066][0.036][0.113][0.080]6.493**

6.276**

5.847**-1.1915.148**[2.468][1.757][1.176][2.244]Lagged credit-to-GDP ratio (percent of GDP)

Terms of trade growth (percent)Large reform spurt[2.447]
Large deterioration in political stability-3.819***[1.348]Sudden stop dummy-3.553**-3.662***-3.266**-3.922**-3.165*[1.383][1.351][1.075][1.564][1.728]-2.5751.837-14.38115.443*-7.254[7.216][6.857][9.339][8.233][11.901]

Number of observations

1,057

1,057

1,057

548

878

R-squared

0.187

0.195

0.197

0.132

Number of economies

57

57

34

56

Constant

57

Note: Results of a panel regression with country fixed effects for 57 EMDEs during 1998-2018. Dependent variable is real investment growth. Lagged output growth, capital inflows, politicalstability, and terms of trade growth are expected to be positively associated with investment growth, and conversely the case for lagged credit to GDP and sudden stops. Column (1) denotes
the baseline regression. Column (2) controls for episodes of large deterioration in political stability, as defined by standard deviation below the historical mean. Column (3) shows results
using a generalized methods of moments (GMM) regression method. The Wald chi square statistic is 103.4. Column (4) runs the same baseline regression for advanced economies. Column(5) replaces dependent variable with private investment growth. All regressions control for sudden stops in capital inflows and country fixed effects. The regressions exclude 8 EMDEs in thisSpecial Focus due to data availability. Capital inflows are defined as the sum of FDI, portfolio flows, and other investment (including banking) flows. Reforms in governance are based on theWorldwide Governance Indicators (WGI). Political stability denotes the International Country Risk Guide’s (ICRG) political risk rating. 2018 data for capital inflows where not available, termsof trade, and governance are assumed to be same as previous year due to data availability. Robust standard errors in brackets. *** p<0.01, ** p<0.05, * p<0.1

the source of rising living standards), rather thanchanges in the investment-to-GDP ratio, which
would only capture changes in investment growth
relative to output growth. This is in line withrecent studies on advanced economies (Banerjee,
Kearns, and Lombardi 2015; Barkbu et al. 2015;
Kothari, Lewellen, and Warner 2015) or forindividual EMDEs (Anand and Tulin 2014). The
results are robust to adding dummies for periodsof high political risk events, using the generalizedmethod-of-moments estimator, and using private
investment growth as a dependent variable. The
results for advanced economies are shown as well.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

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SPECIAL FOCUS 1.2
Currency Depreciations, Inflation,
and Central Bank IndependenceG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

S P EC IAL FO CU S 1.2

Currency Depreciations, Inflation,
and Central Bank Independence
Financial market turbulence in 2018 illustrated, once again, that emerging market and developing economies(EMDEs) continue to face the risk of destabilizing exchange rate movements. These stress episodes often compel
central banks to tighten policy to lessen currency pressures and fend off inflationary pressures despite slowing
growth. To design appropriate policies, it is important to quantify the exchange rate pass-through to inflation
associated with different domestic and global shocks and with different country characteristics. The pass-throughto inflation tends to be largest when currency movements are triggered or amplified by monetary policy action.
In contrast, the pass-through is significantly smaller when central banks pursue a credible inflation target,
operate in a flexible exchange rate regime, and are independent from fiscal authorities. This highlights a selfreinforcing feedback loop between central bank credibility, exchange rate and price stability. Increased
participation in global value chains and a lower share of imports invoiced in foreign currencies can also be
associated with lower exchange rate pass-through, underscoring the need for complementary policies.

Introduction
Many emerging market and developing economies(EMDEs) confronted significant currency
depreciations last year, reflecting a rise inadvanced-economy yields, a strengthening in the
U.S. dollar, and an increase in investor risk
aversion amid financial stress in some countries.
Currency pressures were most pronounced in
Turkey and Argentina, due to acute concerns
about monetary policy frameworks and debt
sustainability. However, other EMDEs also
suffered from sharp exchange rate depreciations,particularly countries with large external financing
needs and those unable to maintain misaligned
currency pegs or other forms of currency
arrangements. In response, central banks werecompelled to tighten monetary policy in order torestore market confidence: in the last quarter of
2018, the number of EMDEs hiking policy
interest rates was four times larger than thenumber of EMDEs cutting them (Figure
SF1.2.1.A). Currency pressures were accompaniedby accelerating inflation, with a higher passthrough to consumer prices in countries with thelargest depreciations and rising concerns about anerosion of central bank credibility (Figure
SF1.2.1.B).

Note: This Special Focus was prepared by Marc Stocker, Jongrim
Ha, and Hakan Yilmazkuday. Research assistance was provided by
Julia Norfleet and Heqing Zhao.

Despite easing global financing conditions since
the start of 2019, the possibility of new episodesof financial market stress, broad-based capitaloutflows, and sharp exchange rate depreciations
remain among the most prominent risks to
EMDE prospects (Chapter 1). While flexible
exchange rates can serve as a shock absorber andkeep growth on a balanced and sustainable pathover the medium term, sudden sharp currency
depreciations can jeopardize price stability,
especially when inflation expectations are poorly
anchored as they tend to be in many EMDEs(Kose et al. 2019). In the presence of foreigncurrency-denominated debt, currency depreciations can also raise debt burdens and financial
stability concerns. These considerations help
explain the greater propensity of central banks to
respond to currency movements in EMDEs thanin advanced economies, sometimes to a greater
extent than is strictly needed to stabilize output
growth and maintain low inflation (Calvo andReinhart 2002; Ball and Reyes 2008).
Since large exchange rate movements are more
frequent in EMDEs than in advanced economies,
a rigorous assessment of the exchange rate passthrough to inflation in EMDEs is a critical input
into policymaking in those countries. This Special
Focus provides an empirical analysis of theexchange rate pass-through ratio (ERPTR) to
inflation, defined here as the percentage increasein consumer prices associated with a 1-percent
depreciation of the effective exchange rate one

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FIGURE SF1.2.1 EMDE exchange rates, monetary policy
rates, and inflation in 2018
Central banks have responded to episodes of currency depreciations in2018 by hiking policy interest rates. Inflation rose sharply in countries
where currency pressures were most pronounced.
A. Frequency of currency
depreciations and policy interest
rate changes in EMDEs

B. Currency depreciations andinflation in EMDEs in 2018

Source: Haver Analytics, World Bank.
Note: EMDEs = emerging market and developing economies.
A. Depreciations are monthly declines in the nominal effective exchange rate of more than 5 percent
on an annualized basis. Net interest rate hikes are the number of policy interest rate hikes minus thenumber of interest rate cuts in each month. Sample includes 68 EMDEs.
B. The horizontal axis shows cumulative change in the nominal effective exchange rate (NEER) of
more than 5 percent over the period January to December 2018. Vertical axis shows consumer priceinflation in December 2018. Dotted line shows second order polynomial trend. Sample includes 28
EMDEs.
Click here to download data and charts.

year earlier. This pass-through ratio is expected to
be positive, on average, as a depreciation would
tend to be accompanied by rising inflation.
Specifically, this Special Focus examines thefollowing questions:•

How does the exchange rate pass-through varyacross countries and over time?

•

Does the exchange rate pass-through dependon the nature of the shock?

•

What country characteristics are associatedwith smaller pass-throughs?

The main conclusions are as follows. First, large
depreciation episodes—defined as nominal
effective depreciations of more than 10 percent ina quarter—continue to be associated, on average,
with more significant increases in consumer priceinflation in EMDEs than in advanced economies.
In both country groups, larger depreciations tend
to be followed by larger pass-through ratios.
Second, the relationship between inflation andcurrency movements depends on the nature of theinitial shock. Monetary policy shocks, such as an
unexpectedly loose policy stance contributing tocurrency depreciation and accelerating inflation
and activity, are more closely associated with larger
exchange rate pass-throughs than any othershocks. Third, pass-throughs are generally smaller
in countries with greater global value chain
integration and lower share of foreign-currency
invoicing. They are also smaller in countries withmore flexible exchange rate regimes and a credible
commitment to an inflation target. This, in turn,facilitates the central bank’s task of maintaining
low inflation and makes exchange rate movementsa more effective buffer against external shocks.
This Special Focus complements the existing
literature by documenting nonlinearities inexchange rate pass-through depending on themagnitude and direction of the exchange rate
movement. It also extends, on the basis of a larger
and more EMDE-oriented sample than used inprevious studies, a recent literature thatemphasizes the importance of the nature of theinitial shock and of structural country features forthe transmission of exchange rate movements to
inflation.
The Special Focus highlights that central banksneed to consider not only the source of exchange
rate movements but also the crucial role that theirsubsequent policy responses play in anchoring
inflation expectations and lowering the eventual
pass-through to domestic prices. There is a riskthat a central bank that underestimates theexchange rate channel in the transmission of its
policy actions might maintain an excessively tight(or loose) monetary policy stance relative to whatis needed to maintain low inflation and stabilize
output growth. This could lead to excessive
fluctuations in activity and make the anchoring of
inflation expectations more difficult.

Pass-through acrosscountries and over time
Channels of transmission from exchange rate toinflation. The pass-through of currency
depreciations to inflation is typically incomplete,with the effect dissipating through the supply
chain. The pass-through to consumer prices goes
through various channels, from direct effects
through commodity and other import prices, toG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019indirect effects through wage formation and profit
markups (Bacchetta and van Wincoop 2003;
Burstein and Gopinath 2014; Ito and Sato 2008;
McCarthy 2007). Distribution costs, firms’internal pricing, and inventory management canalso drive a wedge between producer andconsumer prices and impact the size and speed ofthe exchange rate pass-through (Alessandria,
Kaboski, and Midrigan 2010; Berger et al. 2012;
Copeland and Kahn 2012).
The size and speed of the impact of exchange rate
movements on domestic inflation depend on
several factors. These include competition among
importing and exporting firms (Amiti, Itskhoki,
and Konings 2016), the frequency of priceadjustments (Devereux and Yetman 2003;
Corsetti, Dedola, and Leduc 2008; Gopinath andItskhoki 2010), wage bargaining structures (Aron,
Macdonald, and Muellbauer 2014), thecomposition of trade (Campa and Goldberg
2010), and the share of trade invoiced in foreign
currencies (Casas et al. 2017; Gopinath 2015).
Credible monetary policy frameworks that support
well-anchored inflation expectations have also
been associated with less pass-through toconsumer prices (Carrière-Swallow et al. 2016;
Gagnon and Ihrig 2004; Reyes 2004; SchmidtHebbel and Tapia 2002; Taylor 2000). A recent
strand of the literature has emphasized theimportance of identifying the underlying cause ofcurrency movements when assessing pass-throughratios (Comunale and Kunovac 2017; Forbes,
Hjortsoe, and Nenova 2017, 2018; Shambaugh2008).
Correlation between exchange rate movements
and inflation over time. Co-movement between
exchange rate and consumer price developments
has varied considerably over time. For advanced
economies, the median correlation became
positive during the late 1990s (+0.4 in 2000),during the mid-2000s (+0.2 in 2007), and again
during the mid-2010s (+0.5 in 2014)—periods
marked by unusually large monetary policy shocks
or heightened uncertainty over policy actions(Figure SF1.2.2.A). In contrast, correlation rates
were close to zero during the recovery in the early
2000s and 2017-18, and significantly negative
during the global financial crisis (-0.5 in 2008-09)

S P EC IAL FO CU S 1.2

71

FIGURE SF1.2.2 Correlation between inflation andeffective exchange rate changes
Correlations between inflation and exchange rate movements varyconsiderably over time.

A. Advanced economies: Correlation

B. EMDEs: Correlation

Source: World Bank.
Note: EMDEs = emerging market and developing economies.
A.B. Correlation over a three-year rolling window between inflation and nominal effective exchange
rate depreciations in the same quarter. The sample includes 51 economies. The median andinterquartile range are for three-year window correlation during 1998-2018.
Click here to download data and charts.

—periods marked by shifts in domestic or global
demand conditions.
Among EMDEs, the median correlation also
moved close to zero during the economic recovery
in the early 2000s and during the global financial
crisis, but it became increasingly positive after
2010 amid deteriorating supply-side conditions inmany countries, including commodity exporters
facing the end of the commodity supercycle(Baffes et al. 2015; Figure SF1.2.2.B). Shifts in thecorrelation between exchange rate and consumer
price movements is consistent with the notion thatdifferent shocks as well as country-specificcharacteristics can modify the response of inflation
to currency movements.
Events of large exchange rate movements. The
event study presented in this section explores
episodes of large exchange rate fluctuations,defined as quarterly movements in (tradeweighted) nominal effective exchange rates inexcess of 5 percent across 34 advanced economies
and 138 EMDEs during 1970-2018. By focusing
on large exchange rate swings, the study is more
likely to be successful in detecting related changes
in prices throughout the entire production chain
and in identifying potential nonlinearities thatwould cause larger ERPTRs in the event of sudden
marked depreciations. By allowing for both

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE SF1.2.3 Pass-through during significant
currency depreciations
The frequency and severity of depreciation episodes have declined overrecent decades. The median pass-through associated with large currency
depreciations has dropped as well in EMDEs but remains higher than inadvanced economies.

A. Frequency of significant exchange
rate depreciations: Advanced
economies

C. Pass-through from depreciations of
5 to 10 percent

B. Frequency of significant exchange
rate depreciations: EMDEs

D. Pass-through from different
depreciation episodes, 1998-2017

Source: World Bank.
Note: Depreciations are defined as negative quarterly changes in the nominal effective exchange
rate. The sample comprises 34 advanced economies and 138 EMDEs. C.D. Pass-throughs aredefined as the change in consumer prices after one quarter divided by the depreciation of the nominal
effective exchange rate. The markers refer to the median pass-through.
C. The bars show the interquartile range of pass-throughs.
Click here to download data and charts.

depreciations and appreciation events, passthroughs can be estimated conditional on the sizeand direction of the exchange rate movement.
This study identifies 2,323 depreciation eventsand 5,514 appreciation events in EMDEs and 242
depreciation events and 706 appreciation events inadvanced economies (Figure SF1.2.3.A). The
median depreciation across all events amounted to-10 percent in EMDEs and -8 percent foradvanced economies, while the medianappreciation amounted to 6 percent across the twogroups.
The frequency and severity of large currency
depreciations have declined over the past two

decades, particularly in EMDEs (Figure
SF1.2.3.B). Prior to 1998, such episodes clusteredaround periods of broad-based U.S. dollar
appreciation, often associated with a tightening of
U.S. monetary policy. In some cases, these led tofull-blown currency or debt crises, particularly in
Latin America during the 1980s and the early to
mid-1990s, and in Asia and Eastern Europe
during the second half of the 1990s. The
incidence of currency crises has diminished since
the early 2000s, with depreciations in excess of 20
percent affecting less than 1 percent of EMDEs,
on average.
ERPTRs during large depreciations. The event
study suggests a broad-based decline in passthrough among EMDEs over the past two decades(Figure SF1.2.3.C). Median estimates of the samequarter pass-through of currency depreciations of
5-10 percent per quarter dropped from +0.4 in the
period 1980-98 to around +0.1 since 1998
(meaning that a 10 percent depreciation in the
median EMDE triggered a 1 percent increase in
consumer prices in the same quarter). In advanced
economies, the median pass-through for similar
depreciations is close to zero for both periods.
Depreciations of 10-20 percent in a given quarter
continue to be accompanied by a larger
pass-throughs, with median values of +0.1 foradvanced economies and +0.2 for EMDEs since1998 (Figure SF1.2.3.D). Depreciations in excess
of 20 percent were associated with pass-throughsof around +0.4 in both groups of countries.
The reduced frequency of large depreciations andsmaller pass-throughs over the past two decades
may have common causes: enhanced monetaryand fiscal policy frameworks, more flexible
exchange rate regimes, accumulations of foreignexchange reserves, and better external debt
management (Frankel, Parsley, and Wei 2005).
Pass-throughs remained larger among EMDEs
with less flexible exchange rate regimes (thosedevaluing from currency pegs or other forms ofcurrency arrangements) and those without
inflation-targeting central banks.
ERPTRs during large appreciations. Appreciation
episodes were generally associated with positive,
but smaller, pass-throughs compared toG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019depreciations of the same magnitude, with medianvalues of +0.02 for advanced economies and
EMDEs for appreciations of 5-10 percent, andonly slightly larger for appreciations of 10-20
percent. These results may indicate that currency
appreciations induce a weaker response fromimport and consumer prices than similarly sized
depreciations (Brun‐Aguerre, Fuertes, andGreenwood‐Nimmo 2017). However, large
currency appreciations are also rare events, making
rigorous conclusions about such asymmetriceffects difficult to establish in this context.
Overall, the results appear to point to the presenceof possible nonlinearities in the relationshipbetween exchange rate movements and inflation,
including in EMDEs (Caselli and Roitman 2016).

Pass-through to inflation
and underlying shocks
The event study documents wide cross-country
and time variation in the relationship between
exchange rate movements and inflation. Thissection explores this variation further by
estimating ERPTRs conditional on the underlying
shocks as well as country-specific characteristics.
Empirical approach. Exchange rate pass-throughratios are estimated for 29 advanced economies
and 26 EMDEs over the periods 1971Q1 to
1997Q4 and 1998Q1 to 2017Q4 in countryspecific Bayesian factor-augmented vector
autoregression (FAVAR) models (see Annex 1 fordetails).1 The models include a global block(featuring global inflation, global output growth,and oil price changes) and a domestic block(featuring inflation, output growth, changes innominal effective exchange rates, and monetary
policy rates or equivalent short-term nominalinterest rates). The identification strategy is basedon the following sign and timing assumptions:

1 The model framework used here—a FAVAR with sign
restrictions to identify structural shocks—accounts for theendogenous nature of exchange rate movements by identifying truly
structural shocks that are, by construction, orthogonal to each other.
This reduces potential estimation bias due to simultaneousinteractions between variables.

S P EC IAL FO CU S 1.2•

A
positivemonetary
policyshock(corresponding to an unexpected tightening ofmonetary policy) initially increases thedomestic interest rate and appreciates thedomestic currency, while it decreases domestic
output growth and inflation.

•

A positive country-specific supply or demand
shock increases country-specific output
growth. A country-specific supply shock
reduces domestic inflation, whereas a countryspecific demand shock increases it.

•

A positive exchange rate shock (corresponding
to an appreciation) only assumes a change inthe exchange rate, while its impact on otherdomestic variables is left unrestricted.

•

A positive global demand shock triggers asimultaneous increase in global output
growth, global inflation, and oil prices.

•

A positive global supply shock leads to higher
global output growth and oil prices but lower
global inflation.

•

A positive oil price shock induces an increasein oil prices and global inflation but a drop in
global output growth.

•

Global shocks can have contemporaneous
effects on domestic variables, but domestic
shocks can only influence global variables witha lag.

A two-step procedure is applied to measure shockspecific exchange rate and inflation responses tothese shocks, and are mapped separately from
impulse response functions. Second, the passthrough is defined as the cumulative impulse
response of consumer price inflation relative to theimpulse response of the effective exchange rateover one year. A positive pass-through ratio
indicates that a shock triggering a currency
depreciation is followed by an increase in
consumer prices, as is generally expected. A
negative value means that a shock triggering acurrency depreciation is followed by a decline in
consumer prices.

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE SF1.2.4 Variance decompositions of exchange
rate movements, 1998-2017•

Domestic shocks. Monetary policy tightening
is followed by currency appreciations in alladvanced economies and, to an even greater
extent, in EMDEs, particularly those with
inflation-targeting central banks and somecommodity exporters (Brazil, Colombia, andSouth Africa). Stronger domestic demand isaccompanied by currency appreciations as
well, but the impact is statisticallyinsignificant after one year in most cases.
Changes in domestic supply conditions havemixed effects, consistent with the literature on
productivity shocks (Alfaro et al. 2018;
Corsetti, Dedola, and Leduc 2008).

•

Global shocks.2 In EMDEs, domestic
currency appreciations are more likely in thewake of a positive global demand shock,possibly reflecting the U.S. dollar depreciationthat typically accompanies global upturns andcapital inflows to EMDEs, particularly thosewith current account deficits (Avdjiev et al.
2018). A positive global supply shock has
mixed effects, with currency depreciations
observed among some EMDEs that run
current account surpluses (for example,
China) and appreciations among somecommodity exporters (for example, Brazil,
Colombia, Malaysia, and South Africa).
Rising oil prices also tend to be associatedwith currency appreciations in oil-exporting
economies and with depreciations in some oil
importers.

Domestic shocks account for about two-thirds of the variation in exchange
rates in the median advanced economy and more than half in the median
EMDE after one year. Monetary policy shocks have contributed most to
exchange rate variations.

A. Variance decomposition

B. Variance decomposition: EMDEs

Source: World Bank.
Note: Median share of country-specific exchange rate variance accounted for by global, domestic,
and exchange rate shocks based on country-specific factor-augmented vector autoregression models
estimated for 29 advanced economies and 26 EMDEs over 1998-2017. Bars show the interquartile
range and markers represent the median across economies. EMDEs = emerging market anddeveloping economies.
Click here to download data and charts.

Estimated exchange rate responses to shocks.
Empirical studies have shown that certain
macroeconomic fundamentals have some, albeit
limited, predictive power over exchange rate
movements. These fundamentals include changes
in relative business cycle positions, monetary
policy stances, risk premiums, and terms of trade(Ca’Zorzi and Rubaszek 2018; Cheung et al.
2017). Periods of domestic output or investment
contraction are often associated with currency
depreciations (Cordella and Gupta 2015; Landon
and Smith 2009; Campa and Goldberg 1999).
Monetary policy easing tends to lead to currency
depreciations, with a change in interest rate
differentials unfavorable to the domestic currency
putting downward pressure on its value (Chinn
and Meredith 2005; Engel 2016). Rising risk
premiums and heightened sovereign default risks
tend to trigger depreciation pressures (Foroni,
Ravazzolo, and Sadaba 2018). Finally, nominal
exchange rates can respond to terms of trade
shocks, particularly in commodity-exporting
countries with flexible currency regimes(Aizenman, Edwards, Riera-Crichton 2012;
Schmitt-Grohé and Uribe 2018).
Focusing on the period 1998-2017, the responseof nominal effective exchange rates one year after
different shocks are as follows:

Relative contributions of global and domestic
shocks to exchange rate movements. Domestic
factors are the main drivers of exchange rate
movements, accounting for about two-thirds ofcurrency movements in advanced economies andmore than one-half in EMDEs over the past two
decades (Figure SF1.2.4.A). Changes in monetary
policy play a particularly prominent role (Figure
SF1.2.4.B). Although the direction and magnitudeof the impact of global shocks vary substantiallyacross countries, global shocks explain around 7
percent of the variance of currency movements in
2 The median impact of global shocks on exchange rates is close tozero across countries, since one country’s currency depreciation is, bydefinition, another’s appreciation.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019the median advanced economy and up to 16
percent in the median EMDE. About one-quarterof currency movements are accounted for bychanges in other (unmeasured) factors, such as
sovereign and private sector risk premiums. This isconsistent with a significant impact of
expectations about sovereign default risks on
exchange rate dynamics (Alvarez, Atkeson, andKehoe 2009; Foroni, Ravazzolo, and Sadaba2018).

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75

FIGURE SF1.2.5 Shock-specific pass-throughs, 19982017
The exchange rate pass-through is large and positive when currency
movements result from monetary policy shocks. It is smaller when currency
movements are associated with changes in domestic supply conditions
and negative when they are associated with changes in domestic demandconditions. Exchange rate pass-throughs vary widely when driven by
global shocks.
A. Monetary policy shocks

B. Domestic demand shocks

C. Domestic supply shocks

D. Global demand shocks

E. Oil price shocks

F. Global supply shocks

Estimated ERPTRs. Empirically, the following
pattern of shock-specific one-year exchange ratepass-through ratios emerge:•

Domestic shocks. Domestic shocks accountfor over half the variance of inflation andexchange rates in most countries but areassociated with different ERPTRs dependingon their source. Monetary policy shocks are
generally associated with large, positive
ERPTRs that are statistically significant innearly all advanced economies and EMDEs.
This means that currency appreciations
triggered by monetary policy tightening tend
to be followed by significantly slower inflation
after one year, as the dampening impact of
declining import prices is compounded by theeffect of decelerating demand and activity.
Median values since 1998 are estimated to be+0.2 for advanced economies and +0.3 for
EMDEs (Figure SF1.2.5.A). Domestic demand
shocks are associated with small, negative
ERPTRs that are statistically insignificant formost advanced economies and EMDEs(Figure SF1.2.5.B). In other words, thebuildup of domestic inflationary pressureswhendomestic
demandstrengthens
unexpectedly could more than offset thedisinflationary impact of the accompanying
currency appreciation. Median values of the
ERPTRs are at around -0.07 for bothadvanced economies and EMDEs. Domestic
supply shocks are associated with positive
ERPTRs with lower median values thanmonetary policy shocks (less than +0.1 foradvanced economies and EMDEs; Figure
SF1.2.5.C). However, most of these estimates
are insignificant, with wide variations acrosscountry groups, largely reflecting the

Source: World Bank.
Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of
consumer price inflation to the one-year cumulative impulse response of the exchange rate change
estimated from factor-augmented vector autoregression models for 29 advanced economies and 26
EMDEs over 1998-2017. A positive pass-through means that a currency depreciation is associatedwith higher inflation. Bars show the interquartile range and markers represent the median acrosscountries.
Click here to download data and charts.

heterogenous exchange rate response to thesetypes of shocks.
•

Global shocks. Global shocks account for asmaller proportion of the variance of exchange
rate movements and are associated withsignificant variations in estimated ERPTRs,

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FIGURE SF1.2.6 Average pass-throughOver the past two decades, the average pass-through dropped close tozero in advanced economies and somewhat below +0.1 in EMDEs, albeit
with considerable differences across countries.

A. Average pass-throughB. Average pass-through: EMDEs

Source: World Bank.
Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of
consumer price inflation to the one-year cumulative impulse response of the exchange rate change
estimated from factor-augmented vector autoregression models for 29 advanced economies and 26
EMDEs over 1998-2017. A positive pass-through means that a currency depreciation is associatedwith higher inflation. Bars show the interquartile range and markers represent the median acrosscountries. Shock-specific pass-throughs are aggregated using shares of currency movements
accounted for by each type of shock as weights. EMDEs = emerging market and developing
economies.
A. Full sample estimations are over 1971 to 2017 but can vary at the country level depending on data
availability.
Click here to download data and charts.

reflecting the fact that these shocks have, bydefinition, diverging effects on individual
country exchange rates (i.e., one country’s
currency
depreciationisanother’sappreciation). Estimated ERPTRs associatedwith global demand shocks are statisticallyinsignificant in over one-fifth of advanced
economies and one-third of EMDEs, but are
mostly positive across both groups (Figure
SF1.2.5.D). Oil price shocks tend to be
associated with positive ERPTR for the
median energy exporters and a negative one
for the median advanced economy, though
not for the United States (partly due to thenegative correlation between the U.S. dollar
and oil prices; Figure SF1.2.5.E). However,estimates are insignificant in over one-half ofadvanced economies and almost two-thirds of
EMDEs. Global supply shocks tend to be
associated with largely insignificant ERPTRs(for nearly three-quarters of advanced
economies and about two-thirds of EMDEs;
Figure SF1.2.5.F).
•

Heterogenous consequences. Collectively,
these results suggest that the estimatedexchange rate pass-through is highly

heterogeneous across underlying shocks thattrigger exchange rate fluctuations. This
heterogeneity in part reflects the endogenous
nature of exchange rates (Rincón-Castro andRodríguez-Niño 2018). In general, nominal
shocks (such as commodity price shocks) are
more likely to change relative prices, whereas
real shocks (such as supply shocks) are more
likely to be associated with lower passthroughs but a higher impact on real exchange
rates that facilitates expenditure switching.
Average ERPTRs. The average ERPTR has
declined in both advanced economies and EMDEs
since the late 1990s (Figure SF1.2.6.A). The
average ERPTR is defined here as the weightedaverage of shock-specific pass-through ratios,
where weights are the estimated shares of currency
movements accounted for by each type of shock.
The median estimate over the period 1998-2017
was close to zero for advanced economies and+0.08 in EMDEs, significantly down from theprior two decades, but with wide country
variations (Figure SF1.2.6.B).3

Pass-through and country
characteristics
The previous section illustrates the fact that
ERPTRs can vary considerably depending on thenature of the shock driving exchange rate
movements. However, country characteristics
matter as well. In particular, previous empiricalstudies have emphasized that differences inmonetary policy frameworks and in the degree ofinternational integration can account for some of

3 Among larger EMDEs, the average ERPTR in China isestimated at +0.08 since 1998, somewhat below previously reported
estimates (Jiang and Kim 2013; Shu and Su 2009; Wang and Li2010). For India, the average ERPTR is estimated at +0.14, broadly
in line with previous studies (Bhattacharya, Patnaik, and Shah 2008;
Forbes, Hjortsoe, and Nenova 2017; Kapur and Behera 2012). For
the Russian Federation, it is measured at +0.11, consistent withfindings of the Central Bank of the Russia (2014). For Brazil, theaverage ERPTR is estimated at +0.06 since 1998, toward the lower
end of other studies (Forbes, Hjortsoe, and Nenova 2017; Ghosh2013; Nogueira and Leon-Ledesmab 2009). For South Africa, the
ERPTR is estimated at +0.07, broadly in line with the evidence
presented in Kabundi and Mbelu (2018). For Turkey, the average
ERPTR is somewhat lower than found in earlier studies, partly
reflecting the shorter sample focusing on a period marked bysignificant de-dollarization and disinflation.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019the heterogeneity in estimated ERPTRs (Campaand Goldberg 2010; Carrière-Swallow et al. 2016;
Caselli and Roitman 2016; Coulibaly and Kempf
2010; Gagnon and Ihrig 2004; Mishkin andSchmidt-Hebbel 2007). These country characteristics are further investigated by comparing shockspecific ERPTRs for different subset of countries.
Global value chain integration. A priori, theimpact of greater trade openness and international
economic integration on estimated ERPTRs isdifficult to ascertain. On the one hand, a larger
share of imported products implies a potentiallylarger role for exchange rate movements in driving
domestic inflation (Benigno and Faia 2016; Soto
and Selaive 2003). On the other hand, increased
foreign competition in domestic markets andgreater integration in global value chains (GVCs)
may reduce the ERPTR (Auer 2015; Berman,
Martin, and Mayer 2012; Gust, Leduc, andVigfusson 2010; Amiti, Itskhoki, and Konings
2016; de Soyres et al. 2018; Georgiadis, Gräb, andKhalil 2017; Figure SF1.2.7.A). Consistent withthe literature, some economies in East Asia andthe Pacific and in Eastern Europe and Central Asia
are highly integrated into GVCs and also have low
average pass-throughs (Chinn 2014). However,for other EMDEs, the association between GVC
participation and ERPTRs is not as clear cut(Figure SF1.2.7.B).
Foreign currency invoicing. Having a large shareof imports invoiced in a foreign currency could
amplify the sensitivity of import and export prices
to exchange rate movements (Devereux, Tomlin,
and Dong 2015; Gopinath 2015). The ERPTR toimport and export prices tend to be particularly
elevated for countries with a high share of imports
priced in U.S. dollars (Casas et al. 2017;
Korhonen and Wachtel 2006). Domestic prices inhighly dollarized economies also tend to react
more to currency movements relative to othercountries, since tradable and nontradable goods
are priced in a foreign currency (Carranza,
Galdon-Sanchez, and Gomez-Biscarri 2009;
Reinhart, Rogoff, and Savastano 2014; Sadeghi etal. 2015). The selection of the pricing currency
could itself depend on the exchange rate passthrough (Gopinath, Itskhoki, and Rigobon 2010).
Among EMDEs, a higher share of imports

S P EC IAL FO CU S 1.2

77

FIGURE SF1.2.7 Global economic integration andpass-throughHigher global value chain participation is associated with lower passthroughs in some EMDEs. A higher share of foreign-currency invoicing is
associated with higher pass-throughs in some EMDEs, but does not seemto account for cross-country variations in EMDEs.

A. Global value chain participation

B. Global value chain participationand pass-through from monetary
policy shocks

C. Share of imports invoiced inforeign currency

D. Share of foreign-currency invoicing
and pass-through from monetary
policy shocks

Source: Organisation for Economic Co-operation and Development, World Bank, World Trade
Organization.
Note: Global value chain data are from the OECD-WTO TiVA (Trade in Value Added) database. The
selected indicator is foreign value added as a percent of gross exports. Pass-throughs are defined as
the ratio between the one-year cumulative impulse response of consumer price inflation and the oneyear cumulative impulse response of the exchange rate change estimated from factor-augmented
vector autoregression models for 29 advanced economies and 26 EMDEs over 1998-2017. A positivepass-through means that a currency depreciation is associated with higher inflation. Bars show theinterquartile range and markers represent the median across countries.
B. Low and high value chain participation are defined as below or above the sample average.
C. Share of imports invoiced in foreign currency based on data for 50 countries calculated by
Gopinath (2015).
D. Low and high share of foreign-currency invoicing are defined as below or above the sample
average.
Click here to download data and charts.

invoiced in foreign currencies tends to be
associated with higher pass-through ratios, butwith significant heterogeneity across countries(Figures SF1.2.7.C and SF1.2.7.D).
Monetary policy framework and credibility. The
increased adoption of credible monetary policy
frameworks that support well-anchored inflation
expectations has helped reduce the exchange ratepass-through to consumer prices in EMDEs by

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FIGURE SF1.2.8 Monetary policy frameworks andpass-throughA growing number of countries have adopted explicit inflation targets, andcentral bank independence has increased since 2000. Greater central
bank independence has tended to dampen the pass-through to inflation of
exchange rate movements stemming from monetary policy shocks and isalso associated with lower average ERPTRs. Among EMDEs, the passthrough is generally lower among countries with more flexible exchange
rate regimes and inflation-targeting central banks.

A. Central bank independence andinflation-targeting frameworks

C. ERPTRs associated with monetary
policy shocks in EMDEs

B. Central bank independence and
ERPTRs from monetary policy shocks

D. ERPTRs associated with global
demand shocks in EMDEs

in EMDEs that do not have inflation-targeting
central banks and have less flexible exchange rate
regimes (for example, Azerbaijan, Botswana,
Jordan, and North Macedonia; Figures SF1.2.8.B
and SF1.2.8.C).4 The growing number of EMDEs
adopting explicit inflation targets and reinforcing
central bank transparency and independence hashelped to dampen estimated ERPTRs over the lasttwo decades. Thus an improvement of the central
bank independence index from one standard
deviation below the sample mean to one standard
deviation above it is estimated to reduce the passthrough ratio associated with monetary policy
shocks by half.
In countries with more independent central banks,
inflation targets, and more flexible exchange rate
regimes, inflation also responds less to exchange
rate movements triggered by global demand and oil
price shocks (Figure SF1.2.8.D). This implies thatcountries with such characteristics can better
absorb external shocks through currency
adjustments without threatening price stability. In
countries with less flexible or pegged exchange rate
regimes, global shocks could generate higher passthrough, making adjustments to devaluations
more disruptive.

Conclusion
Source: World Bank.
Note: The central bank independence index is computed by Dincer and Eichengreen (2014). An
increase in the index means greater central bank independence. Pass-throughs are defined as theratio between the one-year cumulative impulse response of consumer price inflation and the one-year
cumulative impulse response of the exchange rate change estimated from factor-augmented vector
autoregression models for 29 advanced economies and 26 EMDEs over 1998-2017. A positivepass-through means that a currency depreciation is associated with higher inflation. Bars show theinterquartile range and markers represent the median across countries. ERPTR = exchange rate pass-through ratio; IT = inflation-targeting.
B. Low and high central bank independence are defined as below or above the sample average.
C.D. Exchange rate and IT regimes are based on IMF classifications.
Click here to download data and charts.

minimizing domestic wage and mark-up
adjustments (Figure SF1.2.8.A). In fact, ERPTRs
associated with domestic monetary policy shocks are
estimated to be significantly smaller in EMDEs
with more independent central banks and higher
4 This is in line with the empirical literature that has generally
found ERPTRs to be smaller among advanced economies and in
EMDEs with inflation targeting or more credible central banks(Carrière-Swallow et al. 2016; Gagnon and Ihrig 2004; Reyes 2004;
Schmidt-Hebbel and Tapia 2002). Over the past two decades, anincreasing number of central banks have adopted inflation targets andenhanced their credibility, which has helped reduce ERPTRs(Mishkin and Schmidt-Hebbel 2007; Coulibaly and Kempf 2010).

As recent financial market turbulences illustrate,
large depreciations remain a threat to both priceand financial stability in more vulnerable EMDEs.
To formulate the appropriate monetary policy
response to exchange rate pressures, central banksneed to be able to anticipate the direction andmagnitude of their impact on domestic inflation.
But pass-through ratios—the percentage increasein consumer prices associated with a 1-percent
depreciation of the nominal effective exchange
rate—vary considerably across countries and overtime, making inference from average values
unreliable and potentially misleading for policy
evaluation and forecasting purposes. Two
fundamental factors help to account for the wide
range of pass-through estimates: the nature of theshock triggering the currency movement andcountry characteristics.
An event study of past depreciation episodes
suggests that the pass-through can more thanL

B0Yt = α + Σ BjYt - j + t
j=1

t

Yt
t

t
t

t

Yt
t

t

t

t
t

t

utY ,global 
 OP
 +
u
 t
 +
u ,global  
 t
 +
Y
,domesticut = * ,domestic  ut * I ,domestic   *
ut
 
u ER
  *
 t GlobalDemand − + 0 0 0 0   t

OilPrice+ + 0 0 0 0   t
  GlobalSupply + − 0 0 0 0   t
* * + + − *  tDomesticDemand * * + − − *  tDomesticSupply * * * * + *   MonetaryPolicy  t
* * * * + +   ExchangeRate 
 t


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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

ANNEX FIGURE SF1.2.1.1 Robustness of pass-throughestimates: One- versus two-quarter sign restrictions
A. Monetary policy shocks

B. Global demand shocks

C. Domestic demand shocks

D. Global supply shocks

E. Domestic supply shocks

F. Oil price shocks

Source: World Bank.
Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of
consumer price inflation to the one-year cumulative impulse response of the exchange rate change
to shocks from country-specific factor-augmented vector autoregression models estimated for 51
economies (29 advanced economies and 22 EMDEs) over 1998-2017. A positive pass-throughmeans that a currency depreciation is associated with higher inflation. Bars show the interquartile
range and markers represent the median across countries. In the alternative specification, sign
restrictions are applied to the current quarter and next quarter.
Click here to download data and charts.

where * stands for an unrestricted initial response.
Although country-specific shocks do not affectglobal variables in the first four quarters, global
shocks can affect country-specific variables(without any sign or zero restrictions).
The identification strategy is based on thefollowing assumptions, combining sign and shortterm restrictions as shown above:•

A positive global demand shock triggers asimultaneous increase in global output
growth, global inflation, and oil prices.1 A
positive global supply shock leads to higher
global output growth and oil prices but lower
global inflation. A positive oil price shock
induces an increase in oil prices and global
inflation but a drop in global output growth.
Finally,
globalshockscanhavecontemporaneous effects on domestic
variables, but domestic shocks can only
influence global variables with a lag.

•A positive country-specific supply or demand
shock increases country-specific output
growth. However, a country-specific supply
shock reduces domestic inflation, whereas acountry-specific demand shock increases it. A
positive interest rate shock (corresponding to acontractionary monetary policy) initially
increases the domestic interest rate and results
in an appreciation of the domestic currency,
while it decreases domestic output growth andinflation. Finally, a positive exchange rate
shock (corresponding to an appreciation of
the domestic currency) only assumes anincrease in the exchange rate, while its impact
on other domestic variables is left unrestricted.
All country-specific shocks are assumed toaffect country-specific variables on impact
through the corresponding sign restrictions,although the robustness checks also consider
such restrictions lasting for an alternative
number of periods (Annex Figure SF1.2.1.1).
An alternative specification assumes that
positive domestic demand shocks lead to acontemporaneous increase in domestic interest
rates (Annex Figure SF1.2.1.2).

The structural FAVAR model framework has
several advantages over the reduced-form approachin estimating the exchange rate pass-through(Rincón-Castro and Rodríguez-Niño 2018,
Forbes, Hjortsoe, and Nenova 2017, Shambaugh

1 Global shocks are derived from a separate tri-dimensional vector
autoregression model that incorporates global output growth, global
inflation, and oil price changes, following the approach ofCharnavoki and Dolado (2014) and Uhlig (2005).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 20192008). First, it seeks to account for theendogenous nature of exchange rate movements,
whereas reduced-form models assume thatexchange rates are exogenously determined. In
practice, exchange rates are often a function ofmacroeconomic fundamentals and thus the passthrough will depend on the type of shock the
economy is facing. Second, the FAVAR modelallows for the estimation of exchange rate passthroughs are conditional on a variety of global anddomestic shocks in a unified framework. Finally,
the identification using sign and zero restrictions
employed in this Special Focus seeks to identify
truly structural shocks, orthogonal to each other,and reduce potential estimation bias due tosimultaneous interactions between the variables.
The system is estimated on a country-by-country
basis using quarterly data with two lags, as inCharnavoki and Dolado (2014). The Bayesianestimation used searches for 1,000 successful
draws of at least 2,000 iterations with 1,000 burnins. The results shown in this Special Focus are
based on the median of these 1,000 successful
draws and 68 percent confidence sets at thecountry level, although alternative presentation
methodologies (for example, the median target, as
in Fry and Pagan 2011) are considered as arobustness check. In the Bayesian estimation,
Minnesota priors proposed by Litterman (1986)
are used; since the Minnesota prior assumes thatthe variance-covariance matrix of residuals isknown, we use the entire variance-covariancematrix of the vector autoregression estimated byordinary least squares. For the actual estimation,
the identification strategy through the algorithm
introduced by Arias, Rubio-Ramirez, andWaggoner (2014) is used, where the standard
Cholesky decomposition is employed together
with an additional orthogonalization step that isnecessary to produce a posterior draw from thecorrect distribution for structural vector
autoregression coefficients.
The results for the role of global and domestic
shocks in domestic inflation are presented as
median point estimates across countries.
Interquartile ranges indicate the range from the25th to the 75th quartile of country-specificestimates (for example, Forbes, Hjortsoe, andNenova 2017).

S P EC IAL FO CU S 1.2

81

ANNEX FIGURE SF1.2.1.2 Robustness of pass-throughestimates: Additional sign restriction to identify
domestic demand shocks
A. Monetary policy shocks

B. Global demand shocks

C. Domestic demand shocks

D. Global supply shocks

E. Demand supply shocks

F. Oil price shocks

Source: World Bank.
Note: Pass-throughs are defined as the ratio of the one-year cumulative impulse response of
consumer price inflation to the one-year cumulative impulse response of the exchange rate change
to shocks from country-specific factor-augmented vector autoregression models estimated for 51
economies (29 advanced economies and 22 EMDEs) over 1998-2017. A positive pass-throughmeans that a currency depreciation is associated with higher inflation. Bars show the interquartile
range and markers represent the median across countries. In the alternative specification, an
additional sign restriction was imposed, assuming that a positive domestic demand shock leads
to a contemporaneous increase in domestic interest rates.
Click here to download data and charts.

Exchange rate pass-through definition
Following Shambaugh (2008) and Forbes,
Hjortsoe, and Nenova (2017), for each country,
the exchange rate pass-through ratio (ERPTR) is
defined as the ratio of the response of countryspecific inflation to the response of the nominal
exchange rate changes following a given shock.
Since the exchange rate is defined such that anincrease denotes appreciation, the sign of the ratio

•

•

•

•

•

,i
Yt i = Yglobal
f t Y ,global + etY ,i ,iit = global
f t  ,global + et,i

•

t

t

t
t

•

t
Y
t

t
t

t

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

S P EC IAL FO CU S 1.2

TABLE SF1.2.1 Countries and sample periods
Country

Sample period

Country

Sample period

Australia

1970:2 - 2017:4

India

1993:3 - 2017:4

Austria

1990:1 - 2017:4

Israel1985:3 - 2017:4

Azerbaijan

2005:3 - 2017:4

Italy

1979:2 - 2017:4

Belgium

1970:2 - 2017:4

Jordan1999:3 - 2017:4

Bulgaria

1994:4 - 2017:4

Japan

1989:3 - 2017:4

Brazil1998:3 - 2017:4

Korea, Republic of

1991:3 - 2017:4

Botswana

1994:4 - 2017:4

Luxembourg

1999:3 - 2017:4

Canada1970:2 - 2017:4

Mexico1989:1 - 2017:4

Switzerland

1970:3 - 2017:4

Malta

1999:3 - 2017:4

Chile

1986:3 - 2017:4

Malaysia

2004:4 - 2017:4

China

1984:4 - 2017:4

Morocco1995:4 - 2017:4

Colombia

1994:4 - 2017:4

Netherlands

1982:3 - 2017:4

Costa Rica

1997:3 - 2017:4

North Macedonia

2008:1 - 2017:4

Czech Republic

1992:4 - 2017:4

Norway1979:2 - 2017:4

Germany

1970:2 - 2017:4

New Zealand

1974:3 - 2017:4

Denmark

1970:2 - 2017:4

Philippines

1987:3 - 2017:3

Dominican Republic

2004:3 - 2017:3

Poland1992:1 - 2017:4

Egypt

2002:4 - 2017:2

Portugal

1986:2 - 2017:4

Spain

1977:3 - 2017:4

Russia2000:1 - 2017:4

Finland1987:3 - 2017:4

Slovak Republic

1996:1 - 2017:4

France1970:2 - 2017:4

Slovenia

2002:3 - 2017:4

United Kingdom

1970:2 - 2017:4

South Africa

1981:3 - 2017:4

Greece1994:4 - 2017:4

Sweden1983:3 - 2017:4

Honduras

2005:4 - 2017:4

Thailand

2000:4 - 2017:4

Hungary

1995:4 - 2017:4

Tunisia

2000:4 - 2017:4

Indonesia

1990:3 - 2017:4

Turkey2007:1 - 2017:4

Ireland1984:3 - 2017:4

United States

1970:2 - 2017:4

Iceland1988:3 - 2017:4

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CHAPTER 2REGIONALOUTLOOKS

Growth in the East Asia and Pacific region is projected to slow from 6.3 percent in 2018 to 5.9 percent in
2019-20, and to ease further to 5.8 percent in 2021. This will mark the first time since the 1997-98 Asianfinancial crisis that EAP growth dropped below 6 percent. In China, growth is expected to decelerate from 6.6
percent in 2018 to 6.2 percent in 2019, and gradually decline to 6.0 percent by 2021, reflecting softening
manufacturing activity and trade amid domestic and external headwinds. In the rest of the region growth isalso expected to moderate to 5.1 percent in 2019, before rebounding modestly to 5.2 percent in 2020-21, as
global trade stabilizes. Risks to regional growth remain tilted to the downside and have intensified with the reescalation of trade tensions. They include a sharper-than-expected slowdown in major economies, including
China; an intensification of global trade tensions; and an abrupt change in global financing conditions andinvestor sentiment.

Recent developments
Growth in the East Asia and Pacific (EAP) regionis slowing, largely reflecting a deceleration in
China. Growth in the rest of the region is also
moderating, but less sharply, albeit with notable
heterogeneity (Table 2.1.1; Figure 2.1.1.A).
Regional trade, especially exports, has plummeted
amid weakening global investment and elevatedtrade policy uncertainty related to ongoing U.SChina trade tensions. Export growth has declined
sharply, in line with the slowdown in global
growth of manufacturing, investment, and trade.
Import growth has also decelerated, but is stillsolid, aided by robust domestic demand growth(Figure 2.1.1.B). Inflation is generally below
targets across the region, but has been trending up
recently, reflecting higher food prices (Figure
2.1.1.C). External financing conditions have been
generally supportive, with narrowing bond spreads
and improved net capital inflows (Figure 2.1.1.D).
Regional currencies and equity markets, however,are under renewed pressure, most recently
following the re-escalation of trade tensions(World Bank 2019a; Figures 2.1.1.E-F).
Note: This section was prepared by Ekaterine Vashakmadze.
Research assistance was provided by Liu Cui.

In China, the economy continues to slow andrebalance. Decelerating industrial production
growth has been partly offset by more resilient
activity in the services sector (Figure 2.1.2.A).
Fiscal policies have eased and monetary policies
have been generally supportive, helping to balance
the impact of external and domestic headwinds(Chapter 1).
China’s consumer price inflation has been
trending up, but remains below the 3 percent
target, while producer price inflation hasbottomed out, partly reflecting some stabilizationin the industrial sector. The current accountsurplus widened in 2019Q1 (Figure 2.1.2.B).
Both export and import growth slowed sharply inlate 2018, and despite some signs of stabilization,
recent high-frequency indicators point tocontinuing broad-based weakness in trade (Figure
2.1.2.C).
Asset prices came under renewed pressure mostrecently, following a re-escalation of trade tensions
in early May (Figures 2.1.2.D-E). Sovereign bondspreads remain above their long-term averages,
reflecting slowing growth prospects amid lingering
domestic vulnerabilities and ongoing tradedisputes with the United States.

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FIGURE 2.1.1 EAP region excluding China: Recent
developments
Growth in the EAP region is slowing, albeit with notable heterogeneity.
Regional export growth has declined sharply, while domestic demandremains robust. Inflation has been trending downward across the region
and is generally below targets. Net capital flows improved in 2019Q1.
Regional equity markets, however, are under renewed pressure, mostrecently following the re-escalation of trade tensions. Financial conditions
remain supportive with bond spreads generally narrowing or below theirlong-term averages.
A. Growth

B. Export and import growth

C. Inflation

D. Balance of payments

E. Equity prices

F. Bond spreads

Source: Haver Analytics, International Monetary Fund, World Bank.
A. East Asian countries excl. China includes Cambodia, Indonesia, Lao PDR, Malaysia, Mongolia,
Myanmar, Palau, Philippines, Thailand, and Vietnam. Pacific Island excl. PNG includes Fiji, Kiribati,
Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, andVanuatu. 1990-2018 average for East Asian countries excl. China excludes Myanmar and1990-2018 average for Pacific Island excl. PNG excludes Marshall Islands, Micronesia, Palau,
Timor-Leste, and Tuvalu due to data limitations. Aggregate growth rates are calculated using 2010
U.S. dollar GDP weights. Data in shaded areas are forecasts.
B. Export and import volumes. Data include only goods. 12-month moving average. Regional
aggregate excludes Cambodia, Fiji, Lao PDR, Mongolia, Myanmar, Solomon Islands, Papua New
Guinea, Timor-Leste, Vanuatu, and Vietnam due to data limitations. Dotted lines indicate January
2000-March 2019 averages. Last observation is March 2019.
C. Average year-on-year consumer price inflation. Mid-point of inflation for Indonesia, Philippines, andThailand. Inflation target for China and Vietnam. For Malaysia, the low point of Bank Negara’s official
forecast range of 2.5-3.5 percent in the 2019 budget is used. Last observation is April 2019.
D. e=estimate. The aggregate includes Indonesia, Malaysia, Philippines, and Thailand. Net capital
flows and change in reserves are staff estimates. Net capital inflows include net capital and financial
account balance, errors and omissions. 2019Q1 data is not available for Philippines and Thailand.
E. Equity index stands for the respective country composite index. Last observation is May 21, 2019.
F. The spread of a country’s sovereign debt as measured by J.P. Morgan’s Emerging Markets Bond
Index over their equivalent maturity U.S. Treasury bond. Horizontal lines denote January 2000-May
2019 average rates. Last observation is May 21, 2019.
Click here to download data and charts.

Regulatory tightening has helped reduce leveragein some segments of the non-bank sector;
however, bank credit growth remains robustand bond issuance has accelerated (Figure
2.1.2.F). Total leverage of the economy—
measured as the ratio of total credit (general
government and non-financial private sector) togross domestic product—is estimated to haveincreased by about 2 percentage points of GDP in
the year to 2018Q4. Total debt has surpassed 250
percent of GDP.
Growth in commodity importers remains robust
but continues to moderate, reflecting weakening
exports amid resilient domestic demand. Inflation
is subdued or declining in most countries(Cambodia, the Philippines, Thailand, Vietnam),allowing monetary authorities to keep policy rates
steady, generally at accommodative levels. In
Thailand, domestic demand is supported by more
accommodative fiscal policy. However, weakening
export growth is weighing on activity. In thePhilippines, private consumption is rebounding
amid slowing inflation and improving
employment conditions. In addition, electionrelated spending in the first half of 2019 is giving
the economy an additional boost and is partly
mitigating the impact of weakening exports.
In commodity exporters, the cyclical recovery ismaturing, and the pace and composition of
growth increasingly reflect country-specific factors.
In larger and more diversified economies, where
past terms-of-trade shocks were less acute andmacroeconomic fundamentals are strong, steady
growth has continued at rates of around 4.5-5
percent per year (Indonesia, Malaysia). In
Indonesia, growth has been supported by robust
private consumption and investment. In Malaysia,
investment is rebounding, reflecting improved
financing conditions and business confidence,
offsetting the impact of moderating but stillrobust consumption growth. In smaller
commodity exporters, the subdued recovery fromthe 2015-16 downturn is resuming at a strongerthan-expected pace, helped by investments in newmining projects (Mongolia) and a rebound in theextractive sector following a devastating
earthquake in 2018 (Papua New Guinea).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

OutlookAfter moderating from 6.3 percent in 2018 to 5.9
percent a year in 2019-20, regional growth isprojected to ease further to 5.8 percent in 2021
(Tables 2.1.1 and 2.1.2; Figure 2.1.3.A). Growthin China is projected to slow to 6.2 percent in2019 amid continued domestic and external
headwinds. The recent increase in tariffs on tradewith the United States is projected to weigh on
growth in 2020, which has been revised down to
6.1 percent.
This outlook is predicated on a deceleration in
global trade, no further escalation of trade tensions
between China and the United States, broadly
stable commodity prices, and supportive global
financing conditions, especially in the near term.
The baseline also assumes that authorities in
China continue to calibrate supportive monetaryand fiscal policies to address the challenging
external environment and any other headwinds toactivity (SCPRC 2019).
Regional growth excluding China is projected to
decline to 5.1 percent in 2019 before inching up
to 5.2 percent in 2020-21 as global traderebounds. Growth among commodity importers is
expected to moderate in 2020-21, reflecting
capacity constraints and subdued external
demand. Domestic demand will continue
benefiting from favorable financing conditions
amid low inflation and rising capital flows(Cambodia, the Philippines, Thailand, Vietnam).
Regional economies will continue to benefit frompan-Asian infrastructure investments andexpanding intra-regional trade, despite weakerthan-expected global growth and investment. The
investment outlook is favorable in commodityimporting economies. Some countries will benefit
from large public infrastructure projects coming
onstream in 2020-21 (Thailand, the Philippines).
Growth in commodity exporters is expected toremain stable at about 5.1 percent a year in 201921, in line with potential, but with significant
cross-country differences. In particular, growth isprojected to diverge slightly between the twolargest commodity exporters in the region. In
Indonesia, which is less open to trade, growth is

EAST ASIA AND PACIFIC

91

FIGURE 2.1.2 China: Recent developments
China’s growth continues to slow, reflecting a deceleration in
manufacturing activity and trade. The current account surplus widened in
2019Q1. Recent high-frequency indicators point to a continuing broadbased weakness in trade. Equities and the renminbi have largely
recovered from losses incurred in 2018, but have come under renewedpressure recently. Growth of bank lending has remained strong, bondissuance has accelerated, but growth of other debt instruments has
slowed.

A. Manufacturing andnonmanufacturing PMI

B. Balance of payments

C. Export and import volumes

D. Bond spreads and equity prices

E. Exchange rate

F. Aggregate financing

Source: Haver Analytics, National Bureau of Statistics of China, World Bank.
A. Manufacturing and nonmanufacturing are measured by Purchasing Managers’ Index (PMI). PMI
readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction.
Horizontal line indicates expansionary threshold. Last observation is April 2019.
B. e=estimate. Net capital flows and change in reserves are estimates. Net capital inflows include net
capital and financial account balance, errors and omissions.
C. Data include only goods. 12-month moving average. Export and import volumes are calculated asexport and import values deflated by export and import price deflators. Export and import indices forsome missing values and for April 2019 are estimates. Last observation is April 2019.
D. Bond spread denotes the average spread of China’s sovereign debt (measured by J.P. Morgan’s
Emerging Markets Bond Index) over its equivalent maturity U.S. Treasury bond. Equity index isrepresented by the Shanghai Stock Exchange Composite. Last observation is May 21, 2019.
E. Nominal=exchange rate vis-à-vis U.S. dollar. NEER=Nominal Effective Exchange Rate.
REER=Real Effective Exchange Rate. Increase denotes appreciation. Last observation is
May 20, 2019.
F. Bonds include local government special bonds and net financing of corporate bonds. Other
instruments include entrusted loans, trust loans and other instruments. Last observation is
March 2019.
Click here to download data and charts.

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FIGURE 2.1.3 EAP region: Outlook and risks
EAP growth is projected to gradually decline, mainly reflecting thecontinuing structural slowdown in China. Excluding China, is also slowing,albeit with notable heterogeneity. The region is characterized by deep
global integration, which makes countries vulnerable to external trade or
financial shocks. Domestic and external vulnerabilities would amplify the
impact of such shocks, especially where policy buffers are limited.
A. GDP growth

B. Exports and openness to foreign
inflows, 2013-18

C. Total domestic and external debt

D. Total public and non-public debt

E. GDP growth and total debt in China

F. Current account balance net of FDI
and GDP growth

Source: Bank for International Settlements, Haver Analytics, International Monetary Fund, The
Institute of International Finance, World Bank.
A. East Asian countries excl. China includes Cambodia, Indonesia, Lao PDR, Malaysia, Mongolia,
Myanmar, Palau, Philippines, Thailand, and Vietnam. Pacific Island excl. PNG includes Fiji, Kiribati,
Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, andVanuatu. 1990-2018 average for East Asian countries excl. China excludes Myanmar and1990-2018 average for Pacific Island excl. PNG excludes Marshall Islands, Micronesia, Palau,
Timor-Leste, and Tuvalu due to data limitations. Yellow diamonds denote forecasts published in theJanuary 2019 edition of the Global Economic Prospects report. Aggregate growth rates arecalculated using 2010 U.S. dollar GDP weights. Data in shaded areas are forecasts.
B. EA=East Asia. PI=Pacific Islands. EA1 comprises Brunei Darussalam, Cambodia, Malaysia,
Mongolia, Thailand, and Vietnam; EA2 comprises Indonesia, Lao PDR, Myanmar and Philippines.
PI1 comprises Kiribati, Marshall Islands, Micronesia, Timor-Leste, Tonga, and Tuvalu; PI2 comprises
Palau and Vanuatu; PI3 comprises Fiji, Papua New Guinea, Samoa, and Solomon Islands. The
linkages estimated in this chart only represent direct channels: spillovers may also propagate via
indirect channels such as global and regional value chains. Diamonds denote direct cumulative
exposure to China, Euro Area, and United States.
C. Total debt is defined as a sum of domestic and external debt. Data for 2018 are estimates.
D. Non-public debt includes all debt excluding public debt. The general government debt data for
Mongolia is based on World Bank staff estimates. Data for 2018 are estimates.
E. Total debt is defined as a sum of domestic and external debt.
F. CAB ex. FDI=Current Account Balance excluding Foreign Direct Investment. Orange dashes
denote GDP growth in 2010; green hyphen—CAB ex. FDI in 2010. Data for 2019 are estimates.
Click here to download data and charts.

projected to accelerate marginally in 2020-21,
reflecting continued support from highinfrastructure spending, robust private consumption. and solid growth of the working-age
population. In Malaysia, growth is expected tomoderate slightly but remain robust, withweakening export growth largely offset by strong
domestic demand on the back of favorable
financing conditions and low inflation. In smaller
commodity exporters, growth is expected toremain strong in 2020, supported by continued
investment in new mining projects (Mongolia,
Papua New Guinea).
While growth in the region is projected to remainrobust in the near term, underlying potential
growth—which has fallen considerably over the
past decade, in part reflecting slowing
productivity—is likely to decline further over thelong term. This largely reflects deteriorating
demographic trends, especially in China,
Thailand, and Vietnam, combined with aprojected slowdown in capital accumulation in
China as credit growth is reined in (World Bank
2018a, 2018b).

Risks
Risks to the forecast remain tilted to the downside.
They include the possibility of a sharper-thanexpected downturn in large economies, a further
slowing of global trade, a possible intensificationof trade tensions, and an abrupt change in global
financing conditions and investor sentiment. Mostof the region managed to weather thedeterioration of external conditions in 2018.
However, worsening conditions would place
additional pressure on policymakers even thoughmost countries having reasonably sound economic
fundamentals and robust domestic demand(World Bank 2019a). The baseline also assumes
that global trade policy uncertainty will remain
elevated over the forecast horizon.
Around 80 percent of advanced economies, as well
as China, are expected to register slower growth in
2019. In the baseline scenario, the impact ofslower global growth and external demand on the
EAP region is assumed to be offset by more
supportive financing conditions and stronger

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

policy stimulus in China. However, a sharperthan-expected deceleration of activity in large
economies—the Euro Area, China, and theUnited States—could have adverse repercussions
across the EAP region, mainly through weaker
demand for exports and disruption of global value
chains, as well as through financial, commodity,
and confidence channels (Chapter 1; World Bank
2016; Figure 2.1.3.B).
In particular, risks of a sharper-than-expected
slowdown in China remain significant because of adifficult external environment alongside notable
domestic challenges. Total non-financial-sector
debt in China is above levels seen at the peak ofprevious credit booms in other major EMDEs andsome advanced economies. High corporate
indebtedness in sectors with weak profitability isof particular concern. Policymakers’ continued
reliance on credit expansion to support growth
may exacerbate domestic risks by adding further
leverage to its already highly leveraged corporate
sector, while also contributing to rising debt in thehousehold sector. In addition, a sizable portion ofrecent stimulus has taken the form of expanding
local government special bond quotas. This formof stimulus may eventually become less effective
because of diminishing returns to investment, andmay further amplify domestic risks. More thanhalf of the 2019 stimulus has taken the form of tax
and fee cuts, whose impact on growth may be lesspredictable than that of changes in public
investment.
A renewed spike in global policy uncertainty,
including renewed trade tensions between major
economies, could cause a further deterioration in
confidence, investment, and trade. Policy
uncertainty in the region remains high amid
unresolved trade dispute between the United

EAST ASIA AND PACIFIC

States and China, as demonstrated by the mostrecent escalation of trade tensions. Commitments
by China to purchase U.S. goods as part of aninterim agreement could lead to further global
trade policy uncertainty and trade diversion forother countries. Failure to reach a long-term
agreement between these two economies could
lead to a further escalation in tariffs, with broadranging global and regional consequences. In theextreme case scenario, it could reduce global
exports by up to 3 percent and global income by
1.7 percent over the medium term, with thelargest decline (3.5 percent) occurring in China(Freund et al. 2018).1 The region may also be
negatively affected by a disorderly exit of theUnited Kingdom from the European Union. The
U.K. is an important trading partner for several
regional economies, especially Cambodia andMalaysia. The materialization of a combination ofdownside risks could trigger an even sharper
slowdown in regional growth.
Notwithstanding the region’s strong fundamentals—solid growth, diversified economic base,sound policy frameworks, and strong buffers—
EAP economies remain vulnerable to risks related
to abrupt changes in global financial conditions.
Many countries have pockets of vulnerabilities,
including elevated debt (China, Lao People’s
Democratic Republic, Malaysia, Mongolia,
Vietnam), sizable fiscal deficits (Cambodia, Lao
PDR, Mongolia, Vietnam), or significant relianceon potentially volatile capital flows (Cambodia,
Indonesia; Figures 2.1.3.C-F). Renewed episodesof financial market stress could have pronounced
and widespread effects on countries with highindebtedness (Chapter 1). Vulnerabilities amongsome EAP countries could amplify the impact ofexternal shocks, such as a sudden stop in capital
flows or a rise in borrowing costs.

1 Assumes a 25 percent tariff surcharge on all products traded
between China and the United States, combined with a decline ininvestor confidence, resulting in a 0.5 percentage point drop in global
investment to GDP.

93

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.1.1 East Asia and Pacific forecast summary
Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE EAP, GDP1

2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

6.3

6.5

6.3

5.9

5.9

5.8

-0.1

-0.1

0.0

(Average including countries with full national accounts and balance of payments data only)2
6.3

6.5

6.3

5.9

5.9

5.8

-0.1

-0.1

0.0

GDP per capita (U.S. dollars)

5.6

5.8

5.7

5.4

5.3

5.3

0.0

-0.1

0.0

PPP GDP

6.3

6.4

6.3

5.9

5.9

5.8

0.0

0.0

0.0

7.1

6.5

8.1

7.0

7.0

7.0

-0.4

-0.1

-0.2

EMDE EAP, GDP2

Private consumption
Public consumption

9.3

7.4

9.4

7.6

7.5

7.4

0.3

0.4

0.3

Fixed investment

6.6

5.3

5.3

5.1

5.1

4.9

-0.2

-0.1

-0.2

Exports, GNFS3

2.6

9.4

4.7

3.3

3.9

4.3

-1.4

-0.5

0.0

Imports, GNFS3

5.4

7.9

7.8

4.7

5.0

5.7

-1.8

-0.9

-0.1

Net exports, contribution to growth

-0.8

0.4

-0.9

-0.4

-0.4

-0.5

0.1

0.1

0.0

Memo items: GDP
East Asia excluding China

4.9

5.4

5.2

5.1

5.2

5.2

-0.1

0.0

0.0

China

6.7

6.8

6.6

6.2

6.1

6.0

0.0

-0.1

0.0

Indonesia

5.0

5.1

5.2

5.2

5.3

5.3

0.0

0.0

0.0

Thailand

3.4

4.0

4.1

3.5

3.6

3.7

-0.3

-0.3

-0.2

Source: World Bank.
Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any
given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Democratic People’s Republic of Korea and dependent territories.
2. Sub-region aggregate excludes Democratic People’s Republic of Korea, dependent territories, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar,
Nauru, Palau, Papua New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components.
3. Exports and imports of goods and non-factor services (GNFS).
Click here to download data.

TABLE 2.1.2 East Asia and Pacific country forecasts1
Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)
2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

Cambodia

7.0

7.0

7.5

7.0

6.9

6.8

0.2

0.1

0.1

China

6.7

6.8

6.6

6.2

6.1

6.0

0.0

-0.1

0.0

Fiji

0.7

3.0

3.2

3.4

3.3

3.3

0.0

0.0

0.0

Indonesia

5.0

5.1

5.2

5.2

5.3

5.3

0.0

0.0

0.0

Lao PDR

7.0

6.9

6.5

6.6

6.7

6.6

0.0

0.0

0.0

Malaysia

4.2

5.9

4.7

4.6

4.6

4.6

-0.1

0.0

0.0

Mongolia

1.4

5.4

6.9

7.2

6.9

6.2

0.6

0.6

0.0

Myanmar

5.9

6.8

6.2

6.5

6.6

6.8

0.0

0.0

0.0

Papua New Guinea

4.1

2.3

-0.3

5.6

3.1

3.5

0.5

0.0

0.1

Philippines

6.9

6.7

6.2

6.4

6.5

6.5

-0.1

-0.1

-0.1

Solomon Islands

3.3

3.0

3.5

2.9

2.8

2.7

0.0

0.0

0.0

Thailand

3.4

4.0

4.1

3.5

3.6

3.7

-0.3

-0.3

-0.2

Timor-Leste 2

5.1

-3.5

-0.7

3.9

4.6

5.0

0.6

-0.3

0.0

Vietnam

6.2

6.8

7.1

6.6

6.5

6.5

0.0

0.0

0.0

Source: World Bank.
Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may
differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
2. Non-oil GDP. Timor-Leste’s total GDP, including the oil economy, is roughly four times its non-oil economy and is highly volatile as a result of sensitivity to changes in global oil prices
and local production levels.
Click here to download data.

Growth in Europe and Central Asia is projected to fall sharply from 3.1 percent in 2018 to 1.6 percent in2019. The slowdown partly reflects a sharp weakening of activity in Turkey, which fell into recession in thewake of acute financial market stress in 2018. Regional growth is projected to pick up in 2020-21 as Turkey
recovers and the Russian Federation strengthens. Excluding these economies, the rest of the region is expected tomoderate. In particular, growth in Central Europe is projected to soften as economies grapple with theslowdown in the Euro Area and binding domestic capacity constraints. Key external risks to the region include
spillovers from weaker-than-expected activity in the Euro Area and from escalation of global policy uncertainty,
particularly in relation to trade tensions and the United Kingdom’s exit from the European Union. Renewed
financial pressures in Turkey could also disrupt regional growth.

Recent developments
Growth in Europe and Central Asia (ECA)
moderated in 2018 to 3.1 percent—close to its
potential rate—while the start of 2019 has beenslow amid weakening investment and trade
growth. The slowdown followed a strong
expansion in 2017, driven by both domestic
demand and exports (Figure 2.2.1.A; World Bank
2019c). Regional growth in 2018 suffered frommarked weakness in Turkey, where GDP
contracted sharply in the second half of 2018.
Activity in Central Europe also slowed toward theend of 2018, reflecting weakening domestic
demand and challenging external factors amid aslowdown in the Euro Area (Poland, Romania). In
contrast, growth in Russia accelerated due toseveral temporary factors.
Trade weakened across the region in early 2019, as
goods trade volumes slowed in tandem withactivity in the Euro Area, which is the region’slargest export destination (Figure 2.2.1.B). The
region’s three largest economies—Russia, Turkey,
and Poland—faced softening trade prospects amid
slowing industrial production growth (Figure
2.2.1.C).
Note: This section was prepared by Collette M. Wheeler.
Research assistance was provided by Mengyi Li and Julia R.R.
Norfleet.

In response to deteriorating global growthprospects, central banks in major economies haveprovidedadditionalmonetary
policyaccommodation since the start of 2019, resulting
in easing global financing conditions. The
tightening cycle in monetary policy in 2018 has
paused in ECA, with some economies cutting
policy rates (Armenia, Azerbaijan, Georgia,
Kazakhstan, Kyrgyz Republic, North Macedonia,
Ukraine) or leaving them unchanged in 2019, but
overall policy rates in some large ECA economies
remain higher than in 2018 (Figure 2.2.1.D;
Russia, Turkey). Fiscal policy has also loosened in
2019, resulting in widening government deficitto-GDP ratios (Belarus, Kyrgyz Republic, Poland,
Romania). Public debt has increased by over 10
percentage points of GDP since the global
financial crisis, reaching 45 percent at the end of
2018. Inflation has been trending up in the region
since the start of 2019 (Armenia, Azerbaijan,
Bulgaria, Croatia, Georgia, Hungary, Kosovo,
Moldova, Montenegro, Poland, Romania, Russia,
Serbia, Tajikistan), driven in part by rising oil
prices (Figure 2.2.1.E).
Activity strengthened somewhat in Eastern
Europe, the South Caucasus, and Central Asia in
2018, with all three subregions benefiting fromfirming growth in Russia via close trade andfinancial linkages. However, the earlier boosts inEastern Europe from improved agricultural

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CHAPTER 2.2

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 2.2.1 ECA: Recent developments
Growth in ECA eased in 2018 and early 2019 on weakening exports to thetightly linked Euro Area. Inflation has risen owing to a combination of oil
price movements and currency depreciations, which has forced many
central banks to maintain higher policy interest rates in 2019. Turkey’s
financial market stress was accompanied by large financial outflows, andthe subsequent weakness in Turkish economic activity has weighed onregional growth.

A. Contribution to regional GDP
growthB. Growth in goods trade, volumes

C. Industrial production growth andmanufacturing PMI in Russia, Turkey,
and Poland

D. Bond spreads and policy interest
rates

E. Inflation and global oil prices

F. Turkey portfolio flows and nominal
effective exchange rate

Source: CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, Institute ofInternational Finance, J.P. Morgan, World Bank.
Note: For sample coverage, refer to Table 2.2.1.
A. Aggregate growth rates calculated using 2010 constant U.S. dollar GDP weights. Data for 2018
are estimates. Sample includes 18 economies, for which GDP components are available.
B. Last observation is March 2019.
C. Manufacturing PMI are 3-month moving averages. PMI is the Purchasing Managers’ Index (PMI).
Readings above 50 indicate expansion, readings below indicate contraction. The aggregates arecalculated using constant 2010 U.S. dollar GDP weights. Last observation is April 2019 for
manufacturing PMI, and March 2019 for industrial production growth.
D. Data are 3-month moving averages and calculated using 2010 U.S. dollar GDP weights. Bond
spread denotes the average spread of ECA sovereign debt (measured by J.P. Morgan’s Emerging
Markets Bond Index) over its equivalent maturity U.S. Treasury bond. Sample includes Georgia,
Hungary, Kazakhstan, Poland, Russia, Serbia, Turkey, and Ukraine, for which EMBI spreads areavailable. Last observation is April 2019.
E. Figure shows median inflation values. Headline inflation measured as the percent change in the
consumer price index. Sample includes Belarus, Croatia, Hungary, North Macedonia, Poland,
Romania, Russia, and Turkey, for which data are available. Last observation is April 2019.
F. Cumulative weekly flows since April 20, 2018. Last observation is May 17, 2019.
Click here to download data and charts.

harvests (Ukraine) and robust domestic demand(Moldova) have already begun to fade, as private
consumption is dampened by inflationarypressures and weaker remittances in 2019. Robust
services sector activity continues to underpin
growth in the South Caucasus, with an additional
boost coming from manufacturing in Armenia. In
Central Asia, strong production in the Kashagan
oil field supported the cyclical recovery in
Kazakhstan in 2018, but production has flattenedin 2019 due to agreed upon cuts with OPEC, as
Kazakhstan is a non-OPEC partner. Strong tourist
arrivals have continued in early 2019 in theWestern Balkans (Albania, Montenegro), while
the rebound in Serbia from earlier weather-related
disruptions fades.
In Russia, growth picked up to a six-year high of
2.3 percent in 2018, despite tightening
international economic sanctions and financial
market pressures. The acceleration of activity was
supported by the rise in oil prices, a solid
contribution from net exports, as well as one-off
factors such as energy-related construction projects
and the hosting of the World Cup. Industrial
activity slowed at the start of 2019, as compliancewith agreed upon oil production cuts took effectas a non-OPEC partner. Retail sales volume
growth also declined with the onset of the valueadded tax hike.
Following strong growth of 7.4 percent in 2017
and solid momentum at the start of 2018, theTurkish economy slowed sharply and entered arecession in the second half of 2018. The
downturn was triggered by corporate fragility
stemming from rising levels of debt, often
denominated in foreign currency, and exacerbatedby policy uncertainty. This led to significant
pressure on financial markets and the value of thelira. Growth was 2.6 percent for 2018 as a whole.
The deceleration of activity was partly driven bysignificant financial outflows from Turkey amid
market concerns about high current accountdeficits and policy developments, which led to
sharp falls in investment and private consumption(Figure 2.2.1.F).
Growth in Poland was a robust 5.1 percent in
2018, partly reflecting European Union (EU)G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

E URO PE AND CE NTRAL AS IA

fund transfers and the strongest labor market sincethe 1990s. Despite this, low inflation andborrowing rates enabled the authorities toundertake accommodative monetary policy andfiscal policy expansion. However, since the end of
2018, core inflation has nearly tripled, accelerating
to a 6-year high in April.

FIGURE 2.2.2 ECA: Outlook and risks

Outlook

A. GDP growth

B. Capacity utilization and labor
shortages in Central Europe

C. Share of export goods trade bydestination, 2017

D. Remittances and foreign direct
investment inflows, 2018

E. External debt, 2017

F. Average fiscal cost of realized
contingent liability episodes

Regional growth is projected to sharply decelerate
to a four-year low in 2019, to 1.6 percent, downfrom 3.1 percent in 2018. This is 0.7 percentage
point lower than previous forecasts, reflecting
weaker-than-expected activity in Turkey andRussia, as well as some smaller economies. Energy
exporters in the region (Azerbaijan, Kazakhstan,
Russia) should benefit from the recent rise in oil
prices. Regional growth is expected to firm in
2020-21 as Turkey recovers (Figure 2.2.2.A).
Excluding Turkey, regional activity is expected tostabilize, with modest growth in domestic demand
and a small drag from net exports.
The baseline projection for regional growth ispredicated on the assumption that Turkey’s
economy bottoms out in 2019 and that spillovers
from slowing growth in the Euro Area are limited.
The baseline also assumes no further escalation intrade tensions between the United States andChina or other major trading partners, nodisorderly exit from the European Union by theUnited Kingdom, and an absence of policy
missteps in economies that recently suffered acute
financial stress—mainly Turkey. Trade relations
between the United States and China remainfragile, however, and further escalation in tariffs orretaliatory action could adversely affect economies
in the region, particularly energy and metals
exporters. Similarly, a deterioration in traderelations between the United States and Europe,
particularly with respect to auto tariffs, could also
be detrimental to the ECA region. Regional
growth also depends on oil prices remaining
relatively stable, moderating gradually over theforecast horizon.
The projected weakening of growth is more
pronounced in Central Europe than in other ECA
subregions because of closer linkages with the97

Growth in ECA is projected to fall to 1.6 percent in 2019, reflecting theeffects of Turkey’s financial stress and weakening activity in other large
economies. Capacity constraints are expected to hinder growth in Central
Europe, while a further deceleration in the Euro Area or Russia could dent
activity in tightly connected subregions. Large external debt leaves
regional economies susceptible to sudden shifts in investor sentiment,
while the realization of contingent liabilities could pose additional fiscal
costs in ECA.

Source: Bova et al. (2016), European Commission, Kose et al. (2017), Organisation for Economic
Co-operation and Development, United Nations Conference on Trade and Development, World Bank.
A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Shaded areas
indicate forecasts. Data for 2018 are estimates. Green diamonds correspond to forecasts from theJanuary 2019 edition of the Global Economic Prospects report.
B. Data are calculated using constant 2010 U.S. dollar GDP weights. Sample includes Hungary,
Poland, and Romania. Labor shortage is the percentage of manufacturing firms pointing to labor
shortages as a factor limiting production. Last observation is 2019Q1.
C. Shares are calculated from exports in millions of U.S. dollars.
D. Figure shows the 2018 averages for remittances, and the 2016-17 averages for foreign direct
investment, based on data availability.
E. Figure shows total public and private external debt stocks as a share of GDP in 2017, as in Koseet al. (2017). “Other EMDEs” are all other EMDEs that are not in the Europe and Central Asia region.
F. Fiscal cost is measured as gross fiscal outlays and the change in the government financial position
due to a contingent liability realization, as estimated by Bova et al. (2016). The data cover episodes
from 1990 to 2014. Types of contingent liabilities include those that involved public sector bailouts forthe financial sector, SOEs, the private non-financial sector, PPPs, and others, as defined by Bove etal. (2016).
Click here to download data and charts.

98

CHAPTER 2.2

Euro Area and increasingly binding domestic
capacity constraints (Figure 2.2.2.B). Fiscal
stimulus, and the resulting boost to private
consumption, will begin to fade in some of thesubregion’s largest economies by 2020 (Hungary,
Poland, Romania). Shrinking working-age
populations, partly reflecting emigration towestern Europe in recent years, limits mediumterm growth prospects in Central Europe. Tepid
private investment growth could weaken further in
the absence of sustained progress on structuralreforms.
Growth is expected to moderate over the forecasthorizon in both Eastern Europe and Central Asia.
These regions face a more challenging external
environment as growth decelerates in major
trading partners, such as the Euro Area andRussia. The pace of future growth in bothsubregions
dependsonthesuccessful
implementation of structural reforms to improvethe business environment, achieve debt
sustainability, and restructure state-owned
enterprises (Belarus, Kyrgyz Republic, Moldova,
Ukraine, Uzbekistan; EBRD 2017; Funk, Isakova,
and Ivanyna 2017). In Central Asia, modest
growth in Russia and low productivity will weighon activity in the region’s largest economy,
Kazakhstan.
Growth in the South Caucasus subregion is
projected to strengthen to 4.2 percent by 2021,
from 2.6 percent in 2018, assuming the continued
implementation of domestic reforms andinfrastructure investment. Activity in the region’slargest economy, Azerbaijan, will be boosted by a
new natural gas pipeline coming on stream,
although this will be partly offset by the effects of
weak credit growth arising from problems in thefinancial sector. In Armenia and Georgia, growthis expected to firm, partly on account of increased
government investment.
Growth in the Western Balkans is projected to bebroadly stable, dipping to 3.5 percent in 2019 but
returning to 3.9 percent by 2021. This forecast ispredicated on political stability and policy
uncertainty remaining in check. Infrastructure
investment and private consumption will help
deliver robust growth in some economies (Kosovo,

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

North Macedonia, Serbia), while a deceleration in
public and private investment will slow growth inothers (Albania, Montenegro; World Bank
2019d).
In Russia, the projection for 2019 has been
downgraded to 1.2 percent, reflecting oil
production cuts. Tighter monetary policy,
combined with a value-added tax hike at the
beginning of 2019, are also contributing to weaker
growth momentum in the remainder of 2019.
Private investment remains tepid due to policy
uncertainty and prospects for slowing potential
growth over the longer term due to worsening
demographic pressures.
In Turkey, growth is expected to be weighed
down by increased inflation and associatedpressure on real incomes, banking and corporate
sector deleveraging following several years of rapid
credit growth, and low business and consumer
confidence. Activity is expected to bottom out in
2019, with annual growth contracting 1 percent,but the recent flare up in financial market
pressures highlight that downside risks remain
sharply elevated. The recovery is assumed tostrengthen in 2020 through gradual improvementin domestic demand and continued strength innet exports, provided that fiscal and monetary
policy avert further sharp falls in the lira andcorporate debt restructurings help avoid serious
damage to the financial system.
In Poland, growth in 2019-20 will be buoyed by arecently announced fiscal stimulus package,amounting to roughly 2 percent of GDP. Thisfiscal expansion aims to boost private
consumption through various social transfers andincome tax reduction schemes. Nevertheless,growth is expected to slow over the forecasthorizon, to 3.3 percent by 2021 from a peak of
5.1 percent in 2018, as domestic capacity
constraints and slowing investment weigh on
growth.
Over the long term, regional growth could behindered by worsening demographic trends, inconjunction with tepid productivity andinvestment growth (World Bank 2018c; Bussolo,
Koettl, and Sinnott 2015; EBRD 2018).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

Structural reforms that close remaining investment
gaps, encourage privatization, and promote FDI
and greater participation in global value chains
could help boost productivity in the region(EBRD 2015; Gould 2018; Chapter 1). Greater
economic integration and regional coordination
could also help spur innovation and competition,
unleashing the region’s growth potential (Kunzel
et al. 2019).

Risks
The region’s outlook remains subject to significant
downside risks. Chief among these is a sharperthan-expected slowdown in ECA’s most important
trading partner, the Euro Area. The Euro Areapurchased the majority of ECA exports in 2017,
while total foreign direct investment inflows
accounted for over 7 percent of GDP in Central
Europe (Figure 2.2.2.C). In Central Asia andEastern Europe, slowing activity in Russia could
impact remittance inflows, which account for an
important proportion of income (Kyrgyz
Republic, Moldova, Tajikistan, Ukraine; Figure
2.2.2.D).
The financial stress in Turkey has had limited
spillovers to the other economies in the region.
However, the experience of Turkey is a stark
reminder of the risk of sudden shifts in investor
sentiment—in particular for countries with large
current account deficits or reliance on potentiallyvolatile capital inflows, high external debt loads, or

E URO PE AND CE NTRAL AS IA

sizableforeign-currency-denominateddebt(Belarus, Croatia, Georgia, Kyrgyz Republic,
Moldova, Tajikistan, Ukraine; Figure 2.2.2.E).
Increases in policy uncertainty could undermine
business and investor confidence in the region.
Policy disagreements between the European
Union and some Central European countries
could deter international investors and reduce
fiscal transfers. Election outcomes in some of theregion’s largest economies could also elevate policy
uncertainty. Further escalation of international
trade restrictions could have a negative impact on
the region, given its openness to trade and capital
flows. A reversal of structural reforms remains arisk in many countries, especially Armenia,
Azerbaijan, Belarus, Turkey, and Ukraine.
Renewed conflict in the Syrian Arab Republic or
Ukraine could trigger new sanctions.
Fiscal risks have increased in the ECA region
despite more benign global financing conditionsin 2019, as corporate debt has risen, with large
shares of foreign-currency-denominated debt
(Belarus, Kyrgyz Republic, Moldova, Ukraine).
The rapid increase in private sector debt in ECAover the past decade has come with growing
contingent liabilities for the public sector—
potential bailouts of systemic private liabilities
would come at a high cost. Past episodes ofrealized contingent liabilities have imposed large
fiscal costs in the region (Figure 2.2.2.F; Bova et
al. 2016).

99

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.2.1 Europe and Central Asia forecast summary

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE ECA, GDP

1

EMDE ECA, GDP excl. Turkey

2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

1.9

4.1

3.1

1.6

2.7

2.9

-0.7

0.0

0.0

1.5

3.0

3.3

2.4

2.6

2.6

-0.2

0.0

0.1

(Average including countries with full national accounts and balance of payments data only)

2

EMDE ECA, GDP2

1.8

4.1

3.1

1.5

2.6

2.9

-0.8

-0.1

0.0

GDP per capita (U.S. dollars)

1.4

3.7

2.7

1.2

2.4

2.7

-0.8

0.0

0.0

PPP GDP

1.8

3.9

3.1

1.6

2.7

2.9

-0.7

0.0

0.0

Private consumption

1.4

4.8

3.0

1.4

2.6

2.7

-1.0

-0.6

-0.2

Public consumption

3.1

3.1

1.6

1.6

1.6

1.8

-0.9

-0.6

-0.3

Fixed investment

-0.1

6.3

2.6

-0.8

3.3

3.6

-3.1

-1.3

-1.2

Exports, GNFS3

4.0

7.1

5.7

4.0

4.2

4.0

-1.3

-0.1

-0.5

3.5

10.7

3.2

3.2

5.4

5.8

-1.9

-0.4

0.0

0.3

-0.7

1.0

0.5

-0.2

-0.4

0.2

0.0

-0.2

Imports, GNFS

3

Net exports, contribution to growthMemo items: GDP
Commodity exporters4

0.7

2.1

2.7

1.8

2.2

2.3

-0.2

0.0

0.0

Commodity importers5

3.1

6.0

3.6

1.4

3.1

3.5

-1.2

-0.1

-0.1

Central Europe6

3.4

5.0

4.6

3.7

3.3

3.1

0.1

0.0

0.1

Western Balkans7

3.2

2.6

3.9

3.5

3.8

3.9

0.0

0.0

0.1

8

Eastern Europe

0.9

2.6

3.2

2.4

2.7

3.0

-0.5

-0.4

-0.4

South Caucasus9

-1.6

2.0

2.6

3.7

3.9

4.2

-0.3

0.1

0.8

Central Asia

2.9

4.6

4.7

4.2

4.0

4.1

0.0

0.0

0.0

Russia

0.3

1.6

2.3

1.2

1.8

1.8

-0.3

0.0

0.0

Turkey

3.2

7.4

2.6

-1.0

3.0

4.0

-2.6

0.0

-0.2

Poland

3.1

4.8

5.1

4.0

3.6

3.3

0.0

0.0

0.0

10

Source: World Bank.
Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any
given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
2. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan, and Turkmenistan, for which data limitations prevent the forecasting of GDP
components.
3. Exports and imports of goods and non-factor services (GNFS).
4. Includes Albania, Armenia, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Kosovo, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
5. Includes Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, and Turkey.
6. Includes Bulgaria, Croatia, Hungary, Poland, and Romania.
7. Includes Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia.
8. Includes Belarus, Moldova, and Ukraine.
9. Includes Armenia, Azerbaijan, and Georgia.
10. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

101

E URO PE AND CE NTRAL AS IA

TABLE 2.2.2 Europe and Central Asia country forecasts1

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)
2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

Albania

3.3

3.8

4.1

3.7

3.7

3.8

0.1

0.2

0.3

Armenia

0.2

7.5

5.2

4.2

4.9

5.2

-0.1

0.3

0.6

Azerbaijan

-3.1

0.1

1.4

3.3

3.5

3.7

-0.3

0.2

1.0

Belarus

-2.5

2.5

3.0

1.8

1.3

1.2

-0.9

-1.2

-1.3

Bosnia and Herzegovina2

3.1

3.2

3.1

3.4

3.9

4.0

0.0

0.0

0.0

Bulgaria

3.9

3.8

3.1

3.0

2.8

2.8

-0.1

-0.2

0.0

Croatia

3.5

2.9

2.6

2.5

2.5

2.4

-0.3

-0.3

-0.2

Georgia

2.8

4.8

4.7

4.6

4.8

5.0

-0.4

-0.2

0.0

Hungary

2.3

4.1

4.9

3.8

2.8

2.6

0.6

0.0

0.2

Kazakhstan

1.1

4.1

4.1

3.5

3.2

3.2

0.0

0.0

0.0

Kosovo

4.1

4.2

4.2

4.4

4.5

4.5

-0.1

0.0

0.0

Kyrgyz Republic

4.3

4.7

3.5

4.3

4.0

4.1

0.9

0.1

0.1

Moldova

4.4

4.7

4.0

3.4

3.6

3.8

-0.4

0.1

0.6

Montenegro

2.9

4.7

4.9

2.9

2.4

2.3

0.1

-0.1

-0.2

North Macedonia

2.8

0.2

2.7

2.9

3.2

3.6

0.0

0.0

0.3

Poland

3.1

4.8

5.1

4.0

3.6

3.3

0.0

0.0

0.0

Romania

4.8

7.0

4.1

3.6

3.3

3.1

0.1

0.2

0.3

Russia

0.3

1.6

2.3

1.2

1.8

1.8

-0.3

0.0

0.0

Serbia

3.3

2.0

4.3

3.5

4.0

4.0

0.0

0.0

0.0

Tajikistan

6.9

7.1

7.3

6.0

6.0

6.0

0.0

0.0

0.0

Turkey

3.2

7.4

2.6

-1.0

3.0

4.0

-2.6

0.0

-0.2

Turkmenistan

6.2

6.5

6.2

5.6

5.1

4.9

0.0

0.0

0.0

Ukraine

2.4

2.5

3.3

2.7

3.4

3.8

-0.2

0.0

0.0

Uzbekistan

6.1

4.5

5.1

5.3

5.5

6.0

0.2

0.0

0.0

Source: World Bank.
Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may
differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars, unless indicated otherwise.
2. GDP growth rate at constant prices is based on production approach.
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Growth in Latin America and the Caribbean is expected to be subdued in 2019, at 1.7 percent, reflecting
challenging conditions in several of the largest economies. Gradually building momentum in Brazil and arecovery in Argentina are projected to contribute to a pickup in regional growth to 2.5 percent in 2020 and 2.7
percent in 2021. Financial conditions in the region have eased markedly since early 2019. Despite soft global
trade, regional export growth has picked up, boosted by trade diversion in response to bilateral tariffs by theUnited States and China, and by solid growth in the United States. As these effects wane and global tradedecelerates further, export growth in the region is projected to slow. Risks to the growth outlook remain tilted tothe downside. Sharper-than-projected slowdowns in the United States and China could have negative spillovers
on regional growth through trade, financial, and commodity market channels. Adverse market responses to
weak fiscal conditions and disruptions from natural disasters are other important risks. The crisis in Venezuela
also presents risks.

Recent developments
Following weak growth of 1.6 percent in 2018,activity indicators in Latin America and the
Caribbean (LAC), in aggregate, have been
subdued in the first half of 2019.1 However,conditions in the largest economies are uneven. In
Brazil, although labor and financing conditions
have improved, activity indicators remain sluggish.
Chile and Mexico are both experiencing
slowdowns, and the Argentine economy continues
to contract. Recent data for Colombia indicates a
gradually building expansion, however.
In contrast to global trends, trade in the region
continues to expand. Goods export volumes havegrown steadily since early 2018, recently
overtaking import growth (Figure 2.3.1.A). Thereis evidence that trade diversion, following theimposition of bilateral tariffs by the United States
and China, has benefited some LAC countries(Brazil, Mexico). However, export orders in somelarge economies have moderated in recent months,
consistent with weakening global trade growth.
Note: This section was prepared by Dana Vorisek. Research
assistance was provided by Mengyi Li.
1 Due to lack of data, the World Bank has ceased producing a
growth forecast for Venezuela and has removed Venezuela from all
growth aggregates in which it was previously included.

Manufacturing activity in the region decelerated at
the start of 2019, echoing a soft patch in global
industrial production around the turn of the year
(Figure 2.3.1.B). Mining (including oil) sector
activity in LAC continues to contract. Supply
disruptions in Brazil due to the Vale dam accident
and in Chile due to heavy rains contributed to thecontraction in early 2019, while declines in oil andgas production in Mexico persist.
Compared to the industrial sector, activity in theservices sector in LAC has been much more
supportive of growth (Figure 2.3.1.C). However,services growth softened in late 2018, largely due
to the weak performance in Argentina; the dragshould diminish as this economy recovers.
Financing conditions in the region have eased
markedly in recent months, with a general fall inbond yields and credit default swap (CDS)
spreads, even though in some cases bond yields
remain substantially higher than in 2017
(Argentina, Mexico, Venezuela; Figure 2.3.1.D).
Equity price indexes in major economies arehigher than in late 2018, reflecting improved
investor sentiment. Capital inflows have picked up
after slowing in much of 2018.
Inflows of remittances to LAC have been robust,in part reflecting strong U.S. labor market

104

CHAPTER 2.3

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 2.3.1 LAC: Recent developments
Export growth momentum has picked up in LAC in recent months. An
expanding services sector continues to be a source of growth. Industrial
production has been weak, however, especially mining production.
Financing conditions in the region have eased markedly since the start of
the year. The financial stress in Argentina last year and the subsequent
output contraction has had an impact on neighboring countries throughspecific sectors, such as tourism, but has not generated widespread
intraregional spillovers. The humanitarian and economic crisis in Venezuela
has deepened, and oil production has further collapsed.

A. Trade volume growth

C. Services sector growth

E. Tourism expenditures in Uruguay

B. Manufacturing and mining
production

D. Bond yields

F. Oil production in Venezuela

Source: CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, International
Energy Agency, JP Morgan, World Bank.
A. Lines show 3-month moving average growth of aggregate volumes for 13 countries representing
97 percent of regional GDP. Last observation is February 2019.
B. Lines show 3-month moving average of 2018 industrial production-weighted averages of Brazil,
Chile, Colombia, Ecuador, Mexico, Peru, and Uruguay for manufacturing and Brazil, Chile, Colombia,
Mexico, and Peru for mining. Last observation is March 2019.
C. LAC line shows 2018 GDP-weighted averages of Brazil, Chile, Colombia, Mexico, and Peru. Lastobservation is 2018Q4.
D. LAC line shows median of 16 countries; others show medians excluding the indicated countries.
Last observation is May 10, 2019.
E. Lines show 4-quarter moving averages. Last observation is 2018Q4.
F. Last observation is April 2019.
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conditions. In several of the countries whereremittances account for large shares of domesticGDP, remittance growth was more than 10
percent in 2018 (the Dominican Republic,
Guatemala, Honduras; World Bank 2019d).
Strong remittance inflows have helped offset
challenging social and economic conditions inseveral Central American countries in 2018 (e.g.,political and social unrest in Honduras andNicaragua).
With some key exceptions (Argentina, Venezuela),
inflation in LAC remains moderate, in part due tostable or strengthening exchange rates against the
U.S. dollar, following significant depreciations in
2018. Headline inflation has fallen in most of theregion during the past year, while core inflation
has been more stable. In most countries, policy
interest rates have been on hold or have beenadjusted downward since the end of 2018. Amongthe central banks in the regions using inflation
targets, inflation is in the target range in all butone (the Dominican Republic).
Although the 2018 crisis in Argentina did nothave broad-ranging spillovers within the region,
there have been some negative repercussions inneighboring countries. The value of Brazil’s
exports to Argentina fell by 15 percent in 2018.
Within Brazil’s industrial sector, vehicles,
automobile parts, and machinery are estimated tohave been most affected (Central Bank of Brazil
2019). Uruguay and Paraguay also experienced
slowdowns in export growth—in particular,
tourism exports—due to strong bilateral currency
appreciation against the Argentine peso (Figure
2.3.1.E). Remittance inflows to Paraguay, thelarge majority of which come from Argentina, fell
sharply in 2018, by about 19 percent.
In Venezuela, the humanitarian and economiccrisis is deepening. The population is experiencing
frequent electricity outages and water shortages;
widespread scarcity of basic goods, including foodand medicine; and sharp increases in infant andmaternal mortality rates, malnutrition, and casesof preventable diseases. An estimated 3.7 million
people had left the Venezuela as of early 2019—
approximately 12 percent of the country’s
population in 2015 (UNHCR 2019). This creates
challenges both in Venezuela and in host

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

countries. Mismanagement in the economicallyvital oil sector, together with insufficientmaintenance and investment, have contributed toa precipitous decline in oil production—to 1
million barrels per day in April, compared to an
average of 2.7 million barrels per day in 2010–15(Figure 2.3.1.F). Large-scale electricity blackouts
in the first quarter of the year resulted in a further
collapse of the industrial sector.

LATIN AME RIC A AN D THE C ARIBBE AN

105

FIGURE 2.3.2 LAC: Outlook and risks
Growth in LAC is expected to continue to be weak in 2019, and to recovermoderately during the forecast period. A rebound in fixed investment afteran extended period of weakness is expected to underpin the improved
regional growth forecast in 2020 and 2021. The outlook is subject toseveral downside risks, however. They include the possibility of sharperthan-projected slowdowns in the United States and China, which could
have spillover effects, as well as adverse market responses to poor fiscal
conditions and disruptions from natural disasters. The growing crisis in
Venezuela also presents risks for other countries in the region.

A. Growth outlook

B. Growth forecast downgrades

C. Investment

D. Impact of a 1-percentage point
growth slowdown in major economies

E. Government debt

F. Natural disasters

Outlook
The region is projected to post subdued growth in2019, of 1.7 percent, and to gain momentum
thereafter, with growth reaching 2.5 percent in2020 and 2.7 percent in 2021 (Figure 2.3.2.A and
Table 2.3.1). However, growth prospects for 2019and 2020 have been downgraded, reflecting
weaker-than-expected activity in Brazil and
Mexico, but also in smaller economies (Table
2.3.2). The growth forecast for 2019 has been
downgraded for close to half of LAC economies(Figure 2.3.2.B).
The regional recovery will be driven predominantly by private consumption as inflation
remains moderate and confidence returns and, in
2020-21, by a rebound in fixed investment
growth. Net exports are projected to subtractslightly from growth in 2020 and 2021, as
external demand weakens and import demandstrengthens. The forecast recovery in investment
growth is particularly welcome after weak
investment performance in recent years (Figure
2.3.2.C). Falling investment-to-GDP ratios, weak
productivity
growth,andunfavorable
demographic developments have all contributed toslowing potential output growth in recent years.
With the prices of commodities projected to berelatively stable, following substantial volatility inprior years, the importance of commodity pricechanges for regional economic developments
should diminish.
Among the largest economies in the region,
growth prospects are uneven. In Brazil, a weakcyclical recovery already underway is expected toslowly gain traction, with growth rising to 1.5
percent in 2019 and 2.5 percent in 2020. Easing
credit conditions, rising real wages, and, by 2020,

Source: Bloomberg, Centre for Research on the Epidemiology of Disasters, Haver Analytics,
International Monetary Fund, World Integrated Trade Statistics, World Bank.
B. Figure shows share of countries with growth downgrades for the current year.
C. Investment refers to real gross fixed capital formation (public and private combined). Investmentto-GDP ratio and investment growth are 2010 real GDP-weighted averages. Sample includes 17
economies representing 98 percent of regional GDP.
D. Bars represent medians and error bars 33-66 percent confidence bands. Spillover estimates arederived from cumulative impulse responses after two years from a Bayesian structural vector
autoregression estimated using quarterly seasonally adjusted GDP data. The maximum data
coverage is 1998Q1-2018Q2. Coverage for some countries is shorter: from 2000Q1 for Colombia,
and from 2000Q2 for Honduras. The model is estimated for each spillover destination country andthe variables include, in this Cholesky ordering: U.S. real GDP growth, EMBI, China’s real GDP
growth, Brazil’s real GDP growth (for South American economies) or Mexico’s real GDP growth (forCentral American economies), the country’s trade-weighted commodity price growth, the country’s
real GDP growth, and the country’s real effective exchange rate appreciation.
E. Sample includes 31 economies. Venezuela is excluded.
F. Annual averages for the periods indicated. Sample includes 32 LAC economies. “Other” eventsare earthquakes, tsunamis, landslides, mudslides, and fires. 1980s bar shows events that occurred
between 1980 and 1989, 1990s bar shows those between 1990 and 1999, 2000s shows thosebetween 2000 and 2009, and 2010s bar shows those between 2010 and February 2019.
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106

CHAPTER 2.3

reduced political uncertainty contribute to thisoutlook. In Argentina, the pace of contraction is
expected to ease in 2019, and the economy isexpected to resume expanding in 2020. The
recovery will be supported by robust export
growth, partly reflecting much higher agricultural
production after the drought in 2018. Investment
and government spending are expected to shrink
at faster rates in 2019 than in 2018, however.
Growth in Colombia is also forecast to continue
to strengthen. Corporate tax reforms, together
with the implementation of large-scale roadinfrastructure projects, will support a pickup in
investment growth.
In other large economies, growth is projected todecelerate for at least part of the forecast period. In
Mexico, growth is projected to ease for a fourthconsecutive year in 2019, to 1.7 percent, as adecelerating U.S. economy slows export demand
and uncertainty about key policy decisions by the
new administration constrain fixed investment. As
policy uncertainty fades, growth in Mexico is
expected to pick up moderately, to 2 percent in2020 and 2.4 percent in 2021. Growth in Chile isexpected to be dampened by slowing export
demand through 2021, together with planned
fiscal tightening.
Growth in Central America is projected toaccelerate moderately in the forecast period as thesubregion moves past a difficult 2018. The
exception is Nicaragua, where a political crisis thatbegan in early 2018 has severely dented investor
and consumer sentiment and is contributing to avery sharp contraction in investment.
In the Caribbean, growth is projected to slow to
3.4 percent in 2019, from 4.3 percent in 2018. In
the Dominican Republic, growth in the industrial
and services sectors is expected to moderateslightly, consistent with softer external demand as
global activity decelerates. And in Haiti, thelingering effects of social unrest in 2018, together
with projected fiscal tightening in the context of
an IMF program, are weighing on growth. Rapid
development of the offshore oil industry inGuyana will be the key driver of faster growth in
the Caribbean in 2020, to about 4.1 percent.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

Risks
The outlook for LAC is subject to predominantly
downside risks, emanating from both external anddomestic sources. Intensifying policy and politicaluncertainty, including a further escalation of trade
restrictions between major economies, could
weigh on investment and trade. Further, as the
fiscal stimulus in the United States winds down
and creditworthiness deteriorates in the corporate
sector, slowing U.S. growth could be sharper than
expected, with possible negative spillovers for LAC
economies with strong trade, financial, andremittances linkages to the United States (Figure
2.3.2.D). This risk is compounded by thepossibility of a larger-than-expected decelerationin economic activity in China. The United States
and China have both accounted for growing sharesof regional goods exports in recent years, although
there are differences within LAC subregions.
Roughly 80 percent of exports from Mexico andCentral America go to the United States, while
China has become the largest export destination ofseveral South American economies (Brazil, Chile,Peru, Uruguay).
Government debt has risen steadily in much of theregion during the past decade, to an average of 60
percent of GDP in 2018, with negative
implications for regional growth if borrowing costs
were to rise suddenly (Figure 2.3.2.E). Sovereign
credit ratings for several countries have been
downgraded since late 2018 (Argentina, Costa
Rica, Nicaragua). A downgrade of Mexico’s
national oil company, Pemex, has raised concerns
about how much more support the government
can provide to the ailing company without riskinga sovereign downgrade. Although slightly smallerfiscal deficits are expected to contribute to aleveling off of average government debt in theregion during the forecast period, average debt
stands at the highest level since 2005.
The worsening crisis in Venezuela is pressuring
fiscal accounts and social programs in other LAC
countries (World Bank 2018d). If economic
conditions in Venezuela (e.g., oil production andprices, and remittance inflows) worsen, emigration

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

107

LATIN AME RIC A AN D THE C ARIBBE AN

could rise significantly further, producing additional pressures. Within Venezuela, falling oil
production or remittances would limit theavailability of foreign currency and makeimporting basic goods, including food, morechallenging (Bahar and Barrios 2018). Regional
challenges related to growing outward migrationfrom Central America may also become moreacute.

Disruptions related to climate change and natural
disasters are a persistent source of downside risk to
the regional growth outlook. Hurricanes, floods,
droughts, and earthquakes have had detrimental
impacts on growth in numerous economies in theregion in recent years, and the region remains
highly vulnerable to such events (Figure 2.3.2.F).

TABLE 2.3.1 Latin America and the Caribbean forecast summary
Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE LAC, GDP1

2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

-0.3

1.7

1.6

1.7

2.5

2.7

-0.4

-0.2

0.0

(Average including countries with full national accounts and balance of payments data only)

2

EMDE LAC, GDP2

-0.3

1.7

1.6

1.7

2.5

2.7

-0.4

-0.2

0.0

GDP per capita (U.S. dollars)

-1.4

0.7

0.5

0.8

1.6

1.7

-0.3

-0.1

0.0

PPP GDP

0.1

1.9

1.6

1.8

2.6

2.7

-0.3

-0.1

0.0

Private consumption

-0.3

2.4

2.0

1.8

3.2

2.9

-0.3

0.3

0.0

Public consumption

1.0

0.6

0.7

-0.2

1.2

1.2

-0.3

1.0

0.8

Fixed investment

-5.3

-0.2

2.2

1.3

3.1

4.4

-1.0

-1.8

-0.3

Exports, GNFS3

2.6

3.8

4.3

4.1

3.7

3.8

-0.7

-0.2

-0.1

Imports, GNFS3

-1.3

5.8

5.5

3.0

4.7

4.6

-1.0

-0.1

-0.3

Net exports, contribution to growth

0.8

-0.4

-0.3

0.2

-0.2

-0.2

0.0

0.0

0.0

South America4

-1.7

1.5

1.2

1.6

2.6

2.7

-0.4

-0.1

0.0

Central America5

3.9

3.8

2.7

3.1

3.4

3.6

-0.3

-0.1

0.0

Memo items: GDP

Caribbean

2.3

2.5

4.3

3.4

4.1

4.1

-0.1

0.1

0.2

Brazil

-3.3

1.1

1.1

1.5

2.5

2.3

-0.7

0.1

-0.1

6

Mexico

2.9

2.1

2.0

1.7

2.0

2.4

-0.3

-0.4

0.0

Argentina

-2.1

2.7

-2.5

-1.2

2.2

3.2

0.5

-0.5

0.1

Source: World Bank.
Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any
given moment in time. Due to lack of data, the World Bank has ceased producing a growth forecast for Venezuela and has removed Venezuela from all growth aggregates in which it waspreviously included.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
2. Aggregate includes all countries in Table 2.3.2 except Dominica, Grenada, Guyana, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, andVenezuela, for which data limitations prevent the forecasting of demand-side GDP components.
3. Exports and imports of goods and non-factor services (GNFS).
4. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay.
5. Includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama.
6. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Suriname, and Trinidad and Tobago.
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108

CHAPTER 2.3

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.3.2 Latin America and the Caribbean country forecasts1

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)
2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

Argentina

-2.1

2.7

-2.5

-1.2

2.2

3.2

0.5

-0.5

0.1

Belize

-0.6

1.4

3.0

2.3

2.1

1.9

0.4

0.4

0.2

Bolivia

4.3

4.2

4.2

4.0

3.6

3.4

-0.3

-0.2

0.0

Brazil

-3.3

1.1

1.1

1.5

2.5

2.3

-0.7

0.1

-0.1

Chile

1.7

1.3

4.0

3.5

3.1

3.0

0.0

-0.2

-0.2

Colombia

2.1

1.4

2.6

3.5

3.7

3.7

0.2

0.0

0.1

Costa Rica

4.2

3.4

2.7

3.0

3.1

3.4

0.3

0.3

0.4

Dominican Republic

6.6

4.6

7.0

5.2

5.0

5.0

0.1

0.0

0.2

Ecuador

-1.2

2.4

1.4

0.0

0.4

0.8

-0.7

-0.3

-0.4

El Salvador

2.5

2.3

2.5

2.6

2.5

2.4

0.1

0.1

0.0

Grenada

3.7

5.1

5.2

3.9

3.7

3.7

-0.3

0.9

0.9

Guatemala

3.1

2.8

3.1

3.3

2.7

3.0

0.4

-0.3

-0.1

Guyana

3.4

2.1

4.1

4.6

33.5

22.9

0.0

3.5

-1.9

Haiti2

1.5

1.2

1.5

0.4

1.6

1.3

-1.9

-0.8

-1.2

Honduras

3.9

4.8

3.7

3.6

3.8

3.9

-0.2

0.0

0.2

Jamaica

1.4

1.0

1.9

1.6

1.7

1.9

-0.2

-0.3

-0.1

Mexico

2.9

2.1

2.0

1.7

2.0

2.4

-0.3

-0.4

0.0

Nicaragua

4.6

4.7

-3.8

-5.0

1.1

1.3

-4.5

-1.5

-2.3

Panama

5.0

5.3

3.7

5.0

5.4

5.2

-1.0

0.0

0.0

Paraguay

4.3

5.0

3.6

3.3

4.0

4.0

-0.6

0.0

0.0

Peru

4.0

2.5

4.0

3.8

3.9

4.0

0.0

0.1

0.3

St. Lucia

3.9

3.7

1.5

3.4

3.5

2.4

0.7

0.7

0.1

St. Vincent and the Grenadines

1.3

0.7

2.0

2.1

2.3

2.3

0.5

0.7

0.3

Suriname

-5.6

1.4

2.0

2.0

2.1

2.1

0.4

0.3

0.2

Trinidad and Tobago

-6.5

-1.9

0.7

0.9

1.5

2.1

0.0

0.3

0.9

Uruguay

1.7

2.6

1.6

1.5

2.3

2.5

-0.6

0.0

0.0

Source: World Bank.
Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here
may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
2. GDP is based on fiscal year, which runs from October to September of next year.
Click here to download data.

Growth in the Middle East and North Africa is projected to remain subdued in 2019, at 1.3 percent. Activity
in oil exporters has slowed due to weak oil sector output and the effects of intensified U.S. sanctions on Iran,despite an easing of fiscal stance and positive prospects in non-oil sectors in some countries. Many oil importers
continue to benefit from business climate reforms and resilient tourism activity. Regional growth is projected topick up to around 3 percent a year in 2020-21, supported by capital investment and policy reforms. Risks to theoutlook are tilted to the downside, including geopolitical tensions, reform setbacks, and a further escalation of
global trade tensions.

Recent developments
Growth is expected to remain subdued in the
Middle East and North Africa (MENA) in 2019
(Figure 2.4.1.A).1 Among oil exporters, oil
production cuts and a contraction in economic
activity in Iran due to U.S. sanctions have weighedon activity. Growth is improving modestly in oil
importers as policy reforms progress, despite longterm structural challenges. While easing externalfinancing conditions have supported regional
growth, weakening external demand has softened
export prospects.
Oil exporters’ growth has remained subdued. Oil
production cuts implemented by OPEC and some
non-OPEC members (OPEC+) to rebalance
global oil markets have constrained oil sector
growth in the Gulf Cooperation Council (GCC)
economies; however, as suggested by rising
Purchasing Managers’ Indexes, non-oil activity in

Note: This section was prepared by Lei Sandy Ye. Research
assistance was provided by Liu Cui.
1 The World Bank’s Middle East and North Africa aggregate
includes 16 economies and is grouped into three subregions. Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates
comprise the Gulf Cooperation Council (GCC); all are oil exporters.
Other oil exporters in the region are Algeria, the Islamic Republic of
Iran, and Iraq. Oil importers in the region are Djibouti, the Arab
Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and WestBank and Gaza. Syrian Arab Republic, the Republic of Yemen, andLibya are excluded from regional growth aggregates due to data
limitations.

large GCC economies is picking up amid easierfiscal stances and higher government spending(Figure 2.4.1.B). Oil exporters’ growth this year isalso being dragged down by a further economic
contraction in Iran as the effects of U.S. sanctions
intensify and private consumption weakens. Whilehigh government spending has supported activity
in Algeria, hydrocarbon sector activity has been
muted. Current account balances have improved
among oil exporters, supported by high oil prices
in most of 2018.
Growth has been steadily improving among oil
importers, led by the largest economies. In Egypt,
the largest country in this group, investment andnatural gas output have remained strong. Tourism
activity has been resilient and has supported thegrowth prospects of oil importers (Figure 2.4.1.C).
However, export growth has softened somewhat as
global demand weakened, particularly amongsmall countries in this group (Figure 2.4.1.D). Oil
importers continue to proceed with long-term
adjustments, including areas that amend gaps in
human capital development (Figure 2.4.1.E;
World Bank 2019e).
Inflation is contained in most of the MENA
region, with rates averaging less than 3 percent in
the past year in the GCC countries and fallingrecently to about 3 percent in the smaller oil
importers (Figure 2.4.1.F). Policy interest rates inthese economies have mostly remained neutral.
Moreover, in Egypt, inflation has subsided to

110

CHAPTER 2.4

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 2.4.1 MENA: Recent developments
Growth in the MENA region is projected to remain subdued at 1.3 percent
in 2019. In the large oil exporters, oil production cuts and U.S. sanctions on
Iran have weighted on activity, despite positive momentum in non-oil
sectors. Activity among oil importers has been supported by policy reforms
and improved tourism prospects, but is constrained by weaker external
demand. A number of countries continue to tackle long-term issues, suchas the need for human capital investment, through structural adjustment
programs. Inflation has eased in Egypt over the past year, but has risen
substantially over the past year in Iran, while remaining generally low andstable elsewhere.

A. GDP growth

B. Composite PMI

C. Tourism growth

D. Goods exports growth: oil
importers

E. World Bank Human Capital Index

F. Inflation

Sources: Haver Analytics, International Monetary Fund, World Bank.
A. Shaded area indicates forecasts. Aggregate growth rates calculated using constant 2010 GDP
weights.
B. Figure shows composite Purchasing Managers' Index (PMI). PMI readings above 50 indicate
expansion in economic activity; readings below 50 indicate contraction. Last observation is April
2019.
C. Figure shows average year-on-year growth of 3-month moving sum of tourism arrival for the
denoted periods. Last observation is end-2018.
D. Figure shows average year-on-year growth of 3-month moving sum of goods exports values.
Large oil importers are Egypt, Morocco, and Tunisia; small oil importers are Jordan and Lebanon.
“2019Q1” denotes January and February.
E. The Human Capital Index ranges between 0 and 1. The index is measured in terms of productivityof the next generation of workers relative to the benchmark complete education and full health. An
economy in which a child born today can expect to achieve complete education and full health willscore 1 on the Index. Includes 6 GCC economies, 3 non-GCC oil exporters, and 6 oil importers.
F. CPI inflation rates. Other oil importers include Jordan, Lebanon, Morocco, and Tunisia, Lastobservation is April 2019.
Click here to download data and charts.

about 13 percent (year-on-year) recently from apeak above 30 percent in July 2017; and thecentral bank cut interest rates in February 2019.
In contrast, Iran’s inflation (year-on-year) has
risen sharply from about 10 percent in mid-2018
to about 52 percent in April 2019, contributed bya depreciation of the rial in the parallel market of
more than two-fold compared to levels prior to theannouncement of U.S. sanctions in April 2018.
Financing conditions have eased this year as U.S.
policy rate hikes pause and renewed risk appetiteby international investors emerge. Bond issuancein the GCC remained robust this year, supported
in part by Saudi Aramco’s bond debut.
Government debt in many oil importers remains
high, in some instances exceeding 100 percent ofGDP, and continues to challenge their access tofinance internationally via high credit risk.

Outlook
Growth in the region is projected to decrease to
1.3 percent in 2019 and to pick up to about 3
percent in 2020-21. The projected pickup overthe next two years is largely driven by an assumed
rebound in activity in Iran as the impact of recent
U.S. sanctions wanes, and by an expected ramping
up of infrastructure investment in GCC
economies. Growth in the rest of the region is
projected to remain stable, with broadly resilient
domestic demand in key economies partly offset
by slowing external demand growth. Mediumterm growth prospects are contingent on
geopolitical tensions remaining contained andregional spillovers from conflict-ridden economies
remaining limited.
For oil exporters, growth in 2019 is expected todecrease slightly to 0.7 percent, with strengthening
non-oil activity only partly offsetting constraints
on oil sector activity. Growth is projected to pickup to 2.9 percent in 2020 before tapering slightly
in 2021. The rebound in 2020 is partly driven byrising growth in Iraq as oil production increases.
Stronger infrastructure investment (including an
expansion of natural gas capacity in some
economies), higher oil production, and eased
financing conditions associated with slowed rate
hikes are expected to support higher growth inG LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

GCC economies (World Bank 2019f; Figure
2.4.2.A).2 An improved regulatory and businessenvironment in the GCC will remain supportiveof private sector activity. Growth in Iran is
expected to resume in 2020-21, albeit at weakrates, as the impact of U.S. sanctions tapers andinflation stabilizes. Algeria’s growth is expected toremain subdued as an expected return to fiscal
consolidation weighs on non-oil activity.
Growth in oil importers is expected to rise steadily
from 3.9 percent in 2018 to 4.7 percent in 2021,
led by expansions in the larger economies. These
projections are predicated on business climate
reforms to support investment, healthy tourism
activity, and a slight easing in political risks.
Growth prospects in smaller oil importers (Jordan,
Lebanon, West Bank and Gaza) are highly
uncertain, however, as business and consumer
confidence are contingent on anticipated reforms
or foreign financial assistance. Banking sector
weakness and high public debt form significant
constraints on growth in smaller oil importers.
Nonetheless, tourism and renewed bilateral tradeopportunities (for instance, between Syria andJordan), aided by the easing of conflicts and by
policy initiatives, are expected to continue
supporting activity in most oil importers.
Continued IMF- and World Bank-supported
policy programs in many economies (e.g., Egypt,
Morocco) will promote structural adjustment,such as stronger fiscal management frameworks,
more vibrant small business entrepreneurship, andelectricity access; however, in other cases economic
prospects are contingent upon successful policy
resolution in some newly formed governments (forinstance, Lebanon). New reforms, such as
investment, industrial licensing and procurement
laws in Egypt; small and medium enterprisefinancing liberalizations in the United ArabEmirates; and participation of Djibouti in theConvention on the Settlement of Investment
Disputes between States and Nationals of Other
States, are expected to help relieve constraints in

2 The OPEC+ cuts are scheduled to expire in June and talks forrenewal will commence soon thereafter. The recent decision by the
U.S. to end its Iran sanctions waivers and OPEC’s reaction on oil
prices are expected to serve as inputs to these meetings.

MID D LE E AS T AN D NO RTH AFRIC A

111

FIGURE 2.4.2 MENA: Outlook and risks
Stronger momentum in the non-oil sector in the GCC, aided by a pause inrate hikes, is expected to support activity. There are several risks to thegrowth outlook, however. Slower-than-expected reforms could hamper not
only structural adjustment, but also efforts to diversify away from commodities. Trade disputes among major economies could weigh on external demand for both oil exporters and importers. Persistently lower-thanexpected growth in the Euro Area would constrain external demand for oil
importers.
A. GCC interest rates

B. Political stability and businessclimateC. Export Market Penetration Index

D. Euro Area trade exposure

Sources: Haver Analytics, International Country Risk Guide, International Monetary Fund, WorldBank.
A. GCC economies include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United ArabEmirates. Bahrain and Qatar have the same deposit rate values during the period denoted. Lastobservation is April 2019.
B. Political stability rating denotes the political risk rating of the International Country Risk Guide.
Business climate score denotes the overall Doing Business “distance to frontier” of the World Bank’s
Doing Business report. Figure shows unweighted averages. Latest observation in 2018.
C. Export Market Penetration index is based on the number of countries to which the reporter exports
a particular product divided by the number of countries that report importing the product from global
suppliers that year. Based on 2017 or latest available year of data. Includes 20 MENA economies.
D. Goods trade to Euro Area as a percent of total exports or imports for each subgroup denoted.
Based on 2018 data. Includes 6 GCC economies, 3 non-GCC oil exporters, and 7 oil importers.
Click here to download data and charts.

the corporate
confidence.

sectorandsupportinvestor

Risks
Risks remain tilted to the downside for both oil
exporters and importers, but for different reasons.
Geopolitical risks are elevated in some oil
exporters, while political challenges remain high in
oil importers. Peace remains fragile in conflictaffected economies (e.g., uncertainty over the UNcoordinated truce in the Yemen war), andeconomic and social mobility of refugees (e.g.,

112

CHAPTER 2.4

Syria) are still highly constrained (World Bank
2019g). Further amplification of U.S.-Irantensions would pose risks for the region’s
economies other than Iran.
Developments in oil production in Iran,
Venezuela, and the United States could add
volatility to oil prices, and this could complicate orstall fiscal adjustment in both oil exporters and oil
importers, including their subsidy reforms andother fiscal adjustment programs. Uncertainty
about oil prices may dampen oil exporters’
investment and social programs. Impact on oil
exporters could also dampen capital inflows andinvestment to oil importers via FDI andremittance linkages. Moreover, oil price volatility
may also translate to significant adjustment costs
for oil importers, including in countries with still
elevated energy subsidies.
Slower-than-expected reforms would weigh onregional activity, especially for oil importers.
Although some political uncertainties in theregion have been resolved (for example, formationof new governments), risks of reform delays orreversals remain, owing to budgetary concerns andlack of political consensus. Higher political risk,
by generating uncertainty and dampening investor
confidence, has been associated with weakerbusiness climate in the region (Figure 2.4.2.B).
Reconstruction in Iraq has been proceeding at amoderate pace, and materialization of its benefitsin2020
remains
uncertain.
Sustained
implementation of reforms in oil importers is
crucial for their medium-term growth, andbackloaded fiscal consolidation under high debt
levels in these economies may worsen the risk
overhang for the private sector and generate
additional uncertainty. Sustained structuralreforms are also necessary to put MENA
economies’ current accounts on a more sustained
path (Arezki et al. 2019) and to more fully untap
their export potential, such as higher market
penetration (Youssef and Zaki 2019; Figure
2.4.2.C).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

Further escalation of trade tensions remains a key
risk. Increased trade restrictions could dampen
external demand from major trading partners,
including the Euro Area (Figure 2.4.2.D).
Relatedly,
persistently
weaker-than-expected
activity in major trading partners, particularly theEuro Area, could weigh further on external
demand from these economies and weaken
remittance flows (World Bank 2019d). This risk
may be partly mitigated by enhanced regional
trade capacity (for instance, Djibouti export
logistics hub development).
Interest rates in the GCC economies have moved
broadly in tandem with U.S. rates, reflecting thegeneral pegging of their currencies to the U.S.
dollar. The recent pause of advanced-economy
monetary policy normalization and renewed risk
appetite for GCC assets have been supportive for
GCC financial assets. Nonetheless, GCC
economies have relatively open capital accounts,
and a resumed tightening of external financing
conditions is a downside risk to capital flows. In
non-GCC economies, banking sectors arevulnerable in some cases due to exposure tosovereign risks associated with high public debt
and policy uncertainty. Among oil importers,
average public debt level is about 90 percent ofGDP, exposing these economies to rollover risks
and fluctuations in global interest rates. In GCC
economies, public debt levels are lower but
increased capital market access (e.g., large bondissuances) will subject them to volatility in global
financial markets alongside the beneficial effects offinancial market deepening.
On the upside, rising spending on infrastructure
in conflict-affected countries (e.g., Iraq) may
generate positive spillovers to neighboring
economies. These include spending in soft
infrastructure, such as broadband internet andmobile phone, that may broaden access to service
delivery in areas like education, health, andfinancial services.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.4.1 Middle East and North Africa forecast summary

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE MENA, GDP1

113

MID D LE E AS T AN D NO RTH AFRIC A

2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

5.1

1.2

1.4

1.3

3.2

2.7

-0.6

0.5

0.0

(Average including countries with full national accounts and balance of payments data only)

2

EMDE MENA, GDP2

4.7

1.4

1.5

1.1

2.9

2.7

-0.5

0.2

0.0

GDP per capita (U.S. dollars)

2.8

-0.3

-0.1

-0.4

1.5

1.4

-0.5

0.2

0.0

PPP GDP

5.0

1.7

1.6

1.1

3.0

2.8

-0.5

0.2

0.0

Private consumption

2.9

2.2

0.8

1.3

1.9

2.1

-0.3

-0.4

-0.2

Public consumption

-6.3

2.9

0.9

1.4

1.4

1.0

0.3

-0.5

-0.9

Fixed investment

-0.3

2.4

3.7

4.4

5.7

6.4

0.8

1.0

1.6

Exports, GNFS3

9.6

4.1

3.8

0.4

3.9

3.6

-1.4

0.5

0.2

Imports, GNFS

-0.8

6.3

1.4

1.9

3.3

3.8

0.0

0.2

0.7

4.8

-0.2

1.4

-0.5

0.8

0.4

-0.7

0.3

-0.1

3

Net exports, contribution to growthMemo items: GDP
Oil exporters4

5.6

0.7

0.9

0.7

2.9

2.2

-0.7

0.6

-0.1

GCC countries5

2.4

-0.3

1.9

2.1

3.2

2.7

-0.5

0.5

0.0

Saudi Arabia

1.7

-0.7

2.2

1.7

3.1

2.3

-0.4

0.9

0.1

Iran

13.4

3.8

-1.9

-4.5

0.9

1.0

-0.9

-0.2

-0.1

Oil importers6

2.9

3.8

3.9

4.1

4.5

4.7

-0.1

-0.1

0.0

Egypt

4.3

4.8

5.4

5.7

5.9

6.0

0.0

0.0

0.0

4.3

4.2

5.3

5.5

5.8

6.0

-0.1

0.0

0.0

Fiscal year basis7

Source: World Bank.
Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any
given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Yemen due to data limitations.
2. Aggregate includes all countries in notes 4 and 6 except Djibouti, Iraq, Qatar, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components.
3. Exports and imports of goods and non-factor services (GNFS).
4. Oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
5. The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
6. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza.
7. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2018 reflects the fiscal year ended June 30, 2018.
Click here to download data.

114

CHAPTER 2.4

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.4.2 Middle East and North Africa economy forecasts1

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)
2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

Algeria

3.2

1.4

1.5

1.9

1.7

1.4

-0.4

-0.1

-0.4

Bahrain

3.5

3.8

1.8

2.0

2.2

2.8

-0.6

-0.6

0.0

Djibouti

9.1

4.1

6.0

7.0

7.5

8.0

-0.3

0.0

0.5

Egypt

4.3

4.8

5.4

5.7

5.9

6.0

0.0

0.0

0.0

4.3

4.2

5.3

5.5

5.8

6.0

-0.1

0.0

0.0

Iran

13.4

3.8

-1.9

-4.5

0.9

1.0

-0.9

-0.2

-0.1

Iraq

13.6

-1.7

0.6

2.8

8.1

2.3

-3.4

5.2

-0.5

Fiscal year basis

2

Jordan

2.0

2.1

2.0

2.2

2.4

2.6

-0.1

0.0

-0.1

Kuwait

2.9

-3.5

1.2

1.6

3.0

2.9

-2.0

-0.6

-0.7

Lebanon

1.6

0.6

0.2

0.9

1.3

1.5

-0.4

-0.2

0.0

Morocco

1.1

4.1

3.0

2.9

3.5

3.6

0.0

0.0

0.1

Oman

5.0

-0.9

2.1

1.2

6.0

2.8

-2.2

3.2

0.0

Qatar

2.1

1.6

1.4

3.0

3.2

3.4

0.3

0.2

0.4

Saudi Arabia

1.7

-0.7

2.2

1.7

3.1

2.3

-0.4

0.9

0.1

Tunisia

1.1

2.0

2.5

2.7

3.2

3.5

-0.2

-0.2

-0.1

United Arab Emirates

3.0

0.8

1.7

2.6

3.0

3.2

-0.4

-0.2

0.0

West Bank and Gaza

4.7

3.1

0.9

0.5

1.0

1.6

-1.4

-0.9

-0.3

Source: World Bank.
Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here
may differ from those contained in other Bank documents, even if basic assessments of economies’ prospects do not significantly differ at any given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Libya, Syria, and Yemen due to data limitations.
2. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2018 reflects the fiscal year ended June 30, 2018.
Click here to download data.

South Asia continued to enjoy solid economic activity in 2018, posting 7 percent GDP growth due to robust
domestic demand. Pakistan was a notable exception, with a broad-based weakening of domestic demand overthe past year against the backdrop of tightening policies aimed at addressing the country’s macroeconomic
imbalances. Regional growth is projected to remain close to 7 percent a year over the forecast horizon, as it
continues to benefit from strong private consumption and investment. The main risks to the outlook include a
re-escalation of political uncertainty and regional tensions, financial sector weakness due to nonperforming
assets, fiscal challenges amid elections in several countries, and a sharper-than-expected weakening of growth inmajor economies.

Recent developments
South Asia’s growth remains robust despite
headwinds from the global economy amid
weakening trade and manufacturing. Regional
output is estimated to have expanded by 7 percent
in 2018 (Figure 2.5.1.A). Economic activity was
underpinned by strong private domestic demand.
Private consumption and investment remainedrobust in much of the region, offsetting a
slowdown in Pakistan. Government spending
growth moderated in 2018, expanding closer tohistorical averages following rapid growth in 2017.
Net exports continued to contribute negatively toregional growth, with import growth remaining
stronger than export growth amid solid domestic
demand (World Bank 2019h).
Regional inflation has remained moderate in mostcountries, partly reflecting broadly stablecommodity prices (Figure 2.5.1.B). However,Pakistan has recently experienced a significant risein inflation driven by currency depreciation,
which was followed by several policy rate hikes
over the course of FY2018/19.
There has been limited progress in fiscal
consolidation in the region (Figure 2.5.1.C).
Recently announced budget plans indicate
Note: This section was prepared by Temel Taskin. Research
assistance was provided by Ishita Dugar.

divergent developments. India has announced apackage of direct benefits to farmers and some tax
breaks for the middle class while others (Pakistan,
Sri Lanka) are on paths of fiscal consolidation to
tackle sizable deficits. Current account deficits
broadly widened last year, but recent data show
signs of narrowing in a context of more stable oil
prices (Figure 2.5.1.D).
In India, the largest economy in the region, GDP
grew by 7.2 percent in FY2018/19 (April 1, 2018
to March 31, 2019)—the same pace as shown forthe previous year by upwardly revised data. A
slowdown in government consumption was offset
by solid investment, which benefited from bothprivate investment and public infrastructure
spending. Urban consumption was supported by apickup in credit growth, whereas rural
consumption was hindered by soft agricultural
prices. On the production side, robust growth wasbroad-based, with a slight moderation in services
and agricultural activity accompanied by anacceleration in the industrial sector. Weakening
agricultural production reflected subdued harvest
in major crops on the back of less rainfalls.
Services activity softened mainly due to slowing
trade, hotel, transport, and communication
activity. The industrial sector benefited fromstrong manufacturing and construction with solid
demand for capital goods. The slowing
momentum in economic activity in late 2018carried into the first quarter of 2019, as suggested

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G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

FIGURE 2.5.1 SAR: Recent developments
Growth in South Asia picked up to 7 percent in from 6.7 percent in 2017.
Inflation has softened in most countries, partly reflecting broadly stablecommodity prices. There has been limited progress in fiscal consolidationin the region. Current account deficits mostly widened last year, but recent
data show signs of narrowing amid more stable oil prices. PMIs havesoftened in the first half of 2019. Remittances inflows broadly picked up in
2018.
A. Growth

B. Inflation

C. Fiscal balances

D. Current account balances

E. Purchasing Managers’ Indexes

F. Net remittance inflow growth

Source: Haver Analytics, World Bank.
A. SAR = South Asia Region. Shaded areas indicate forecasts. Aggregate growth rates calculatedusing constant 2010 U.S. dollar GDP weights. Data for 2018 are estimates.
B. Last observation is March 2019 for Bangladesh and April 2019 for India, Pakistan, and Sri Lanka.
The 2019 data represent average y/y inflation year-to-date. The data refer to fiscal years of countries
except for Sri Lanka, as described in Table 2.5.1.
C. D. Shaded areas indicate forecasts. Data for 2018 are estimates. The data refer to fiscal years ofcountries except for Sri Lanka, as described in Table 2.5.1.
E. PMI readings above 50 indicate expansion in economic activity; readings below 50 show
contraction. Last observation is April 2019.
F. Data present the workers' remittances and compensation received by countries. The last available
observation is 2018Q4 for India and 2019Q1 for Bangladesh, Pakistan, and Sri Lanka.
Click here to download data and charts.

FY2018/19 (July 16, 2018 to July 15, 2019) from
5.8 percent in the previous fiscal year.1 This
slowdown reflects a broad-based weakening ofdomestic demand amid monetary and fiscal policy
tightening designed to address macroeconomic
imbalances, particularly large fiscal and current
account deficits. These have contributed to aconsiderable decline in international reserves tolevels that would cover less than three months ofimports (World Bank 2018c). On the productionside, recent high-frequency data indicate a notableweakening in both manufacturing and agricultural
sectors. Inflation increased considerably during thepast fiscal year, reflecting currency depreciation.
Recently, financial assistance from Gulf countries
and China, as well as an IMF program havehelped partially rebuild confidence.
In Bangladesh, GDP is estimated to expand by 7.3
percent in FY2018/19 (July 1, 2018 to June 30,2019), 0.3 percentage point higher than theprevious projection, as a recovery in remittanceinflows, stemming from improving economic
activity in source countries (Figure 2.5.1.F)
supported private consumption. While private
investment benefited from the improved outlook
for political stability, public investment wasunderpinned by progress in infrastructure projects.
In the first half of FY2018/19, exports to theUnited States and China increased significantly,
especially textile and apparel, in part reflecting
trade diversion due to bilateral tariff increases
between these two countries (World Bank 2018f).
Growth in Sri Lanka slowed marginally to 3.2
percent in 2018, on account of weaker domestic
demand. Decline in international reserves andelevated political controversy contributed todepressed investor sentiment and Sri Lanka’ssovereign credit rating was downgraded by one
notch by some rating agencies in 2018 (WorldBank 2019i). Activity remained soft in the firstquarter of 2019, constrained by tight monetary
policy. While last year’s political turbulence haslargely been resolved, recent security-related
incidents are weighing on confidence and activity.

by softening services and manufacturing
Purchasing Managers’ Indexes (Figure 2.5.1.E).
Elsewhere in the region, Pakistan’s growth isestimated to decelerate to 3.4 percent in

1 Pakistani authorities have revised the growth estimate for
FY2017/18 from 5.8 percent to 5.2 percent in February 2019.
However, the complete revised national accounts have not yet been
published, which is why the earlier figure is used in this document.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

In Afghanistan, GDP growth decelerated to 1
percent in 2018, partly owing to a severe drought
and increased political uncertainty. Nepal’s GDP
expanded by 6 percent in FY2018/19 on the backof solid services and industrial sector growth(World Bank 2018g). In Bhutan and Maldives,
economic growth in 2018 continued to beunderpinned by infrastructure projects andtourism. Maldives’ GDP expanded 7.9 percent in
2018, reflecting solid tourism receipts and a strong
construction sector growth with robust credit
growth and infrastructure projects. In Bhutan,
economic activity decelerated to an estimated 5.4
percent in FY2018/19 (July 1, 2018 to June 30,2019) as investment softened with delayedhydropower projects.

SOUTH ASIA

117

FIGURE 2.5.2 SAR: Outlook and risks
Domestic demand is expected to remain solid next year, with support frommonetary and fiscal policies in some cases, whereas contribution of net
exports will be limited with the subdued global trade outlook. The elevatedtension between major South Asian economies in mid-February did nothave a major immediate effect on financial markets, but a re-escalation
might reduce confidence and weigh on investment. Nonperforming assets
could remain elevated and weigh on credit growth unless further steps aretaken to enhance effectiveness of the resolution mechanisms. Uncertainty
about the Brexit process poses a risk to some South Asian economies thathave preferential trade agreements with the European Union. A higher-than-expected increase in oil prices would increase current account deficits
and inflation in the region.
A. Growth components

B. Stock market indexes

C. Nominal exchange rates

D. Nonperforming assets

E. Shares of exports to the United
Kingdom

F. Oil prices and share of oil inimports

Outlook
The outlook for South Asia over the forecasthorizon is expected to remain solid. Regional
GDP is expected to expand 6.9 percent in 2019,
0.2 percentage point down from previous
projections owing to downward revisions for
Pakistan, but to pick up to 7 percent in 2020 and
7.1 percent in 2021. Domestic demand growth isexpected to remain solid, with support frommonetary and fiscal policies in some cases (such as
India). The contribution of exports to economic
activity is expected to remain weak with moderate
global trade growth. (World Bank 2018h; Figure
2.5.2.A).
In India, growth is projected at 7.5 percent in
FY2019/20 (April 1, 2019 to March 31, 2020),
unchanged from the previous forecast, and to stayat this pace through the next two fiscal years.
Private consumption and investment will benefit
from strengthening credit growth amid more
accommodative monetary policy, with inflation
having fallen below the Reserve Bank of India’s
target. Support from delays in planned fiscal
consolidation at the central level should partially
offset the effects of political uncertainty aroundelections in FY2018/19 (Beyer and Milivojevic
2019; World Bank, forthcoming).
Pakistan’s growth is expected to slow further, to
2.7 percent, in FY2019/20 with domestic demandremaining depressed. Current account and fiscal

Source: Export Promotion Bureau of Bangladesh, Haver Analytics, International Monetary Fund,World Bank.
A. Aggregate growth rates calculated using constant 2010 U.S. dollar GDP weights. Data for 2018
are estimates.
B. SENSEX and KSE are major stock market indexes of India and Pakistan, respectively. The verticalline marks February 15, 2019. Last observation is May 22, 2019.
C. The foreign exchange rates are Indian rupee and Pakistan rupee per U.S. dollar. The vertical line
marks February 15, 2019. Last observation is May 21, 2019 for India and May 22, 2019 for Pakistan.
D. Last observation is 2018Q2 for Afghanistan, Bhutan, India, Pakistan, Maldives, and 2018Q1 for Sri
Lanka. Bangladesh observation is 2017.
E. Last observation is 2017 for Sri Lanka and 2018 for the rest. Data show exports to the United
Kingdom as a share of total exports.
F. Oil imports data cover Bangladesh, India, Pakistan, and Sri Lanka. Blue bars show oil imports as ashare of total imports. Oil price data are the simple average of Dubai, Brent, and West Texas
Intermediate. Shaded areas indicate forecasts.
Click here to download data and charts.

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CHAPTER 2.5

deficits are projected to diminish only gradually.
Workers’ remittances are expected to help improve
both growth performance and the current accountbalance next year, reflecting economic recovery insource countries (Figure 2.5.2.C). This, together
with a broadly stable external environment and areduction in macroeconomic imbalances, is
expected to lead to an increase in growth to 4.0
percent beginning in FY2020/21.
In Bangladesh, annual growth is projected toaverage 7.3 percent over the forecast horizon.
Activity will be underpinned by strong
infrastructure spending and solid private
investment with some easing of infrastructure
constraints. Slowing activity in major trade
partners’ economies (such as the Unites States andthe Euro Area) will constrain the contribution of
net exports to growth next fiscal year.
Economic activity in Sri Lanka is expected toaccelerate to 3.5 percent in 2019 and to average
3.6 percent over the forecast horizon. This modest
acceleration will be supported by a pickup inservices sector activity and solid infrastructure
investment.
Afghanistan’s growth is projected to accelerateover the forecast horizon, reaching 3.6 percent by
2021, on the assumption that political stability
will be restored by presidential elections in July.
The business environment, and thus economic
activity, is expected to benefit from an easing of
the domestic armed conflict.
In Nepal, growth of 6.1 percent a year is projected
over the medium term. The services sector will besupported by tourism, and manufacturing will bebolstered by the opening of the country’s largest
cement factory next year.
Bhutan’s growth is expected to remain solid at 5.4
percent in FY2019/20 (July 1 to June 30) and tocontinue at around this annual rate over theforecast horizon, supported particularly by tourism
and retail trade. Economic growth in the Maldivesis forecast at 5.7 percent in 2019, and is projected
to moderate to 5.3 percent over the medium term
as investment growth in the tourism sector
converges to historical averages.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

Risks
The main domestic risks to the outlook include a
re-escalation of political turbulence amid elections
in some countries (Afghanistan, Sri Lanka); fiscal
slippages with expanding public spending; and a
resurgence of non-bank financial sector funding
issues.
Military skirmishes between major South Asian
countries in mid-February remained contained,
and economic repercussions were minor.
However, a re-escalation of tensions between thetwo countries could increase uncertainty, depress
confidence, and weigh on investment in the region(Figures 2.5.2.B and 2.5.2.C). In Sri Lanka, a risein political uncertainty in the months leading up
to presidential and parliamentary elections, which
will take place in 2019 and 2020, respectively,
could weigh on business confidence. In addition,
recent security-related incidents could dampen
investor sentiment and perceptions.
In India, the new GST (goods and services tax)
regime is still in the process of being fully
established, creating some uncertainty about
projections of government revenues. Fiscal deficits
continue to exceed official targets in somecountries (India, Pakistan). Supply bottlenecks
such as infrastructure gaps, and relatively weakbusiness climates continue to depress domestic
and foreign investment potential in the region(Grainger and Zhang 2017; Aritua et al. 2018).
Setbacks in reforms to address these issues would
likely weigh on activity.
Nonperforming assets remain high in South Asia
(Figure 2.5.2.D). While recent measures helped
the recognition of these assets in India, theframeworks could still be improved by accelerating
the resolution process. Unless further steps aretaken to enhance effectiveness of the resolution
mechanisms, nonperforming assets could remain
elevated and pose a risk to financial stability andcredit growth, weighing on activity in the region.
External risks include weakening global growth
and rising policy uncertainty. A sharper-thanexpected deceleration in major economies or a
new escalation of trade-related tensions among

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019119

SOUTH ASIA

major economies would likely result in adverse
trade and financial market spillovers to the region.
High external debt and low international reserves
could limit the policy room to address external
shocks in some countries (Pakistan, Sri Lanka).
Uncertainty about the Brexit process poses a risk
to some South Asian economies which havepreferential trade agreements or generalized systemof preferences with the European Union andsignificant exports to United Kingdom(Bangladesh, India, Pakistan, Sri Lanka). A nodeal Brexit could have a significant impact onexports of those countries to the UK in theabsence of new trade agreements (Figure 2.5.2.E).
South Asia, as a net oil-importing region, isvulnerable to oil price spikes. A sudden increase inoil prices would tend to worsen current accountbalances and elevate inflation in the region (Figure
2.5.2.F). South Asia is also vulnerable to theeffects of climate change, such as natural disasters,
which tend both to increase inflation and weighon activity through supply disruptions, especiallyin the agricultural sector.

TABLE 2.5.1 South Asia forecast summary
Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE South Asia, GDP1, 2

2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

8.1

6.7

7.0

6.9

7.0

7.1

-0.2

-0.1

0.0

(Average including countries with full national accounts and balance of payments data only)3
EMDE South Asia, GDP3

8.2

6.7

7.1

6.9

7.0

7.1

-0.2

-0.1

0.0

GDP per capita (U.S. dollars)

6.9

5.5

5.8

5.7

5.8

5.9

-0.2

-0.1

-0.1

PPP GDP

0.0

7.6

6.2

7.6

6.9

7.0

7.1

-0.2

-0.1

Private consumption

7.6

6.2

8.3

7.0

6.9

7.0

0.0

-0.1

0.0

Public consumption

8.5

11.1

8.5

7.6

6.9

7.1

-1.5

-1.6

-1.4

Fixed investment

9.3

7.5

8.4

7.6

7.8

7.8

-0.3

0.1

0.3

4

1.9

6.0

7.8

5.4

5.2

5.5

-0.2

-0.7

-0.5

Imports, GNFS4

Exports, GNFS

2.7

13.0

14.0

6.2

5.8

6.1

-0.1

-0.9

-0.7

Net exports, contribution to growth

-0.3

-2.0

-2.1

-0.6

-0.6

-0.6

0.0

0.0

0.0

16/17

17/18

18/19e19/20f

20/21f

21/22f

19/20f

20/21f

21/22fSouth Asia excluding India

5.8

6.0

5.4

4.8

5.0

5.3

-0.7

-0.6

-0.3

India

8.2

7.2

7.2

7.5

7.5

7.5

0.0

0.0

0.0

Memo items: GDP2

Pakistan (factor cost)

5.4

5.8

3.4

2.7

4.0

4.7

-1.5

-0.8

-0.1

Bangladesh

7.3

7.9

7.3

7.4

7.3

7.3

0.6

0.5

0.5

Source: World Bank.
Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any
given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
2. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs
from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India.
3. Sub-region aggregate excludes Afghanistan, Bhutan, and Maldives, for which data limitations prevent the forecasting of GDP components.
4. Exports and imports of goods and non-factor services (GNFS).
Click here to download data.

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CHAPTER 2.5

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.5.2 South Asia country forecasts
Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)
2016

2017

2018e

2019f

2020f

2021f

2019

2020f

2021f

Calendar year basis 1
Afghanistan

2.3

2.7

1.0

2.4

3.2

3.6

-0.3

0.0

0.4

Maldives

7.3

6.9

7.9

5.7

5.2

5.3

-0.6

-0.4

-0.3

Sri Lanka

4.5

3.3

3.2

3.5

3.6

3.7

-0.5

-0.5

-0.4

21/22fFiscal year basis1

16/17

17/18

18/19e19/20f

20/21f

21/22f

19/20f

20/21fBangladesh

7.3

7.9

7.3

7.4

7.3

7.3

0.6

0.5

0.5

Bhutan

6.3

5.8

5.4

5.4

5.2

5.2

-1.0

-1.2

-1.2

India

8.2

7.2

7.2

7.5

7.5

7.5

0.0

0.0

0.0

Nepal

8.2

6.7

7.1

6.4

6.5

6.5

0.4

0.5

0.5

Pakistan (factor cost)

5.4

5.8

3.4

2.7

4.0

4.7

-1.5

-0.8

-0.1

Source: World Bank.
Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may
differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
1. Historical data is reported on a market price basis. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan,
Maldives, and Sri Lanka, which report in calendar year. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, andApril 1 through March 31 in India.
Click here to download data.

The recovery in Sub-Saharan Africa has disappointed, with weakening external demand, supply disruptions,and elevated policy uncertainty weighing on activity in major economies. Growth in the region is projected topick up from 2.5 percent in 2018 to 2.9 percent this year and an average of 3.4 percent in 2020-21, as
domestic demand gathers pace and oil production recovers in large exporting economies. However, this expected
recovery is significantly slower than previously projected, reflecting persistent headwinds in major economies,
and it is largely insufficient to make progress in poverty reduction. Downside risks to the outlook include
weaker-than-expected external demand, lower commodity prices, renewed stress in global financial markets,
fiscal slippages, political uncertainty, armed conflicts, and adverse weather conditions.

Recent developments
The economic environment in Sub-Saharan Africa(SSA) remains challenging, with external anddomestic headwinds that caused the slowdown in2018 dissipating more slowly than previously
envisaged (Figure 2.6.1.A). Weakening external
demand from major economies, persistent policy
uncertainty, and domestic growth bottlenecks
have been only partly offset by an easing of
external financing conditions and recoveringcommodity prices.
In Angola, Nigeria, and South Africa—the threelargest economies in the region—growth has
remained subdued in 2019. In Nigeria, theanticipated recovery in the oil sector—the main
source of government revenue—has been weaker
than expected as policy uncertainty continues toconstrain investment in new capacity. Weakdomestic demand amid high unemployment and achallenging business environment has dampened
growth in the non-oil sector. In South Africa,
continued policy uncertainty and rolling power
blackouts have slowed economic activity in thefirst half of 2019; however, it is expected tostrengthen aided by somewhat easier externalfinancing conditions and as the new
Note: This section was prepared by Rudi Steinbach. Research
assistance was provided by Mengyi Li.

administration’s fast-tracking of long-delayed
reforms gradually improves the businessenvironment. Angola is expected to emerge fromthree years of contraction, with the recent growth
momentum in the non-oil sector partly reflecting
reforms to bolster the business environment.
However, a faster-than-expected decline inproduction from decaying oil fields and lower
production from marginal oil fields have led tosignificantly weaker-than-expected growth in2019.
Elsewhere in the region, growth has been robust
among non-resource-rich countries, supported bysustained public investment (Rwanda, Uganda;
Figure 2.6.1.B). In some countries, consecutive
years of good harvests have boosted agricultural
exports (Benin, Côte d’Ivoire, Rwanda), andsupported robust consumption growth (Burkina
Faso, Kenya). In Ethiopia, however, weakeragricultural commodity prices, particularly coffee,
and persistent foreign exchange shortages haveweighed on activity.
Southern and East Africa was hit by twodevastating cyclones—Idai and Kenneth—in
March and April 2019, which took a heavy
human toll and severely affected economic activity
in the Comoros, Malawi, Zimbabwe, and inparticular, Mozambique. Among industrialcommodity exporters, growth has generally
strengthened—despite
deceleratingexternal

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CHAPTER 2.6

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FIGURE 2.6.1. SSA: Recent developments
The recovery in Sub-Saharan Africa has lost momentum, reflecting
subdued activity in Angola, Nigeria, and South Africa—the region’s largest
economies. More robust growth among non-resource-intensive economies
has been supported by sustained public investment, although the related
capital goods imports have contributed to widening current accountdeficits. External financing conditions have become more benign, andinflation has moderated across most of the region, but remains elevated ina number of countries. Interest burdens are exacerbating fiscal deficits.

A. GDP growth

B. Public sector investment, share ofGDP

C. Current account balances

E. Inflation, annual rate

D. Financing conditions: 10-year
government bond yields

F. Fiscal balances

Source: Haver Analytics; International Monetary Fund, World Economic Outlook; World Bank.
Note: Non-resource-intensive countries represent agricultural commodity-exporting and commodityimporting countries. Industrial commodity exporters represent oil- and metal-exporting countries.
A. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights.
B. GDP-weighted averages. Sample includes 22 non-resource-intensive countries and 15 industrialcommodity exporters.
C. Simple averages of country groupings.
F. Simple averages.
Click here to download data and charts.

demand—as oil and mining production continued
to benefit from investment in new capacity (Chad,
Democratic Republic of the Congo, Mauritania).
However, in Sudan—the fourth largest economy
in the region—economic activity contracted in2018 and is expected to continue doing so in thisyear as high inflation, chronic food and fuelshortages, and elevated political uncertainty
present significant headwinds to activity. Growthis also expected to contract in Zimbabwe in 2019,as sharply higher inflation curtails real income andprivate consumption. In contrast, growth in the
Democratic Republic of Congo continues to firm,with mining production rising sharply due toinvestment in new capacity.
Current account deficits have widened across theregion, partly reflecting weaker exports (Guinea,
The Gambia), and sizable capital goods imports
related to large investment projects (Côte d’Ivoire,
Mozambique, Niger; Figure 2.6.1.C). In nonresource-richcountries,
sustainedpublicinvestment spending is contributing to elevateddeficits (Kenya, Tanzania, Uganda). Internationalbond issuance activity has been slow to recoverafter weakening in the second half of last year, and
FDI inflows in the region remain mixed—despite
easier financing conditions and a partial recovery
in commodity prices. Capital inflows arenevertheless expected to sufficiently financecurrent account deficits—especially in countries
with large infrastructure investment programs.
Exchange rates have been broadly stable this year,
or have strengthened somewhat, amid improved
external financing conditions (Botswana, Kenya,
South Africa; Figure 2.6.1.D). This has, in part,
supported moderating inflation in many countries
in early 2019 (Angola, South Africa, Tanzania,
Uganda; Figure 2.6.1.E). Reduced inflationarypressures have allowed authorities to pausemonetary policy tightening in some countries(Lesotho, South Africa, Uganda), and ease theirstance in others (Angola, Ghana, Nigeria). In
Zambia, however, monetary policy was tightened
as renewed currency weakness is expected to lift
inflation above the central bank’s target. In Sudan,
repeated devaluations as well as monetization of
the fiscal deficit have fueled inflation rates inexcess of 40 percent, while the removal ofsubsidies and foreign-currency shortages have led
to comparable double-digit inflation rates in
Zimbabwe. Recent oil price increases are expected
to put renewed upward pressure on inflation in
many countries during 2019.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

Public debt vulnerabilities in the region remain aconcern. While primary deficits are expected tocontinue gradually narrowing to 1.2 percent of
GDP in 2019, overall deficits are expected toremain in excess of 3 percent, reflecting theincreases in interest burdens arising from thegrowth in government debt (Figure 2.6.1.F).
Higher interest burdens also reflect the shifting
composition of debt toward more expensive nonconcessional financing, which has increased toabout 60 percent of total external debt—about
one-third higher than in the 2000s (World Bank
2019j). These higher debt-servicing costs tend toconstrain non-interest expenditures and raise
concerns about debt sustainability. In nonresource-intensive
economies,
increasedindebtedness has largely reflected continued strong
public investment (Burkina Faso, Rwanda,
Uganda). Among industrial-commodity exporters,
rising government debt has been more acute,reflecting persistently large deficits amid
expenditure overruns and revenues weighed down
by softer export earnings and slower growth(Namibia, Nigeria, South Africa, Zambia; WorldBank 2019k).

SUB-SAHARAN AFRICA

123

FIGURE 2.6.2 SSA: Outlook and risks
The recovery in the region is projected to strengthen moderately, as oil
production improves in Angola and Nigeria and investor confidence firmsin South Africa. However, per capita growth is expected to remain low, anddownside risks dominate, including the possibility of a sharper-thanexpected slowdown in key partner economies. Rising public debt burdens
are an increasing source of vulnerability across the region. Banking sectors
have become more vulnerable in some countries. A return to El Niño
conditions in 2019 could weigh on agricultural production.
A. GDP growth

B. GDP growth per capita

C. Shares of SSA exports to large
economies

D. Government debt

E. Nonperforming loans

F. Agricultural production growthand El Niño

Outlook
Growth in the region is projected at 2.9 percent
this year, up from 2.5 percent in 2018, but half apercentage point lower than previously forecast,reflecting more pronounced domestic headwinds
and weaker-than-expected external demand. Thistranslates into per capita growth of a mere 0.2
percent for 2019, following three consecutive
years of contraction.
Growth in the region is expected to improve
gradually over the forecast horizon, reaching 3.3
percent in 2020 and 3.5 percent in 2021 (Figure
2.6.2.A). This cyclical recovery is weaker thanpreviously envisioned—despite some increase incommodity prices—reflecting in part weaker
demand growth in major trading partners and, inparticular, an increasingly challenging businessenvironment in Sudan amid heightened politicaluncertainty. The forecast assumes that investor
sentiment will improve in some of the large
economies in the region, that oil production inlarge oil exporters will recover, and that robust

Source: Haver Analytics; International Monetary Fund, World Economic Outlook; NOAA/National
Weather Service Climate Prediction Center; World Bank.
A.-B. Aggregate growth rates calculated using 2010 U.S. dollar GDP weights. Non-resource-intensive
countries represent agricultural commodity-exporting and commodity-importing countries. Industrialcommodity exporters represent oil- and metal-exporting countries.
D. Simple averages of country groupings.
E. Nonperforming loans are expressed relative to total gross loans. 2019Q1 for South Africa reflects
data for January 2019.
F. ONI is the Oceanic Niño Index that measures sea surface temperature anomalies in degrees
Celsius within the Niño 3.4 region of the eastern Pacific Ocean. Sustained ONI values outside of the+/- 0.5 threshold indicate El Niño or La Niña events.
Click here to download data and charts.

growth in non-resource-intensive economies will
be underpinned by continued strong agricultural
production and sustained public investment.

124

CHAPTER 2.6

While per capita GDP growth is expected to
improve somewhat, rising to 0.7 percent in 2020
and 0.9 percent in 2021, it will remain insufficient
to significantly reduce poverty in the region(Figure 2.6.2.B). In countries where progress isbeing made in poverty reduction, increased
prosperity is not always shared, as economic
growth is often concentrated in urban areas withlittle benefit to the rural poor.
In South Africa, growth is expected to pick up
from 1.1 percent in 2019, to 1.5 percent in 2020
and 1.7 percent in 2021. This forecast ispredicated on fading policy uncertainty and on a
gradual growth dividend from reforms to improvethe business environment. Slower growth in theEuro Area—South Africa’s main export
destination—is expected to be counterbalanced, inpart, by more benign external financing conditions
and rising investment spending, reflecting thegovernment’s commitment to accelerate public
investment projects in cooperation with theprivate sector.
Similarly, growth in Angola is expected tostrengthen from 1 percent in 2019 to around 2.9
percent in both 2020 and 2021. The improved
outlook, particularly for 2020, reflects anincreasingly favorable business environment alongwith a boost from the oil sector as new capacity
comes on stream.
In Nigeria, growth is expected at 2.1 percent thisyear—a weaker-than-expected pace reflecting thecontinued constraints from foreign exchange
restrictions, supply disruptions in the oil sector,
and a lack of much-needed reforms to spur new
capacity. Growth is projected to remain broadly
stable in 2020, before strengthening to 2.4 percent
in 2021.
Excluding Angola, Nigeria, and South Africa,
regional growth is expected to be more robust,rising from 4.6 percent in 2019 to an average of 5
percent in 2020-21. The cyclical recovery amongindustrial-commodity exporters will be supported
over the forecast period by investment in new oiland natural gas capacity in several oil exporters(Cameroon, Ghana), and increased mining
production in some metal-exporting countries, as

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019new capacity comes on stream (Democratic
Republic of the Congo, Guinea). In Sierra Leone,
however, mine closures will remain a drag on
metals production. Among non-resource-intensive
economies, sustained strong public infrastructure
spending, combined with increased private sector
participation, will continue to support economic
activity (Ethiopia, Rwanda, Tanzania, Uganda). In
the West African Economic and Monetary Union,
these factors will contribute to growth remaining
above 6 percent over the next two years.

Risks
The outlook is subject to several downside risks.
On the external front, a sharper-than-expected
deceleration in activity in key trading partners,
including China, the Euro Area, and the UnitedStates, could weigh on growth. These three
economies together account for more than onethird of the region’s exports and one-fifth of FDI
inflows (Figure 2.6.2.C). The slowdown in theEuro Area could be aggravated by a disorderly exitof the United Kingdom from the European
Union, while a further escalation of trade tensions
between the United States and China could
adversely impact activity in both economies. A
sharper-than-projected slowdown in China would
hit metal exporting countries particularly hard as it
accounts for more than one-half of global metals
demand (World Bank 2016, 2018i). Lower-thanexpected commodity prices pose an additional risk
to the outlook, as the region remains highly reliant
on commodity export revenues.
Domestically, various developments could weaken
fiscal positions. First, while external financing
conditions have recently become more benign,
they could tighten again if investor sentiment were
to deteriorate. This could pose a significant risk to
the outlook for countries with elevated debt
burdens or where a large share of debt isdenominated in foreign currency, as higher
interest rates and weaker currencies would raisedebt-servicing and refinancing costs, absorb
revenues, and constrain poverty-reducing
expenditures (Figure 2.6.2.D). Second, stateowned enterprises in some countries (Angola,
Ethiopia, Ghana, Mozambique, South Africa),

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

particularly in the energy sector, have sizable debts
that pose an additional contingent liability risk toalready indebted governments (Bova et al. 2019).
Third, countries holding elections during the next
two-and-a-half years together account for onequarter of the region’s GDP, and the risk of fiscal
slippages is particularly high, as domestic politicalconsiderations
could
undermine
fiscalconsolidation efforts (Ethiopia, Ghana, Tanzania,
Zambia; Neumann and Ssozi 2015). Fourth, incountries where continued public investment is
expected to support growth, the sustainability
thereof could weaken if not accompanied bystrong public investment management.
Regardingbanking
sectorvulnerabilities,
nonperforming loan (NPL) ratios have risen, or
remain elevated, among some industrialcommodity exporters (Cameroon, Namibia,
Nigeria, South Africa), as weaker growth andsofter export revenues have translated into
increasingly impaired private sector balance sheets(Figure 2.6.2.E). In Ghana, the large stocks of
NPLs are mostly related to state-owned
enterprises, and the authorities’ continued
measures to help clear them have been
contributing to improved credit extension.

SUB-SAHARAN AFRICA

Nevertheless, if slower-than-expected growth wereto materialize, banking sectors could become evenmore vulnerable and likely amplify the growth
slowdown (Mpofu and Nikolaidou 2018).
Risks that political instability, armed conflicts, orinsurgencies may weigh on economic activity areparticularly elevated in some economies(Cameroon, Nigeria, Sudan, Zimbabwe).
Conflicts and insurgencies, in particular, could
lead to forced displacements and hit agricultural
production especially hard, reducing incomes andheightening food insecurity in many areas (Adelaja
and George 2019). In some countries, acontinuation of disappointing growth could
become self-perpetuating. As slower growth stifles
social progress and poverty reduction efforts,
discontent and populist policies could become
more widespread. This could further elevate policy
uncertainty and undermine investor confidence.
The extreme weather events that have afflictedagricultural sectors in Southern and East Africa
during the first half of this year include the returnof El Niño conditions (Figure 2.6.2.F). Moresevere droughts than assumed could further
suppress agricultural output and exacerbate
poverty.

125

126

CHAPTER 2.6

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

TABLE 2.6.1 Sub-Saharan Africa forecast summary

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE SSA, GDP1

2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

2021f

1.3

2.6

2.5

2.9

3.3

3.5

-0.5

-0.3

-0.2

(Average including countries with full national accounts and balance of payments data only)2
EMDE SSA, GDP2,3

1.3

2.6

2.5

2.9

3.3

3.5

-0.5

-0.3

-0.2

GDP per capita (U.S. dollars)

-1.4

-0.1

-0.2

0.2

0.7

0.9

-0.6

-0.2

-0.1

PPP GDP

1.6

2.9

2.8

3.1

3.5

3.7

-0.6

-0.3

-0.2

Private consumption

0.0

2.2

2.0

2.2

2.7

2.8

-0.6

-0.2

0.3

Public consumption

-0.4

1.1

2.6

2.6

2.5

2.7

-0.3

-0.5

-0.1

Fixed investment

-0.6

4.7

5.8

5.9

6.1

6.7

-1.0

-0.9

-0.8

Exports, GNFS4

2.3

6.7

2.1

2.3

3.1

3.0

-0.8

-0.3

-0.1

Imports, GNFS4

-3.0

2.7

4.2

3.0

3.4

3.7

-0.5

-0.2

-0.1

Net exports, contribution to growth

1.6

1.2

-0.6

-0.2

-0.1

-0.2

-0.1

0.0

0.1

SSA excluding Nigeria, South Africa,and Angola

4.2

4.8

4.4

4.6

4.9

5.0

-0.8

-0.5

-0.4

Oil exporters5

-0.7

1.5

1.4

2.1

2.5

2.6

-0.8

-0.3

-0.2

Memo items: GDP

CFA countries

6

CEMAC
WAEMU
SSA3

2.9

3.4

4.3

5.0

5.0

5.1

0.1

0.3

0.5

-0.8

-0.2

1.7

3.1

3.1

3.3

0.1

0.5

1.0

6.4

6.6

6.5

6.6

6.5

6.5

0.2

0.1

0.2

-0.8

0.9

1.0

1.6

2.0

2.2

-0.3

-0.1

0.1

Nigeria

-1.6

0.8

1.9

2.1

2.2

2.4

-0.1

-0.2

0.0

South Africa

0.6

1.4

0.8

1.1

1.5

1.7

-0.2

-0.2

-0.1

-2.6

-0.1

-1.7

1.0

2.9

2.8

-1.9

0.3

0.0

AngolaSource: World Bank.
Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any
given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan.
2. Sub-region aggregate excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan, for which data limitations prevent the forecasting of GDP components.
3. Sub-region growth rates may differ from the most recent edition of Africa's Pulse (https://www.worldbank.org/en/region/afr/publication/africas-pulse) due to data revisions and the inclusionof the Central African Republic and São Tomé and Principe in the sub-region aggregate of that publication.
4. Exports and imports of goods and non-factor services (GNFS).
5. Includes Angola, Cameroon, Chad, Republic of Congo, Gabon, Ghana, Nigeria, and Sudan.
6. Includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Mali, Niger, Senegal, and Togo.
Click here to download data.

127

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

SUB-SAHARAN AFRICATABLE 2.6.2 Sub-Saharan Africa country forecasts1

Percentage point differencesfrom January 2019 projections(Real GDP growth at market prices in percent, unless indicated otherwise)
2016

2017

2018e

2019f

2020f

2021f

2019f

2020f

Angola

-2.6

-0.1

-1.7

1.0

2.9

2.8

-1.9

0.3

2021f
0.0

Benin

4.0

5.8

6.5

6.5

6.5

6.5

0.3

0.0

-0.1
-0.1

Botswana

4.3

2.9

4.5

4.2

3.9

4.0

0.3

-0.2

Burkina Faso

5.9

6.3

6.8

6.0

6.0

6.0

0.0

0.0

0.0

Burundi

-0.6

0.5

1.6

1.8

2.1

2.0

-0.5

-0.4

-0.8
-0.2

Cabo Verde

4.7

4.0

4.5

4.4

4.6

4.7

-0.3

-0.3

Cameroon

4.6

3.5

4.0

4.2

4.4

4.6

0.0

-0.1

0.1

Chad

-6.3

-3.0

2.6

3.4

5.6

4.8

-1.2

-0.5

-0.1

Comoros

2.2

2.7

2.8

3.1

3.2

3.2

0.0

0.1

0.1

Congo, Dem. Rep.

2.4

3.7

5.8

5.9

6.5

6.8

1.3

1.0

0.9

Congo, Rep.

-2.8

-3.1

0.8

5.4

1.5

1.9

2.2

1.6

3.4

Côte d’Ivoire

8.0

7.7

7.4

7.4

7.3

7.3

0.1

-0.1

0.5

Equatorial Guinea

-8.8

-4.7

-2.9

-2.2

-1.9

-1.8

-0.1

3.9

4.0

Eswatini

3.2

1.9

0.5

1.1

1.6

1.7

-0.6

-0.2

-0.1

Ethiopia2

7.6

10.2

7.9

7.9

8.2

8.2

-0.9

-0.7

-0.7

Gabon

2.1

0.5

0.8

2.8

3.7

3.9

-0.2

0.0

0.2

Gambia, The

0.4

4.6

6.6

5.4

5.2

5.0

0.0

0.0

-0.2

Ghana

3.4

8.1

6.3

7.6

7.0

5.8

0.3

1.0

-0.2

Guinea

10.5

10.6

5.8

5.9

6.0

6.0

0.0

0.0

0.0

Guinea-Bissau

6.3

5.9

3.8

4.3

4.8

5.5

0.1

0.4

1.0

Kenya

5.9

4.9

6.3

5.7

5.9

6.0

-0.1

-0.1

0.0

Lesotho

3.1

-0.4

1.7

1.5

0.4

4.1

0.3

0.2

2.3

Liberia

-1.6

2.5

1.2

0.4

1.6

1.3

-4.1

-3.2

-3.5

Madagascar

4.2

4.3

5.2

5.2

5.3

5.1

-0.2

0.0

-0.2

Malawi

2.5

4.0

3.5

4.5

4.7

5.1

0.2

-0.6

-0.4

Mali

5.8

5.3

4.9

5.0

4.9

4.8

0.0

0.0

0.0

Mauritania

2.0

3.0

3.6

6.7

5.8

6.0

1.8

-1.1

-0.9

Mauritius

3.8

3.8

3.8

3.9

3.9

3.5

-0.1

0.3

-0.1

Mozambique

3.8

3.7

3.3

2.0

3.5

4.2

-1.5

-0.6

0.1

Namibia

1.1

-0.9

-0.1

0.9

1.5

1.9

-0.9

-0.6

-0.2
0.0

Niger

4.9

4.9

5.2

6.5

6.0

5.6

0.0

0.0

Nigeria

-1.6

0.8

1.9

2.1

2.2

2.4

-0.1

-0.2

0.0

Rwanda

6.0

6.1

8.6

7.8

8.0

7.5

0.0

0.0

-0.5
0.1

Senegal

6.2

7.2

6.8

6.8

7.0

7.0

0.2

0.2

Seychelles

4.5

5.3

3.6

3.4

3.0

3.2

0.0

-0.3

0.3

Sierra Leone

6.4

3.8

3.7

5.4

5.4

5.2

0.3

-0.9

-1.1

South Africa

0.6

1.4

0.8

1.1

1.5

1.7

-0.2

-0.2

-0.1

Sudan

4.7

4.3

-2.3

-1.9

-1.3

-0.8

-5.5

-5.1

-4.6

Tanzania

6.9

6.8

6.0

5.4

5.7

6.1

-1.4

-1.3

-0.9

Togo

5.2

4.3

4.9

5.0

5.2

5.1

0.2

0.1

0.0

Uganda

4.6

3.9

5.9

6.1

6.5

5.8

0.1

0.1

-0.7

Zambia

3.6

3.4

3.5

2.5

2.8

2.8

-1.1

-1.0

-1.0

Zimbabwe

0.8

4.7

3.5

-3.1

3.5

4.9

-6.8

-0.5

0.9

2

Source: World Bank.
Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here
may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
1. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Central African Republic, São Tomé and Príncipe, Somalia, and South Sudan.
2. Fiscal-year based numbers.
Click here to download data.

128

C H A P TE R 2

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Development

129

SPECIAL FOCUS 2.1
Growth in Low-Income Countries:
Evolution, Prospects, and Policies

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

S P EC IAL FO CU S 2.1

Growth in Low-Income Countries:
Evolution, Prospects, and Policies
There are currently 34 countries classified as low-income, about half the number in 2001. Rapid growth in
low-income countries from 2001-18 allowed many to progress to middle-income status, supported by a pre-crisis
commodity price boom, the MDRI and HIPC debt relief initiatives, increased investment in human andphysical capital, improved economic policy frameworks, and recoveries from the deep recessions in transition
economies during the 1990s. However, the prospects for today’s LICs appear much more challenging. Comparedto the LICs in 2001 that became middle-income countries, today’s LICs are further below the middle-income
threshold and more often fragile than were LICs in 2001. Their heavy reliance on agriculture makes themvulnerable to climate change and extreme weather events, and their scope to boost external trade is limited bygeography. Coordinated and multi-pronged policy efforts are required to address these challenges.

Introduction
Since 2001, the number of low-income countries(LICs) has almost halved, to 34 in 2019 from 64
in 2001 (Figure SF2.1.1.A).1 During this period,
their number rose to a peak of 66 in 2003 before
falling to a trough of 31 in 2016. Since then,however, the decline has stalled, if not reversed,
with four countries—Senegal, the Syrian Arab
Republic, Tajikistan, and the Republic of
Yemen—relapsing into LIC status amid armed
conflict and terms of trade shocks, while only one
country (Cambodia) reached middle-income
status. The countries classified as LICs in 2001
that have converged to middle-income (MIC)
status experienced average growth of 5.8 percent a
year during 2001-2018—about one-half fasterthan non-LIC EMDEs over the same period andone-quarter faster than those 2001 LICs that haveremained in the group (4.5 percent), althoughwith wide heterogeneity (Figure SF2.1.1.B).
Several factors have contributed to the rapid
economic growth of the 2001 LICs. Twelve 2001
LICs were transition economies, of which nine
rebounded sharply during the 2000s from theirNote: This Special Focus was prepared by Rudi Steinbach.
Research assistance was provided by Mengyi Li.
1 LICs in 2019 reflect the country classification of the 2018/19
World Bank fiscal year and are defined as countries with GNI per
capita (World Bank Atlas method) of $995 or less in 2017; 2001
LICs reflect the country classification of the 2000/01 fiscal year and
had GNI per capita of $755 or less in 1999. New thresholds are
determined at the start of each World Bank fiscal year. Of the 64
2001 LICs, 32 moved to middle-income country status while 32
remained classified as LICs in 2019.

deep recessions in the 1990s.2 Among nontransition 2001 LICs, rapid investment growth
boosted overall economic growth, on averagecontributing more than one-third to output
growth during 2001-18. In six of these countries(Cameroon, the Democratic Republic of Congo,
Guinea, Indonesia, Mauritania, Mozambique),investment booms followed new resource
discoveries. Debt relief in the early 2000s, and thefiscal space created by it, supported government
spending on non-interest expenditure.3 In addition, business climates and policy frameworks
improved in most of the 2001 LICs.
Rapid economic growth in LICs has contributed
to poverty reduction. The share of extreme poorin the population of 2001 LICs has fallen by 16
percentage points, on average, and this has
contributed 20 percentage points—about one
third—to the decline in the global poverty
headcount between 2001 and 2015. This
contribution, however, mostly reflects sharp
declines in the poverty headcount of the 2001
LICs that reached middle-income levels, whilemasking broadly unchanged poverty headcounts
among the countries that have remained, or
became, LICs (Figure SF2.1.1.C). Today’s LICs

2 Transition economies are economies that changed from centrallyplanned to market-oriented economic systems. Those that were LICs
in 2001 include Armenia, Azerbaijan, Georgia, the Kyrgyz Republic,
Cambodia, Lao People’s Democratic Republic, Moldova, Tajikistan,
Turkmenistan, Ukraine, Uzbekistan, and Vietnam. On average, theireconomies contracted by an estimated 30 percent during 1990-1996.
3 Government non-interest expenditure rose by 2 percentage points
of GDP, on average, between the year of debt relief and 2018.

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FIGURE SF2.1.1 LIC growth since 2001
The number of LICs has declined from 64 in 2001 to 34 in 2019. Growth in
LICs benefited from several factors and has allowed 32 countries toprogress to middle-income status. Sharp declines in LIC poverty rates
have contributed one-third to the decline in the global poverty headcountsince 2001. However, these declines mask broadly unchanged
headcounts among countries that have remained LICs. While the share of
LICs in the global population has declined by three-quarters—from 41
percent in 2001 to 10 percent in 2015—they are home to more than 40
percent of the world’s poor.
A. Number of LICs by region

C. LIC poverty rates and headcounts

LIC EMDEs to meet the Sustainable
Development Goals by the end of next decade,underscoring the need for sustained and robust
growth (Gaspar et al. 2019).
Against this backdrop, this Special Focus examines
the following questions.
•

What has driven and supported growth in
LICs since 2001?

•

How have these factors
progression to MIC status?

•

What are the prospects for future progression
among today’s LICs?

B. Average annual GDP growth,
2001-18

D. World poverty and LIC share ofworld population

Source: United Nations, World Bank.
A. LICs = low-income countries. LICs in 2001 had per capita GNI (US$, current) at $755 or below,
while LICs in 2019 have per capita GNI at $995 or below in 2017.
B. Other EMDEs exclude 2001 LICs.
C. Latest reflects 2015 data. Due to data limitations, poverty share for “LICs turned MICs” includes 26
of 32 countries and reflects 94.1 percent of the sample population in 2015; “Continued LICs” includes
25 of 32 countries and reflects 79.8 percent of the sample population.
D. Latest reflects 2015 data. Due to data limitations, poverty share for “LICs turned MICs” includes 26
of 32 countries and reflects 94.1 percent of the sample population in 2015; “Today’s LICs” includes 34
of 34 countries.
Click here to download data and charts.

account for less than one-tenth of the global
population (one-quarter their share in 2001).
However, they are home to around 40 percent of
the world’s extreme poor (Figure SF2.1.1.D). This
share is expected to remain elevated amid
continued fragility in many of these economies,
while the poverty headcount is expected tocontinue to decline elsewhere.
Today’s LICs face severe challenges that threaten
to hold back convergence of their per capita
incomes with those in MICs. Today’s LICs also
face significantly larger spending needs than non-affected

LIC

This Special Focus presents the following findings.
First, growth in low-income countries—and,especially those that have progressed to middleincome status—has benefited from a confluence offavorable developments since 2001. Second,
prospects for further progress by today’s LICs
toward middle-income status are challenging.
Compared to the LICs of 2001 that became
MICs, today’s LICs have per capita incomes thatare even further below the middle-income
threshold, more likely to be fragile, more often
landlocked and clustered with other LICs, heavily
reliant on agriculture, and face weaker prospects
for long-term commodity demand.4 Third, since
today’s LICs account for 40 percent of the global
extreme poor, challenging prospects for LIC
growth will set back progress towards eliminating
extreme poverty globally.
This Special Focus extends previous analysis of
LIC growth (World Bank 2015a). First, a broader
set of factors that have contributed to LIC growthsince 2001 is considered—in particular, the rolesof investment in human and physical capital,
greater trade integration, and improved businessclimates and policy frameworks. Since threequarters of LICs rely heavily on commodity
exports and revenues, the impact of the 2014-16
commodity price plunges is examined. Second,and in contrast to the earlier work which
examined the fates of the 64 LICs of 2001,

4 Fragile LICs are those affected by fragility, conflict, and violence,
according to the World Bank’s Harmonized List of Fragile Situations.

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135

the study here zooms in on the drivers of growthin the smaller group of 34 LICs of 2019,
including the four countries that have become
LICs in recent years amid weaker commodity
prices and increased fragility. Third, this Special
Focus highlights the implications for global
poverty goals.

FIGURE SF2.1.2 Cyclical and structural factors
supporting LIC growth

What has supported growthin LICs since 2001?

A. Annual GDP growth in LICs of 2001

B. Agricultural, energy, and industrial
metals prices

C. Resource production in LICs of
2001

D. Annual average conflict-related
deathsE. Gross government debt in LICs of2001 and LICs of 2019

F. MDRI and HIPC relief in LICs of2001

Growth in the LICs of 2001 was supported over the next decade bybooming commodity prices, increased resource production amid large
investments in mineral exploration, debt relief under the MDRI and HIPC
initiatives, and receding conflicts, particularly in Africa. Conflict-related
casualties have, however, risen sharply in the Middle East where several
countries have tipped into the low-income bracket.

The 64 countries classified as LICs in 2001
experienced growth of 5.3 percent a year, on
average, during 2001-18—considerably faster thanthe 3.6 percent growth in non-LIC EMDEs(Figure SF2.1.2.A). For those LICs, this was a
sharp improvement from their tepid growth of 1.6
percent annually during the 1990s.
Growth in the 64 2001 LICs was supported byseveral cyclical and structural factors. The 2001-11
commodity price boom lifted growth in the onethird of LICs that were—or became—industrial
commodity exporters. In the nine LICs
transitioning into market-oriented economies, thedeep recessions of the 1990s were followed bycyclical rebounds. In five countries, armed
conflicts eased in the 2000s after inflicting heavy
human and economic losses during the 1990s.
Debt relief for about half of the 2001 LICs helped
put these economies on a more sustainablefinancial footing. Business climates andgovernance, especially the rule of law, improved
significantly in more than half of the 2001 LICs.
Cyclical factors
Commodity price boom. Around three-quartersof 2001 LICs benefited from the commodity priceboom of 2001-11. During the commodity priceboom, energy and industrial metals prices morethan tripled and agricultural prices rose by around
150 percent (Figure SF2.1.2.B). The boom, alongwith a decline in easily accessible mineral and gas
deposits in advanced economies and more costeffective transport through advances in bulk
shipping fueled unprecedented investment incommodity exploration and production in the2001 LICs (Figure SF2.1.2.C; Lusty and Gunn
2015). In 2008, commodity prices—particularly

Source: Haver Analytics; International Monetary Fund, World Economic Outlook; Peace ResearchInstitute of Oslo (PRIO), Roser (2019); World Bank Pink Sheet; World Bank staff calculations; World
Bureau of Metal Statistics.
B. Agriculture includes 23 commodities, industrial metals includes 7 metals, and Energy includes
coal, crude oil, and natural gas. Index 100=2000.
D. Only conflicts in which at least one party was the government of a state and which generated
more than 25 battle-related deaths are included. The data refer to direct violent deaths only andexclude outbreaks of disease or famine. Data up to 2016. Country-level data unavailable.
E. Unweighted averages. 2001 LICs includes 61 countries and the 2019 LICs includes 31 countries.
F. Committed debt relief under the assumption of full participation of creditors. Bars represent
average debt relief per region in US$ billions for all HIPC and MDRI LICs. Diamonds reflect averagedebt relief per region relative to countries’ GDP.
Click here to download data and charts.

metals and oil prices—declined sharply with theonset of the global financial crisis, but recovered topre-crisis levels within about a year. However, by

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2011, commodity prices began to slide again, andthey fell by 30-60 percent to a low in 2016 before
gradually and only partially recovering. By 2018,industrial metals and energy prices were at their
2005-06 levels in real terms while agricultural
prices remained near their 2016 lows.
Two-thirds of the 2001 LICs were already heavily
reliant on commodity exports and revenues in
2001—the majority of them on metals and energy
exports, and the rest on agricultural commodity
exports. Another one-tenth of the 2001 LICs
subsequently became reliant on commodity
exports, specifically metals and energy, after
discoveries and exploitation of major commodity
deposits. Several “giant” oil and gas fields—
conventional fields with recoverable reserves of
500 million barrels or more—have been
discovered offshore of East, West, and Central
Africa, to the benefit of many 2001 LICs in theseregions (Côte d’Ivoire, Cameroon, Ghana,
Mozambique, Tanzania). During the 2000s,
major new commodity deposits were also
discovered in Indonesia (oil and gas), Lao PDR(copper, gold), Mauritania (copper, gold, and oil),Republic of Congo (oil), and Zambia (copper).
From 2003-12, new commodity discoveries in
Sub-Saharan Africa accounted for 22 percent of
global discoveries and 15 percent of global
exploration expenditures (Schodde 2013).
The commodity boom of 2001-11 supported
above-average growth in those 2001 LICs that
were, or became, commodity exporters. Exports ofprimary commodities in these countries rose by
one-half of GDP between 2001 and 2011. Higher
export earnings helped improve fiscal positions,with government revenues of commodityexporting LICs rising by close to 4 percentage
points of GDP, on average, and fiscal deficits
narrowing by around 1 percentage point of GDP,between 2001 and 2011. This, as well as debt
relief, allowed a doubling of social expenditures
between the 2000s and 2010s. The commoditydriven growth surge was accompanied by a decline
in inflation to single digits and an annual 3
percent real exchange rate appreciation between
2001 and 2011, on average, in commodityexporting LICs (Trevino 2011; Guillaumont,
Jeanneny, and Hua 2015).

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Rebounds in transition economies. Nine of the2001 LICs were, in the early 2000s, rebounding
from the deep recessions into which theireconomies had plunged as they made thetransition from centrally planned to market-based
economies. By the time their economies hadbottomed out in the mid- to late-1990s, their
output had declined from its pre-recession levels
by one fifth in Uzbekistan, by more than a third
in Kazakhstan, and by at least one half inArmenia, Azerbaijan, Georgia, the Kyrgyz
Republic, Moldova, Tajikistan, and Ukraine(Iradian 2007).5 As a result, per capita incomes
had fallen below the low-income threshold.
However, despite the drop in output these
economies continued to have a foundation of solid
human and physical capital, with near-universal
literacy rates, triple the average secondary
enrollment ratio of the average 2001 LIC, andpower-generating capacity similar to those ofadvanced economies. Governments in many ofthese countries were implementing growthenhancing structural reforms to accelerate thetransition, including privatization of state-owned
assets (for example, agricultural land reform in
Azerbaijan); establishment of legal systems andproperty rights (the Kyrgyz Republic); the designof more efficient social safety nets (Armenia);
strengthening of financial systems; greater
openness to international trade, including throughaccession to the WTO (Georgia); and theimprovement of business environments throughsubstantive regulatory simplification (Moldova).
These reforms helped boost productivity growth,
including by promoting investment and exports(Loukoianova and Unigovskaya 2004). Growthsince 2001 was further supported by thecommodity boom, as seven of these ninetransition economies were also heavily reliant oncommodity exports.6

5 It is likely that the real GDP declines in these transition
economies were overstated in the official data of the early 1990s, as
the private sectors that were emerging at that time were typically not
fully included in the statistical base during the early days of thetransition (Iradian 2007).
6 The commodity-exporting transition-economy LICs of 2001
were Armenia, Azerbaijan, the Kyrgyz Republic, Tajikistan,
Turkmenistan, Ukraine, and Uzbekistan.

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Structural factors

FIGURE SF2.1.3 Domestic factors supporting LIC growth

Receding conflicts. Five of the LICs of 2001—allof which remain LICs today—emerged fromsevere conflicts in the 1990s and early 2000s(Burundi, the Democratic Republic of Congo,
Liberia, Rwanda, and Sierra Leone). The conflictin the Democratic Republic of Congo is estimatedto have cost 2.5 million lives when deaths related
to conflict-induced disease and famine areincluded—equivalent to 3 percent of today’s
population (Lacina and Gleditsch 2004; Roberts
et al. 2001). Conflicts in Burundi, Liberia,
Rwanda, and Sierra Leone inflicted losses ofhuman life equivalent to between 1 and 10
percent of their populations. While most of these
economies are still considered fragile, conflictrelated casualties in Africa have been on adeclining trend since the 1990s (Figure
SF2.1.2.D). This has provided a more favorable
setting for a growth rebound.

The reduction of debt burdens has helped put public finances in the LICs
of 2001 on a sounder footing. Policy frameworks have also improved, andgovernments have become more effective. Investments in human andphysical capital have contributed to higher secondary school enrollment
ratios and greater access to electricity. In addition, more effective healthcare interventions have raised average life expectancy in these countries.

Debt relief. Thirty-five of the 2001 LICs (ofwhich 26 remain LICs today) received debt relief
during the early 2000s in the context of theMultilateral Debt Relief Initiative (MDRI) andHighly-Indebted Poor Country (HIPC) initiative.
Between the year preceding debt relief and two
years after it, government debt in these countries
declined by 53 percentage points of GDP, on
average, to 31 percent of GDP (Figures SF2.1.2.E
and SF2.1.2.F). Rapid growth from 2001, more
broadly, also supported the reduction of debt
ratios. In the median 2001 LIC, government debt
declined by 35 percentage points of GDP, from
84 percent of GDP in 2001 to 49 percent of GDP
in 2018.
This reduction of debt burdens has helped put
public finances on a sounder footing. While
government deficits increased slightly (by about 1
percentage point of GDP), non-interest
government expenditures rose by 5 percentage
points of GDP, and combined health andeducation expenditures rose by one-fifth between
the five years preceding debt relief and the five
years following it (Figure SF2.1.3.A). Moresustainable public finances supported macroeconomic stability (Bayraktar and Fofack 2011;
Marcelino and Hakobyan 2014).

A. Public finances before and after
debt relief

B. Share of population with access toelectricity in 2001 LICs

C. Average secondary school
enrollment rates in 2001 LICs

D. Average life expectancy in 2001
LICs

E. Share of 2001 LICs with flexible
exchange rate arrangements

F. Government effectiveness in 2001
LICs

Source: International Monetary Fund, World Economic Outlook; Reinhart and Rogoff (2004);
Worldwide Governance Indicators; World Development Indicators.
Note. “LICs turned MICs” are those LICs in 2001 that have achieved MIC per capita incomes by 2019;“Continued LICs” are LICs that have remained LICs since 2001.
A. Poverty-reducing expenditure represents public spending on health and education. Unweighted
average for 26 LICs that received MDRI or HIPC debt relief.
B.-F. Unweighted averages.
B. 2010s includes data up to 2016. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 62,
32, and 30 countries, respectively.
C. 2010s includes data up to 2017. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 55,
26, and 29 countries, respectively.
D. 2010s includes data up to 2017. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 64,
32, and 32 countries, respectively.
E. Following the coarse exchange rate regime classification of Reinhart and Rogoff (2004), wherecategories 1-2 represents fixed, and 3-6 represent more flexible arrangements. 2010s includes data
up to 2016. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 63, 32, and 31 countries,
respectively.
F. 2001 LICs, “LICs turned MICs”, and “Continued LICs”, include 64, 32, and 32 countries,
respectively.
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Since 2013, the downward trend in 2001 LICs’
debt has reversed, with government debt rising in
the median 2001 LIC by 14 percentage points of
GDP to 49 percent of GDP in 2018. That said,
only two of the 2001 LICs—Benin and Chad—have returned to debt ratios near those before debt
relief. The composition of this debt has become
increasingly non-concessional as countries haveaccessed capital markets and borrowed from nonParis Club creditors (World Bank 2019a). In
2018, 44 percent of the external debt of themedian LIC of 2001 was on non-concessionalterms, compared with 30 percent in 2001.
Trade integration. Many of the 2001 LICs havereaped benefits from greater trade integration byentering into free trade agreements. Moldova’s
trade agreement with the European Union has
supported export growth and is encouraging
reforms, in particular related to governance, thefinancial sector, and the business environment(European Commission 2018). In Sub-SaharanAfrica, membership in free trade areas has boosted
intra-regional trade (Burundi, Kenya, Rwanda,
Tanzania, Uganda), and supported FDI inflows,industrialization, and integration into global value
chains (e.g., Lesotho; Buigut 2016, Morris andStaritz 2017). Similarly, Nicaragua reaped growth
dividends and attracted stronger FDI inflows
between 2005 and 2011 as a result of the Central
America-Dominican Republic Free Trade
Agreement (Hornbeck 2012). The India-ASEAN
agreement that went into effect in 2009-10 has
benefited the 2001 LICs that became members(Bhutan, Bangladesh, India; Bhattacharyya andMandal 2016).
Investment in human and physical capital. Most
2001 LICs boosted their investment in humanand physical capital during the period of rapid
growth from 2001. Between 2001 and 2017, theratio of total investment to GDP in thesecountries increased by 5 percentage points, ofwhich one-third represented increased public
investment.
•

Infrastructure. Infrastructure in sectors such as
electricity and communications has improved
significantly among LICs (Calderón andServén 2010; Kumar and Rauniyar 2018).

From 2001 to 2016, access to electricity in the
median 2001 LIC increased from 30 to 53
percent of the population and, in one-quarterof LICs, from 52 to 84 percent (Figure
SF2.1.3.B).7 Communications infrastructure
has improved rapidly, helped in part by the
spread of mobile phone networks (Aker andMbiti 2010; World Bank 2016b). The use ofmobile phones has reduced information
inefficiencies and transaction costs, benefitting
particularly businesses and small-scale farmers
in rural areas where distances from markets
are large (Aker 2011). Transaction costs could
be lowered even further if broad-band internet
network infrastructure was increased from its
current low coverage of 1 percent of the
population in the median LIC in 2016
(World Bank 2019b).
•

Human capital. In the median 2001 LIC,
secondary education net enrollment ratios rosefrom 24 to 47 percent of the school-age
population between 2001 and 2016,
supported by a 25 percent increase ingovernment spending on education (Figure
SF2.1.3.C). This, combined with improvements in average life expectancy in LICs—inpart due to the improved prevention andmore effective treatment of widely-prevalentconditions such as malaria, HIV, and AIDS—
is creating the preconditions for an
increasingly productive future workforce(Figure SF2.1.3.D; Asiki et al. 2016; Barofski,
Anekwe, and Chase 2015).

Improved business climates and policy
frameworks. The business climate has improvedin the majority of the 2001 LICs between the
1990s and the 2010s. More specifically, the ease ofstarting a business, obtaining credit, and trading
across borders has, on average, increased by 20-30
index points since 2006 (World Bank 2019c).
Similarly, the Worldwide Governance Indicatorscores for the rule of law have strengthened byabout 20 percent, and there have been more
moderate improvements in regulatory quality andpolitical stability.
7 That said, access to electricity in some countries still remains
below 10 percent of the population (Burundi, Chad, South Sudan).

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A growing number of LICs have strengthened
their fiscal management through medium-term
debt management strategies (World Bank 2019a).
Some have strengthened their monetary policy
frameworks and their buffers against shocks byadopting flexible exchange rate arrangements andusing their policy instruments to target low
domestic inflation; more than one-quarter of 2001
LICs had flexible exchange rate regimes in 2016,
compared to fewer than one-fifth during 2001-10,
on average (Figure SF2.1.3.E).8 Improved policy
frameworks and increased resilience to external
shocks among the 2001 LICs have also been
supported by increases in foreign exchange reserves
from 8 percent of GDP in 2001 to 14 percent ofGDP, on average, in 2017.

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FIGURE SF2.1.4 Factors supporting LIC progression to
MIC income levels
A quarter of the 2001 LICs that have become MICs were transition
economies that recovered from deep recessions after the end of socialism
throughout much of the world. Improvements in per capita income weremore pronounced in the LICs that have reached MIC status. A few rapidgrowing LICs have not been able to reach MIC status, partly due to very
low starting positions in 2001. In countries that have reached MIC status,
school enrollment ratios, government effectiveness, and the rule of law
improved as they neared the year of moving to MIC status, as well as in theyears thereafter. At the point of becoming a MIC, these measures wereconsistently better than the LIC median.

A. Low-income countries, 2001 and2019

B. Growth in 2001 LIC per capita
incomes between 2001 and 2019

C. Progression of 2001 LIC per capita
incomes

D. Secondary school enrollment in
LICs turned MICs

E. Government effectiveness in LICs
turned MICs

F. Rule of law in LICs turned MICs

How have these factors
affected LIC progression to
MIC income levels?
The 2001 LICs that became MICs benefited
somewhat more from the factors discussed above
than those that remained (Figures SF2.1.3.B2.1.3.F). On average, the 2001 LICs that became
MICs had stronger policy frameworks, better
governance and business environments, betterdeveloped infrastructure, larger improvements inhuman capital, and more fiscal resources due torevenue bases being significantly larger—by atleast one fifth of GDP. The 2001 LICs that
became MICs also had a geographical advantage,as around one-third were landlocked compared toalmost half of today’s LICs. Furthermore, the2001 LICs that were landlocked but became
MICs had, on average, neighbors with per capita
incomes that were 36 percent higher than current
incomes among the neighbors of today’s
landlocked LICs.
LICs that achieved MIC per capita income levels.
Between 2001 and 2019, 32 LICs achieved
middle-income status (Figure SF2.1.4.A). The
progress made by LICs that have become MICs

8 Exchange rate regimes are grouped according to the classificationin Ilzetski, Reinhart and Rogoff (2017), with the only exception that
freely falling currencies are also regarded as flexible exchange rate
arrangements.

Source: Worldwide Governance Indicators (WGI), World Bank staff calculations, World Development
Indicators.
C. Sample includes 59 2001 LICs. GNI per capita according to the World Bank Atlas method. GNI per
capita for 1999 was published in August 2000 and reflects the original data used for country income
classification in the 2001 World Bank fiscal year, while GNI per capita for 2017 was published in
October 2018 and reflects the data used for the 2019 World Bank fiscal year. Exceptions are Liberia
and Myanmar, for which GNI per capita in 2002 is used as a proxy for 1999. Rapid-growing LICs withlow starting points are defined as LICs that had per capita incomes below one-third of the $755 LIC
threshold in 2001, and these incomes have increased to above two-thirds of the $995 LIC threshold in
2019.
D. Sample includes 13 LICs that became MICs, due to data limitations. Year turned MIC reflects theWorld Bank fiscal year.
E.-F. WGI index scores are standard normal units that range between -2.5 and 2.5, with zero mean.
A negative score implies government effectiveness or rule-of-law below the global average. Sample
includes all 32 LICs that became MICs. Year turned MIC reflects the World Bank fiscal year.
Click here to download data and charts.

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partly as a result of new commodity
discoveries or the exploitation of commodity
resources. Large investments in the resource
sectors of Azerbaijan, Cameroon, andMongolia facilitated their progression to
middle-income status (World Bank 2015a).
The countries that became MICs amid thecommodity price boom often had stronger
institutional quality and governance thanthose that remained LICs, and were therefore
less likely to fall victim to the resource cursethat erodes non-resource competitiveness(Dauvin and Guerreiro 2017).

has helped lift 20 percent of the global poor in2001 out of poverty by 2016, more than offsetting
the increasing poverty headcount among thecountries that remained LICs.9••

Favorable initial conditions. The 2001 LICs
that have become MICs were some of thosecountries closest to the middle-income
threshold to begin with: their average percapita income in 2001 was about 80 percent
higher than that of the LICs that haveremained LICs (Table SF2.1.1). LICs that
achieved MIC status also grew somewhat
more rapidly during 2001-18 (Figure
SF2.1.4.B; Johnson and Papageorgiou,
forthcoming).10 However, the growth differential between these two LIC groups masks
substantial dispersion within each group.
Despite exceptionally fast and sustained
growth—more than tripling per capita
incomes between 2001 and 2018—several
2001 LICs remain LICs today (Figure
SF2.1.4.C; Ethiopia, Rwanda, Tanzania).
This mostly reflects their low 2001 per capita
incomes (70 percent below the 2001 threshold
LIC income). In these countries, robust
growth was supported by improving macroeconomic environments, institutional andbusiness climate reforms, and strong public
investment (Government of Rwanda andWorld Bank 2019; Möller and Wacker 2017).
Commodity discoveries and exploitation. Of the
32 LICs that became MICs, about one half
benefited from discoveries of commodity
deposits or expanded exploitation of metals,oil, or gas resources. Today, many former
2001 LICs—such as Angola, the Republic ofCongo, Equatorial Guinea, Ghana, Lesotho,
Indonesia, Lao PDR, Mauritania, Nigeria,
Sudan, Timor-Leste, Uzbekistan, andZambia—have achieved middle-income status

9 Due to data limitations, poverty headcount data excludes thefollowing 11 LICs of 2001: Afghanistan, Azerbaijan, Haiti,
Cambodia, Myanmar, Democratic People’s Republic of Korea,
Somalia, Sudan, Turkmenistan, Uzbekistan, and Zimbabwe. In
2001, their combined population accounted for 8 percent of the total
2001 LICs population.
10 In terms of per capita growth, the difference was more
pronounced (Figure 2.1.4B).

•

Rebounding transition economies. Another onequarter of the LICs that have progressed to
MIC status since 2001 were the remaining
transition-economy LICs. All but one(Tajikistan) have returned to middle-income
per capita income levels.

•

Trade integration, peace, and reforms. Of the
27 LICs of 2001 that have subsequently
signed trade agreements, 20 achieved
MIC status as entry into large free tradeareas catalyzed export spurts (Moldova,
Nicaragua).11 Others reached MIC status after
emerging from conflict (Côte d’Ivoire,
Solomon Islands), or undertaking substantial
public infrastructure investment (Bhutan).12
The 2001 LICs that reached MIC statushave steadily strengthened human capitaldevelopment, the effectiveness of theirgovernments, business climates, and thequality of their institutions in the years before
progression and thereafter. In fact, thesecountries have consistently outperformed the
median LIC on measures of these factors(Figures SF2.1.4.D-2.1.4.F).

11 Excludes “region-region” agreements such as the Cotonou
agreement between the European Union and the 78 economies in the
African, Caribbean and Pacific Group of States.
12 During the 2000s, the government of Bhutan transformed theeconomy’s growth prospects by investing heavily in hydropower
infrastructure, taking advantage of the country’s mountainous terrain
and high average annual rainfall. Electricity capacity in Bhutan
tripled and the share of the population with access to it rose from 39
percent in 2001 to 100 percent by 2016. Surplus electricity isexported and accounts for a third of exports and almost half ofgovernment revenue, while overall power generation is estimated tocontribute 1 percent of GDP annually (World Bank 2015b).

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

New LICs: 2016-19. Countries that have reached
MIC status often face structural challenges that
constrain their prospects for continued strong
growth, while those MICs with incomes near the
LIC threshold risk falling back into the LIC
bracket (EBRD 2019). Four countries wereclassified as LICs between 2016 and 2019from middle-income levels: Senegal, Syria,
Tajikistan, and Yemen. While Syria was classified
as a LIC for the first time, Senegal, Tajikistan,and Yemen relapsed into LIC status after some of
the growth-enhancing factors discussed above had
helped them move to middle-income status inearlier years.
•••

Senegal suffered a series of adverse shocks inthe years leading up to its relapse, whichweighed heavily on per capita incomes. The
decline in commodity prices from 2011 wasaggravated by two consecutive droughts thatseverely disrupted agricultural production
between 2011 and 2014 and also led towidespread famine, while a long-lasting
domestic energy crisis repeatedly disrupted
economic activity until the mid-2010s.
In Tajikistan, robust growth was accompanied
by a halving of its currency’s value stemmingfrom the 2014-16 commodity price slump
and by rapid population growth; as a result,
per capita incomes declined.
Armed conflicts in Syria and Yemen caused
sharp declines in per capita incomes in bothcountries by severely disrupting activity,
destroying physical infrastructure, and forcibly
displacing more than one-half of Syria’s
population and almost a tenth of the
population in Yemen (World Bank 2017a,
2019d). In both countries, oil production has
fallen by 90 percent from pre-war levels,
sharply constraining fiscal positions.

Prospects for further LIC
progression
Challenges for future progression towards MIC
per capita income levels. Prospects for most of
today’s LICs to progress to MIC levels in the near
future are dim, as the factors that may hold back

S P EC IAL FO CU S 2.1

141

FIGURE SF2.1.5 Features of today’s LICs
For today’s LICs, prospects of becoming MICs are dim. More than half ofthem are affected by fragility, conflict, and violence, their governments areless effective than those of the 2001 LICs that became MICs, and public
spending on health care is lower. Many countries are landlocked, and theirneighbors are mostly low-income or lower-middle-income countries. LICs
are heavily dependent on agriculture, which faces severe challenges as
extreme weather events become more frequent.

A. LICs affected by fragility, conflict,and violence

B. Distribution of LICs per capita
incomes as percent of non-LIC
EMDEs average

C. Average share of public healthcare
spending in LIC GDP

D. Per capita incomes in LICs’
neighbors

E. Share of agriculture in the economy

F. Extreme weather events in LICs

Source: The Emergency Events Database—Universite Catholique de Louvain, World Bank, WorldBank Doing Business, World Bank staff calculations, World Development Indicators.
Note: “LICs turned MICs” are those LICs in 2001 that have achieved MIC per capita incomes by 2019;“Continued LICs” are LICs that have remained LICs since 2001. FCV = fragility, conflict, and violence.
UMIC = upper-middle-income country.
A. Bars for 2001 “LICs turned MICs” reflect shares in 2001, bars for 2019 LICs reflect latest shares.
Due to data limitations, official FCV country classifications for 2001 are not available. This share isbased on the World Bank FCV country classification of the 2005/06 fiscal year that has been
amended to include countries that had the presence of UN peace-keeping missions between 1999
and 2001.
B. Blue bars represent share of 2001 LICs in 2001, red bars represent share of 2019 LICs in 2017.
X-axis reflects ranges of LIC per capita incomes relative to that of the US, in percent. 2001 LICs
includes 58 countries, 2019 LICs includes 28 countries.
C. Unweighted averages. 2001 LICs, “LICs turned MICs” and “Continued LICs” include 60, 32,
and 28 countries, respectively. 2019 LICs, non-FCV and FCV LICs include 31, 14, and 17 countries,
respectively.
D. Unweighted averages. Neighbors of LICs only include countries with shared land borders. Sample
includes 16 landlocked 2001 “LICs turned MICs”, 15 2019 landlocked LICs and 8 2019 landlocked
non-FCV LICs.
E. Unweighted averages.
F. Data reflect annual averages of extreme weather events in the LICs of 2019.
Click here to download data and charts.

142

S P EC IAL FO CU S 2.1

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019by high trade costs and behind-the-border
non-tariff barriers—limits LICs’ ability tounleash a growth burst by encouraging tradewith large trading partner economies (Arvis,
Raballand, and Marteau 2010; Arvis et al.
2013; Paudel and Cooray 2018).

progression are more pervasive today than they
were in the 2001 LICs (Figure SF2.1.5.A).
•

Weaker starting positions. The gaps between
per capita incomes in today’s LICs and in
middle-income countries are larger than thecorresponding gaps faced by the LICs of 2001
that subsequently became MICs (Figure
SF2.1.5.B). Comparing today’s LICs withthose that have become MICs, public
spending on health care relative to GDP islower by one-quarter, the share of their
populations with access to electricity is lower
by one-third, and measures of financial
inclusion are lower by one-half to one- quarter(Figure SF2.1.5.C).13•

Fragile or in conflict. 56 percent of today’s
LICs are countries affected by fragility,
conflict, and violence (FCV)—about onethird more than the share of countries inconflict among the 2001 LICs that became
MICs.14 In these FCVs, weak governments
and poor institutions are endemic.
Government revenues in these countries areoften lower than in other LICs, leaving themheavily dependent on foreign aid to financecritical government spending (IMF 2014).
Their economies are volatile and prone tocollapses (World Bank 2017b). Since 1990,
chronic FCVs—countries that have been
FCVs for at least five years—have faced
annual output contractions of 3 percent ormore at least once every decade.

•

Clustered. More than half of the LICs that are
not FCVs are landlocked, and their neighbors
are mostly other LICs or countries with per
capita incomes just above middle-income
thresholds(FigureSF2.1.5.D).
This
geographical disadvantage—often exacerbated

13 While mobile payment systems have improved financial
inclusion in LICs, limited access to electricity, particularly in rural
areas, severely constrains the charging of mobile phones (Max andBerman 2018; Riley and Kulathunga 2017, World Bank Group andChina Development Bank 2017).
14 Due to data limitations, official FCV country classifications for2001 are not available. This share is based on the World Bank FCV
country classification of the 2005/06 fiscal year that has been
amended to include countries with UN peace-keeping missions
between 1999 and 2001.

•

Heavily reliant on agriculture. All but two(Yemen, Zimbabwe) of today’s LICs areheavily dependent on the agricultural sectors
which accounts for almost 30 percent of GDP
on average compared with 9 percent of GDP
in the average non-LIC EMDE (Figure
SF2.1.5.E). In 70 percent of today’s LICs
(considerably more than the 40 percent of2001 LICs that became MICs) agriculture
accounts for more than one-quarter of theeconomy. Climate change is presenting manyof these agricultural sectors with severe
challenges as mean temperatures continue torise and extreme weather events such as
droughts, floods, and heatwaves occur more
frequently and with greater intensity than in
the 1980s and 1990s (Figure SF2.1.5.F;
World Bank 2017b; IPCC 2014; Chaney etal. 2014; Hoeppe 2014). Recoveries fromdroughts appear to be taking longer, resulting
in less time for livelihoods to be restored
between droughts and thereby renderingcountries even more vulnerable to the adverse
impacts of climate change (Schwalm 2017).
Climate-related destruction of crops andlivelihoods could push many LIC populations
further into poverty and this is aggravated by
the limited capacity and resources of LICs tocounter the adverse effects of climate change(Hallegatte et al. 2016).

•

Weaker prospects for commodity demand. To
transform recent resource discoveries in LICs
into strong, sustained economic growth will
require continued robust commodity demand
growth, as well as strong governance and

15 Mozambique’s deep-water gas fields are estimated to hold moreoil-equivalent reserves than are held by Angola or Nigeria—SubSaharan Africa’s two largest oil producers—and production is set tostart by 2022/23 (World Bank 2015a). Oil reserves in Uganda are
estimated to be the fourth-largest in Sub-Saharan Africa, andproduction could start within the next three years (Alkadiri andTesfay 2014). Large off-shore gas fields were recently discovered in
Tanzania.

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

institutions to manage the associated revenue
windfalls (Addison and Roe 2018).15
However, long-term prospects for commodity
demand are weakening as growth in China—
the largest source of commodity demand—slows and shifts towards less resource-intensive
sectors (World Bank 2018a).
•

Debt vulnerabilities on the rise. While government debt ratios in most of today’s LICs
are significantly lower than in 2001—helped
largely by debt relief initiatives—their generalrise since 2013 has contributed to increased
vulnerabilities (World Bank 2019a). Theinterest burden brought about by greaterindebtedness could constrain povertyreducing expenditures, particularly on healthand education.

Conclusion
Growth in low-income countries has benefited
from a confluence of favorable cyclical andstructural developments since 2001 that have
reduced the number of LICs by almost one-half.
These factors have, at various points, included acommodity price boom, cyclical rebounds fromthe collapse of centrally-planned regimes in theearly-1990s, debt relief, fewer armed conflicts(especially in Africa), trade integration, andimproved business climates and policy
frameworks. However, the cyclical factors that
contributed to LICs reaching MIC status were
either unique events (transition rebounds) or are
unlikely to be repeated over the foreseeable future(commodity boom), while structural factors that
could support growth present lasting policy
challenges that will require various policy reform
efforts. Prospects for progression of today’s LICs
to middle-income status are, therefore, morechallenging. Compared to the LICs of 2001 that
became MICs, today’s LICs have per capita
incomes that are further below the middle-income
threshold, are more likely to be fragile, are more
often landlocked and clustered with other LICs,
are heavily reliant on agriculture, and face weakerprospects for long-term commodity demand.
Poverty implications. Today’s LICs account for
about 40 percent of the global poor and have

S P EC IAL FO CU S 2.1

143

FIGURE SF2.1.6 Challenges LICs face in reducing
poverty
For the world to reach the Sustainable Development Goal of reducing
extreme poverty to 3 percent, per capita incomes will need to grow by 6
percent per year until 2030, but with the condition that incomes in thebottom 40 percent of the income distribution grow by 8 percent per year.
Growth is expected to fall well short of this requirement.
A. Projections of global extreme
poverty

B. LIC growth

Source: World Bank, World Bank (2018b).
A. Data based on global real per capita growth. 8 percent growth assumes average annual growth inper capita incomes of 6 percent for all countries, but that incomes of the bottom 40 percent of the
distribution grow at 8 percent, while those in the top 60 percent grow at 4.7 percent.
B. Bars represented GDP-weighted aggregates. Diamonds represent GDP aggregates weighted
according to each country’s share in total poverty.
Click here to download data and charts.

average poverty rates in excess of 40 percent.
Subdued prospects for lifting average per capita
incomes in most of today’s 34 LICs to middleincome levels pose a challenge for achieving the
Sustainable Development Goals and reducing
global extreme poverty to 3 percent by 2030. To
reach this goal, per capita GDP would need to
grow by 6 percent per year up to 2030 and per
capita incomes of the bottom 40 percent of theincome distribution would need to grow at 8
percent per year (Figure SF2.1.6.A; World Bank
2018b). Even during the global economic
expansion that preceded the global financial crisis,
per capita growth in LICs fell well below suchrates (1.9 percent during 2001-07). Overall
growth in LICs since the global financial crisis has
been lower when growth is weighted according to
the share of the world’s extreme poor as opposed
to output shares, implying that growth has beenslower where it is needed most: in countries withthe largest numbers of extreme poor (Figure
SF2.1.6.B).
Policy implications. Coordinated and multipronged policy efforts are needed to boost both
domestic and external drivers of LICs growth.
Efforts to harness external drivers of growth
include integrating LICs into global trade,

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S P EC IAL FO CU S 2.1

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

diversifying exports, and encouraging foreign
direct investment (Lee and Zhang 2019).
Domestically, this can help embody upgrades toskills and technologies, but needs to be supported
by continued investment in human and physicalcapital, while maintaining sustainable government
debt profiles. Further efforts to foster domestic
sources of growth include developing stronger anddeeper financial systems, ensuring greater financial
inclusiveness, and strengthening governance andbusiness climates to help the private sector to
thrive while overcoming some of the challenges of

informality (EBRD 2019; World Bank 2017c;
2018c; 2019a). Enhanced competition policies,
including the liberalization of unwarranted pricecontrols, can encourage innovation, boost
productivity and improve international competitiveness (World Bank 2016c; 2017d). Growth
could further be supported by measures aimed atending conflicts and reducing social tensions,mobilizing domestic resources more effectively forsustainable government finances, and managing
and adapting to growing climate risks.

TABLE SF2.1.1 Low-income countries
GNI per capita used for2019 income classification(2017, USD)

Latest GNI per
capita(2017, USD)

GNI per capita used for 2001 Share of agriculture inincome classification
GDP (percent)(1999, USD)

Share of primarycommodity exports
in GDP (percent)2001 LICs turned MICs
Turkmenistan

6,650

6,380

660

…

…

Azerbaijan

4,080

4,080

550

5.6

30.2

Armenia

4,000

3,990

490

14.9

8.3

Georgia

3,790

3,780

620

6.9

6.2

Indonesia

3,540

3,540

580

13.1

5.9

Angola

3,330

3,570

220

10.0

28.4

Mongolia

3,290

3,270

350

10.3

46.7

Bhutan

2,720

2,660

510

17.4

…

Ukraine

2,390

2,390

750

10.2

13.8

Sudan*

2,380

2,380

330

30.5

11.2

Lao PDR

2,270

2,270

280

16.2

8.0

Moldova, Rep.

2,180

2,200

370

…

3.5

Vietnam

2,170

2,160

370

15.3

5.1

Nicaragua

2,130

2,130

430

15.5

1.5

Nigeria

2,080

2,100

310

20.8

11.4

Uzbekistan

1,980

2,000

720

…

…

SolomonIslands*

1,920

1,920

750

…

27.8

India

1,820

1,800

450

15.5

1.2

São Tomé and
Príncipe

1,770

1,770

270

11.5

…

Pakistan

1,580

1,580

470

22.9

0.3

Côte d’Ivoire*

1,540

1,580

710

21.6

5.7

Ghana

1,490

1,880

390

19.7

7.1

Bangladesh

1,470

1,470

370

13.4

0.1

Kenya

1,440

1,460

360

34.6

1.4

Cameroon

1,360

1,370

580

14.4

12.7

Congo, Rep.*

1,360

1,430

670

6.4

44.0

Zambia

1,300

1,290

320

6.7

25.4

Lesotho

1,280

1,210

550

6.1

…

Cambodia

1,230

1,230

260

23.4

1.1

G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2019

S P EC IAL FO CU S 2.1

145

TABLE SF2.1.1 Low-income countries (continued)
GNI per capita used for2019 income classification(2017, USD)

Latest GNI per
capita(2017, USD)

GNI per capita used for 2001 Share of agriculture inincome classification
GDP (percent)(1999, USD)

Share of primarycommodity exports
in GDP (percent)2001 LICs turned MICs
Myanmar*

1,190

1,210

…

23.3

…

Kyrgyz Republic

1,130

1,130

300

12.3

4.1

Mauritania

1,100

1,100

380

23.1

16.3

2001 Continued LICs
Tajikistan

990

990

290

…

…

Senegal

950

1,240

510

16.0

2.3

Tanzania

910

910

240

…

0.7

Zimbabwe*

910

1,170

520

8.3

3.8

Benin

800

800

380

23.0

4.3

Guinea

800

790

510

16.4

6.9

Nepal

790

800

220

26.2

0.3

Mali*

770

770

240

38.3

1.1
0.0

Comoros*

760

1,280

350

29.9

Haiti*

760

760

460

17.6

…

Ethiopia

740

740

100

34.0

0.0

Rwanda

720

720

250

31.0

1.3

Guinea-Bissau*

660

660

160

49.0

0.0

Chad*

630

640

200

49.1

…

Burkina Faso

610

590

240

28.7

5.4

Togo*

610

610

320

41.8

3.9
0.8

Uganda

600

600

320

24.6

Afghanistan*

570

560

…

20.5

…

Sierra Leone

510

510

130

60.3

0.7

Congo, Dem.
Rep.*

450

460

110

19.9

…

Gambia, The*

450

680

340

23.0

0.5

Mozambique*

420

420

230

21.3

31.1

Madagascar

400

400

250

20.0

6.0

Central African
Republic*

390

390

290

39.6

…

Liberia*

380

620

…

37.1

…

Niger

360

360

190

39.7

4.1

Malawi

320

320

190

26.1

0.9

Burundi*

290

280

120

…

0.3

Eritrea*

…

…

200

…

…

Korea, Dem.
People’s Rep.

…

…

…

…

…

Somalia*

…

…

…

…

…

Yemen*

…

…

350

6.0

…

…

…

970

…

…

New LICs
Syria*

Source: World Bank World Development Indicators, World Integrated Trade Statistics.
Notes: Asterisks indicate economies affected by fragility, conflict, and violence (FCV). Ellipses indicate data unavailability. GNI per capita according to the World Bank Atlas method. GNI per
capita for 1999 was published in August 2000 and reflects the original data used for country income classification in the 2001 World Bank fiscal year, while GNI per capita for 2017 was
published in October 2018 and reflects the data used for the 2019 World Bank fiscal year. Latest GNI per capita incorporates data revisions that have occurred since the release of original
GNI per capita data that was used for income classifications. South Sudan is also a new LIC, but not included in the table because it only gained independence in 2011; data not available.

146

S P EC IAL FO CU S 2.1

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Loukoianova, E., and A. Unigovskaya. 2004. “Analysis
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Lower Debt Buy Higher Growth? We Impact of Debt
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STATISTICAL
APPENDIXS T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

151

Real GDP growth
Annual estimates and forecasts 1(Percent change)

Quarterly estimates 2(Percent change, year-on-year)

2016

2017

2018e 2019f

2020f

2021f

17Q4

18Q1

18Q2

18Q3 18Q4 19Q1e

World

2.6

3.1

3.0

2.6

2.7

2.8

3.4

3.2

3.2

2.9

2.7

..

Advanced economies

1.7

2.3

2.1

1.7

1.5

1.5

2.5

2.4

2.4

2.0

1.9

2.0

United States

1.6

2.2

2.9

2.5

1.7

1.6

2.5

2.6

2.9

3.0

3.0

3.2

Euro Area

2.0

2.4

1.8

1.2

1.4

1.3

2.7

2.4

2.2

1.6

1.2

1.2

Japan

0.6

1.9

0.8

0.8

0.7

0.6

2.3

1.4

1.4

0.1

0.2

0.8

4.1

4.5

4.3

4.0

4.6

4.6

4.8

4.9

4.8

4.4

4.2

..
6.1

Emerging market and developing economies

6.3

6.5

6.3

5.9

5.9

5.8

6.4

6.6

6.4

6.2

6.1

Cambodia

7.0

7.0

7.5

7.0

6.9

6.8

..

..

..

..

..

..

China

6.7

6.8

6.6

6.2

6.1

6.0

6.7

6.8

6.7

6.5

6.4

6.4

Fiji

0.7

3.0

3.2

3.4

3.3

3.3

..

..

..

..

..

..

Indonesia

5.0

5.1

5.2

5.2

5.3

5.3

5.2

5.1

5.3

5.2

5.2

5.1

Lao PDR

7.0

6.9

6.5

6.6

6.7

6.6

..

..

..

..

..

..

Malaysia

4.2

5.9

4.7

4.6

4.6

4.6

5.7

5.3

4.5

4.4

4.7

4.5

Mongolia

1.4

5.4

6.9

7.2

6.9

6.2

6.3

6.3

6.1

6.6

7.7

8.6

Myanmar

5.9

6.8

6.2

6.5

6.6

6.8

..

..

..

..

..

..

Papua New Guinea

4.1

2.3

-0.3

5.6

3.1

3.5

..

..

..

..

..

..

Philippines

6.9

6.7

6.2

6.4

6.5

6.5

6.6

6.5

6.2

6.0

6.3

5.6

Solomon Islands

3.3

3.0

3.5

2.9

2.8

2.7

..

..

..

..

..

..

Thailand

3.4

4.0

4.1

3.5

3.6

3.7

4.0

5.0

4.7

3.2

3.6

2.8

Timor-Leste

5.1

-3.5

-0.7

3.9

4.6

5.0

..

..

..

..

..

..

Vietnam

6.2

6.8

7.1

6.6

6.5

6.5

7.7

7.4

6.9

6.8

7.3

6.8

1.9

4.1

3.1

1.6

2.7

2.9

3.5

4.2

3.8

2.9

1.8

..

3.3

3.8

4.1

3.7

3.7

3.8

3.6

4.3

4.2

4.6

3.1

..

Armenia

0.2

7.5

5.2

4.2

4.9

5.2

..

..

..

..

..

..

Azerbaijan

-3.1

0.1

1.4

3.3

3.5

3.7

..

..

..

..

..

..

Belarus

-2.5

2.5

3.0

1.8

1.3

1.2

4.5

5.3

4.0

2.2

1.3

..

Bosnia and Herzegovina

3.1

3.2

3.1

3.4

3.9

4.0

2.4

3.2

3.4

2.7

3.0

..

Bulgaria

3.9

3.8

3.1

3.0

2.8

2.8

3.3

3.5

3.2

2.7

3.0

..

Croatia

3.5

2.9

2.6

2.5

2.5

2.4

2.2

2.5

2.9

2.8

2.3

..

Georgia

2.8

4.8

4.7

4.6

4.8

5.0

5.3

5.2

5.6

3.7

4.5

..

Hungary

2.3

4.1

4.9

3.8

2.8

2.6

4.5

4.6

4.9

5.1

5.1

5.3

Kazakhstan

1.1

4.1

4.1

3.5

3.2

3.2

3.1

4.1

4.3

3.9

5.2

..

Kosovo

4.1

4.2

4.2

4.4

4.5

4.5

..

..

..

..

..

..

Kyrgyz Republic

4.3

4.7

3.5

4.3

4.0

4.1

..

..

..

..

..

..

Moldova

4.4

4.7

4.0

3.4

3.6

3.8

..

..

..

..

..

..

Montenegro 5

2.9

4.7

4.9

2.9

2.4

2.3

..

..

..

..

..

..

North Macedonia

2.8

0.2

2.7

2.9

3.2

3.6

1.6

0.9

3.0

3.0

3.7

..

Poland

3.1

4.8

5.1

4.0

3.6

3.3

4.5

5.0

5.1

5.7

4.5

..

Romania

4.8

7.0

4.1

3.6

3.3

3.1

6.8

4.0

4.1

4.2

4.1

5.0

Russia

0.3

1.6

2.3

1.2

1.8

1.8

0.3

1.9

2.2

2.2

2.7

0.5

Serbia

3.3

2.0

4.3

3.5

4.0

4.0

2.5

4.9

4.9

4.1

3.4

2.3

Tajikistan

6.9

7.1

7.3

6.0

6.0

6.0

..

..

..

..

..

..

Turkey

3.2

7.4

2.6

-1.0

3.0

4.0

7.3

7.4

5.3

1.8

-3.0

..

Turkmenistan

6.2

6.5

6.2

5.6

5.1

4.9

..

..

..

..

..

..

Ukraine

2.4

2.5

3.3

2.7

3.4

3.8

2.2

3.4

3.8

2.8

3.5

2.2

Uzbekistan

6.1

4.5

5.1

5.3

5.5

6.0

..

..

..

..

..

..

East Asia and Pacific

Europe and Central Asia
Albania

152

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

Real GDP growth (continued)
Annual estimates and forecasts 1(Percent change)

Quarterly estimates 2(Percent change, year-on-year)

2016

2017

2018e

2019f

2020f

2021f

17Q4

18Q1

18Q2

18Q3

18Q4

19Q1e

-0.3

1.7

1.6

1.7

2.5

2.7

2.3

1.9

1.7

1.5

1.1

..

Argentina

-2.1

2.7

-2.5

-1.2

2.2

3.2

4.5

4.1

-3.8

-3.6

-6.2

..

Belize

-0.6

1.4

3.0

2.3

2.1

1.9

..

..

..

..

..

..

Bolivia

4.3

4.2

4.2

4.0

3.6

3.4

5.2

4.9

4.9

4.0

3.3

..

Brazil

-3.3

1.1

1.1

1.5

2.5

2.3

2.2

1.2

0.9

1.3

1.1

..

Chile

1.7

1.3

4.0

3.5

3.1

3.0

3.0

4.7

5.3

2.6

3.6

1.6

Colombia

2.1

1.4

2.6

3.5

3.7

3.7

1.3

2.0

2.9

2.6

2.7

2.8

Costa Rica

4.2

3.4

2.7

3.0

3.1

3.4

3.4

3.0

3.8

2.5

1.4

..

Dominican Republic

6.6

4.6

7.0

5.2

5.0

5.0

6.5

6.6

7.2

7.4

6.6

..

Ecuador

-1.2

2.4

1.4

0.0

0.4

0.8

2.8

1.8

1.4

1.5

0.8

..

El Salvador

2.5

2.3

2.5

2.6

2.5

2.4

2.8

2.9

2.9

2.2

2.2

..

Grenada

3.7

5.1

5.2

3.9

3.7

3.7

..

..

..

..

..

..

Guatemala

3.1

2.8

3.1

3.3

2.7

3.0

2.9

1.8

3.6

3.6

3.5

..

Guyana

3.4

2.1

4.1

4.6

33.5

22.9

..

..

..

..

..

..

Haiti 3

1.5

1.2

1.5

0.4

1.6

1.3

..

..

..

..

..

..

Honduras

3.9

4.8

3.7

3.6

3.8

3.9

4.3

3.0

4.0

3.4

4.5

..

Jamaica

1.4

1.0

1.9

1.6

1.7

1.9

1.2

1.4

2.2

1.9

2.0

..

Mexico

2.9

2.1

2.0

1.7

2.0

2.4

1.5

1.2

2.6

2.5

1.7

1.3

Nicaragua

4.6

4.7

-3.8

-5.0

1.1

1.3

4.1

2.4

-5.2

-4.4

-7.7

..

Panama

5.0

5.3

3.7

5.0

5.4

5.2

4.4

4.0

3.1

3.6

4.0

..

Paraguay

4.3

5.0

3.6

3.3

4.0

4.0

5.0

5.4

6.6

1.4

1.2

..

Peru

4.0

2.5

4.0

3.8

3.9

4.0

2.4

3.2

5.5

2.4

4.8

2.3

St. Lucia

3.9

3.7

1.5

3.4

3.5

2.4

..

..

..

..

..

..

St. Vincent and the Grenadines

1.3

0.7

2.0

2.1

2.3

2.3

..

..

..

..

..

..

Suriname

-5.6

1.4

2.0

2.0

2.1

2.1

..

..

..

..

..

..

Trinidad and Tobago

-6.5

-1.9

0.7

0.9

1.5

2.1

..

..

..

..

..

..

Uruguay

1.7

2.6

1.6

1.5

2.3

2.5

1.6

2.0

2.2

1.8

0.6

..

5.1

1.2

1.4

1.3

3.2

2.7

1.1

2.3

2.4

2.8

3.2

..

Algeria

3.2

1.4

1.5

1.9

1.7

1.4

..

..

..

..

..

..

Bahrain

3.5

3.8

1.8

2.0

2.2

2.8

2.9

-1.0

2.1

1.4

4.6

..

Djibouti

9.1

4.1

6.0

7.0

7.5

8.0

..

..

..

..

..

..

Egypt 3

4.3

4.2

5.3

5.5

5.8

6.0

5.3

5.4

5.4

5.3

5.5

5.6

Iran

13.4

3.8

-1.9

-4.5

0.9

1.0

2.4

2.9

2.5

..

..

..

Iraq

13.6

-1.7

0.6

2.8

8.1

2.3

..

..

..

..

..

..

Jordan

2.0

2.1

2.0

2.2

2.4

2.6

..

..

..

..

..

..

Kuwait

2.9

-3.5

1.2

1.6

3.0

2.9

-2.7

-0.5

0.6

2.9

2.0

..

Lebanon

1.6

0.6

0.2

0.9

1.3

1.5

..

..

..

..

..

..

Morocco

1.1

4.1

3.0

2.9

3.5

3.6

..

..

..

..

..

..

Oman

5.0

-0.9

2.1

1.2

6.0

2.8

..

..

..

..

..

..

Qatar

2.1

1.6

1.4

3.0

3.2

3.4

3.3

2.0

1.7

1.7

0.3

..

Saudi Arabia

1.7

-0.7

2.2

1.7

3.1

2.3

-1.3

1.3

1.6

2.3

3.6

..

Tunisia

1.1

2.0

2.5

2.7

3.2

3.5

..

..

..

..

..

..

United Arab Emirates

3.0

0.8

1.7

2.6

3.0

3.2

..

..

..

..

..

..

West Bank and Gaza

4.7

3.1

0.9

0.5

1.0

1.6

..

..

..

..

..

..

Latin America and the Caribbean

Middle East and North Africa

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

153

Real GDP growth (continued)
Annual estimates and forecasts 1(Percent change)

Quarterly estimates 2(Percent change, year-on-year)

2016

2017

2018e

2019f

2020f

2021f

17Q4

18Q1

18Q2

18Q3

18Q4

19Q1e

8.1

6.7

7.0

6.9

7.0

7.1

7.5

8.0

7.9

6.8

6.4

..

Afghanistan

2.3

2.7

1.0

2.4

3.2

3.6

..

..

..

..

..

..

Bangladesh 3,4

7.1

7.3

7.9

7.3

7.4

7.3

..

..

..

..

..

..

Bhutan 3,4

7.4

6.3

5.8

5.4

5.4

5.2

..

..

..

..

..

..

India

8.2

7.2

7.2

7.5

7.5

7.5

7.7

8.1

8.0

7.0

6.6

..

Maldives

7.3

6.9

7.9

5.7

5.2

5.3

..

..

..

..

..

..

Nepal 3,4

0.6

8.2

6.7

7.1

6.4

6.5

..

..

..

..

..

..

Pakistan 3,4

4.6

5.4

5.8

3.4

2.7

4.0

..

..

..

..

..

..

Sri Lanka

4.5

3.3

3.2

3.5

3.6

3.7

3.7

4.0

3.9

3.5

1.8

..

1.3

2.6

2.5

2.9

3.3

3.5

2.6

2.5

2.0

2.7

2.8

..

Angola

-2.6

-0.1

-1.7

1.0

2.9

2.8

..

..

..

..

..

..

Benin

4.0

5.8

6.5

6.5

6.5

6.5

..

..

..

..

..

..

Botswana

4.3

2.9

4.5

4.2

3.9

4.0

6.4

4.5

5.2

4.0

4.1

..

Burkina Faso

5.9

6.3

6.8

6.0

6.0

6.0

..

..

..

..

..

..

Burundi

-0.6

0.5

1.6

1.8

2.1

2.0

..

..

..

..

..

..

Cabo Verde

4.7

4.0

4.5

4.4

4.6

4.7

..

..

..

..

..

..

Cameroon

4.6

3.5

4.0

4.2

4.4

4.6

..

..

..

..

..

..

Chad

-6.3

-3.0

2.6

3.4

5.6

4.8

..

..

..

..

..

..

Comoros

2.2

2.7

2.8

3.1

3.2

3.2

..

..

..

..

..

..

Congo, Dem. Rep.

2.4

3.7

5.8

5.9

6.5

6.8

..

..

..

..

..

..

Congo, Rep.

-2.8

-3.1

0.8

5.4

1.5

1.9

..

..

..

..

..

..

Côte d’Ivoire

8.0

7.7

7.4

7.4

7.3

7.3

..

..

..

..

..

..

Equatorial Guinea

-8.8

-4.7

-2.9

-2.2

-1.9

-1.8

..

..

..

..

..

..

Eswatini

3.2

1.9

0.5

1.1

1.6

1.7

..

..

..

..

..

..

Ethiopia 3

7.6

10.2

7.9

7.9

8.2

8.2

..

..

..

..

..

..

Gabon

2.1

0.5

0.8

2.8

3.7

3.9

..

..

..

..

..

..

Gambia, The

0.4

4.6

6.6

5.4

5.2

5.0

..

..

..

..

..

..

South Asia

3,4

Sub-Saharan Africa

Ghana

3.4

8.1

6.3

7.6

7.0

5.8

5.5

5.4

5.4

7.4

6.8

..

Guinea

10.5

10.6

5.8

5.9

6.0

6.0

..

..

..

..

..

..

Guinea-Bissau

6.3

5.9

3.8

4.3

4.8

5.5

..

..

..

..

..

..

Kenya

5.9

4.9

6.3

5.7

5.9

6.0

5.3

6.6

6.3

6.4

5.9

..

Lesotho

3.1

-0.4

1.7

1.5

0.4

4.1

3.2

2.7

1.9

-1.5

..

..

Liberia

-1.6

2.5

1.2

0.4

1.6

1.3

..

..

..

..

..

..

Madagascar

4.2

4.3

5.2

5.2

5.3

5.1

..

..

..

..

..

..

Malawi

2.5

4.0

3.5

4.5

4.7

5.1

..

..

..

..

..

..

Mali

5.8

5.3

4.9

5.0

4.9

4.8

..

..

..

..

..

..

Mauritania

2.0

3.0

3.6

6.7

5.8

6.0

..

..

..

..

..

..

Mauritius

3.8

3.8

3.8

3.9

3.9

3.5

..

..

..

..

..

..

Mozambique

3.8

3.7

3.3

2.0

3.5

4.2

..

..

..

..

..

..

Namibia

1.1

-0.9

-0.1

0.9

1.5

1.9

..

..

..

..

..

..

Niger

4.9

4.9

5.2

6.5

6.0

5.6

..

..

..

..

..

..

Nigeria

-1.6

0.8

1.9

2.1

2.2

2.4

2.1

2.0

1.5

1.8

2.4

2.0

Rwanda

6.0

6.1

8.6

7.8

8.0

7.5

..

..

..

..

..

..

Senegal

6.2

7.2

6.8

6.8

7.0

7.0

..

..

..

..

..

..

Seychelles

4.5

5.3

3.6

3.4

3.0

3.2

..

..

..

..

..

..

Sierra Leone

6.4

3.8

3.7

5.4

5.4

5.2

..

..

..

..

..

..

154

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

Real GDP growth (continued)
Annual estimates and forecasts 1(Percent change)
2016

2017

2018e

2019f

2020f

Quarterly estimates 2(Percent change, year-on-year)
2021f

17Q4

18Q1

18Q2

18Q3

18Q4

19Q1e

Sub-Saharan Africa (continued)
South Africa

0.6

1.4

0.8

1.1

1.5

1.7

1.4

0.7

0.1

1.3

1.1

..

Sudan

4.7

4.3

-2.3

-1.9

-1.3

-0.8

..

..

..

..

..

..

Tanzania

6.9

6.8

6.0

5.4

5.7

6.1

8.4

..

..

..

..

..

Togo

5.2

4.3

4.9

5.0

5.2

5.1

..

..

..

..

..

..

Uganda 3

4.6

3.9

5.9

6.1

6.5

5.8

5.9

6.8

4.9

6.2

6.6

..

Zambia

3.6

3.4

3.5

2.5

2.8

2.8

3.3

2.7

3.9

5.6

2.5

..

Zimbabwe

0.8

4.7

3.5

-3.1

3.5

4.9

..

..

..

..

..

..

Source: World Bank and Haver Analytics.
Note: e = estimate; f = forecast.
1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.
2. Quarterly estimates are based on non-seasonally-adjusted real GDP, except for advanced economies, as well as Ecuador. Data for Bosnia and Herzegovina are from the production
approach. Quarterly data for Jamaica are gross value added.
Regional averages are calculated based on data from following countries.
East Asia and Pacific: China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Vietnam.
Europe and Central Asia: Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Kazakhstan, North Macedonia, Poland, Romania, Russia, Serbia, Turkey, andUkraine.
Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua,
Panama, Paraguay, Peru, and Uruguay.
Middle East and North Africa: Bahrain, Egypt, Iran, Kuwait, Qatar, and Saudi Arabia.
South Asia: India and Sri Lanka.
Sub-Saharan Africa: Botswana, Ghana, Kenya, Nigeria, South Africa, Tanzania, Uganda, and Zambia.
3. Annual GDP is on fiscal year basis, as per reporting practice in the country.
4. GDP data for Pakistan are based on factor cost. For Bangladesh, Bhutan, Nepal, and Pakistan, the column labeled 2019 refers to FY2018/19. For India, the column labeled 2018 refers to
FY2018/19.
5. Quarterly data are preliminary.
Click here to download data.

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

Data and Forecast Conventions
The macroeconomic forecasts presented in thisreport are prepared by staff of the Prospects
Group of the Development Economics VicePresidency, in coordination with staff from theMacroeconomics, Trade, and Investment Global
Practice and from regional and country offices,and with input from regional Chief Economist
offices. They are the result of an iterative processthat incorporates data, macroeconometric models,and judgment.
Data. Data used to prepare country forecasts
come from a variety of sources. National Income
Accounts (NIA), Balance of Payments (BOP), andfiscal data are from Haver Analytics; the World
Development Indicators by the World Bank; theWorld Economic Outlook, Balance of Payments
Statistics, and International Financial Statistics by
the International Monetary Fund. Population
data and forecasts are from the United Nations
World Population Prospects. Country- andlending-group classifications are from the World
Bank. DECPG databases include commodity
prices, data on previous forecast vintages, and inhouse country classifications. Other internal
databases include high-frequency indicators suchas industrial production, consumer price indexes,
house prices, exchange rates, exports, imports, andstock market indexes, based on data from
Bloomberg, Haver Analytics, OECD Analytical
House Prices Indicators, IMF Balance of Pay-ments Statistics, and IMF International Financial
Statistics.
Aggregations. Aggregate growth for the world andall sub-groups of countries (such as regions andincome groups) is calculated as GDP-weighted
average (at 2010 prices) of country-specificgrowth rates. Income groups are defined as in theWorld Bank’s classification of country groups.
Forecast Process. The process starts with initialassumptions about advanced-economy growthand commodity price forecasts. These are used asconditioning assumptions for the first set ofgrowth forecasts for EMDEs, which are produced
using macroeconometric models, accounting
frameworks to ensure national account identities
and global consistency, estimates of spillovers
from major economies, and high-frequency
indicators. These forecasts are then evaluated toensure consistency of treatment across similar
EMDEs. This is followed by extensive discussions
with World Bank country teams, who conduct
continuous macroeconomic monitoring anddialogue with country authorities and finalize
growth forecasts for EMDEs. The Prospects
Group
preparesadvanced-economy
andcommodity price forecasts. Throughout theforecasting process, staff use macroeconometricmodels that allow the combination of judgement
and consistency with model-based insights.

155

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

S E L E CTE D TO P I C S

157Global Economic Prospects: Selected Topics, 2015-19
Growth and Business Cycles
Informality
Growing in the shadow: Challenges of informality

January 2019, Chapter 3

Linkages between formal and informal sectors

January 2019, Box 3.1

Regional dimensions of informality: An overview

January 2019, Box 3.2

Casting a shadow: Productivity in formal and informal firms

January 2019, Box 3.3

Under the magnifying glass: How do policies affect informality?

January 2019, Box 3.4

East Asia and PacificJanuary 2019, Box 2.1.1

Europe and Central Asia

January 2019, Box 2.2.1

Latin America and the Caribbean

January 2019, Box 2.3.1

Middle East and North Africa

January 2019, Box 2.4.1

South Asia

January 2019, Box 2.5.1

Sub-Saharan Africa

January 2019, Box 2.6.1

Currency depreciation, inflation, and central bank independence

June 2019, Special Focus 1.2

The great disinflation

January 2019, Box 1.1

Growth in low-income countries: Evolution, prospects, and policies

June 2019, Special Focus 2.1

Long-term growth prospects: Downgraded no more?

June 2018, Box 1.1

Is the global economy turning the corner?

January 2018, Box 1.1

Building solid foundations: How to promote potential growth

January 2018, Chapter 3

What is potential growth?

January 2018, Box 3.1

Understanding the recent productivity slowdown: Facts and explanations

January 2018, Box 3.2

Moving together? Investment and potential output

January 2018, Box 3.3

The long shadow of contractions over potential output

January 2018, Box 3.4

Productivity and investment growth during reforms

January 2018, Box 3.5

East Asia and PacificJanuary 2018, Box 2.1.1

Europe and Central Asia

January 2018, Box 2.2.1

Latin America and the Caribbean

January 2018, Box 2.3.1

Middle East and North Africa

January 2018, Box 2.4.1

South Asia

January 2018, Box 2.5.1

Sub-Saharan Africa

January 2018, Box 2.6.1

Investment: Subdued prospects, strong needs

June 2019, Special Focus 1.1

Weak investment in uncertain times: Causes, implications and policy responses

January 2017, Chapter 3

Investment-less credit booms

January 2017, Box 3.1

Implications of rising uncertainty for investment in EMDEs

January 2017, Box 3.2

Investment slowdown in China

January 2017, Box 3.3

Interactions between public and private investment

January 2017, Box 3.4

Inflation

Growth prospects

Global output gap

Potential growth

Investment slowdown

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G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

Global Economic Prospects: Selected Topics, 2015-19
Growth and Business Cycles
Investment slowdown (continued)
East Asia and PacificJanuary 2017, Box 2.1.1

Europe and Central Asia

January 2017, Box 2.2.1

Latin America and the Caribbean

January 2017, Box 2.3.1

Middle East and North Africa

January 2017, Box 2.4.1

South Asia

January 2017, Box 2.5.1

Sub-Saharan Africa

January 2017, Box 2.6.1

Forecast uncertainty
Quantifying uncertainties in global growth forecasts

June 2016, Special Focus 1.2

Cross-border spillovers
Who catches a cold when emerging markets sneeze?

January 2016, Chapter 3

Sources of the growth slowdown in BRICS

January 2016, Box 3.1

Understanding cross-border growth spillovers

January 2016, Box 3.2

Within-region spillovers

January 2016, Box 3.3

East Asia and PacificJanuary 2016, Box 2.1.1

Europe and Central Asia

January 2016, Box 2.2.1

Latin America and the Caribbean

January 2016, Box 2.3.1

Middle East and North Africa

January 2016, Box 2.4.1

South Asia

January 2016, Box 2.5.1

Sub-Saharan Africa

January 2016, Box 2.6.1

Having space and using it: Fiscal policy challenges and developing economies

January 2015, Chapter 3

Fiscal policy in low-income countries

January 2015, Box 3.1

What affects the size of fiscal multipliers?

January 2015, Box 3.2

Chile’s fiscal rule—an example of success

January 2015, Box 3.3

Narrow fiscal space and the risk of a debt crisis

January 2015, Box 3.4

Revenue mobilization in South Asia: Policy challenges and recommendations

January 2015, Box 2.3

Education demographics and global inequality

January 2018, Special Focus 2

Recent developments in emerging and developing country labor markets

June 2015, Box 1.3

Linkages between China and Sub-Saharan Africa

June 2015, Box 2.1

What does weak growth mean for poverty in the future?

January 2015, Box 1.1

What does a slowdown in China mean for Latin America and the Caribbean?

January 2015, Box 2.2

Fiscal space

Other topics

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

S E L E CTE D TO P I C S

159Global Economic Prospects: Selected Topics, 2015-19
Commodity Markets
The role of the EM7 in commodity production

June 2018, SF1, Box SF1.1

Commodity consumption: Implications of government policies

June 2018, SF1, Box SF1.2

With the benefit of hindsight: The impact of the 2014–16 oil price collapse

January 2018, Special Focus 1

From commodity discovery to production: Vulnerabilities and policies in LICs

January 2016, Chapter 1

After the commodities boom: What next for low-income countries?

June 2015, Special Focus

Low oil prices in perspective

June 2015, Box 1.2

Understanding the plunge in oil prices: Sources and implications

January 2015, Chapter 4

What do we know about the impact of oil prices on output and inflation? A brief survey

January 2015, Box 4.1

Globalization of Trade and Financial Flows
Poverty impact of food price shocks and policies

January 2019, Chapter 4

Arm’s-Length trade: A source of post-crisis trade weakness

June 2017, Special Focus 2

The U.S. economy and the world

January 2017, Special Focus

Regulatory convergence in mega-regional trade agreements

January 2016, Box 4.1.1

Can remittances help promote consumption stability?

January 2015, Chapter 4

Potential macroeconomic implications of the Trans-Pacific Partnership Agreement

January 2016, Chapter 4

Regulatory convergence in mega-regional trade agreements

January 2016, Box 4.1.1

China’s integration in global supply chains: Review and implications

January 2015, Box 2.1

What lies behind the global trade slowdown?

January 2015, Chapter 4

Monetary and Exchange Rate Policies
Currency depreciation, inflation, and central bank independence

June 2019, Special Focus 1.2

The great disinflation

January 2019, Box 1.1

Corporate debt: Financial stability and investment implications

June 2018, SF2

Recent credit surge in historical context

June 2016, SF1

Peg and control? The links between exchange rate regimes and capital account policies

January 2016, Chapter 4

Negative interest rates in Europe: A glance at their causes and implications

June 2015, Box 1.1

Hoping for the best, preparing for the worst: Risks around U.S. rate liftoff and policy options

June 2015, SF1.1

Countercyclical monetary policy in emerging markets: Review and evidence

January 2015, Box 1.2

Fiscal Policies
Debt: No free lunch

June 2019, Box 1.1

Debt in low-income countries: Evolution, implications, and remedies

January 2019, Chapter 4

Debt dynamics in emerging market and developing economies: Time to act?

June 2017, Special Focus 1

Having fiscal space and using it: Fiscal challenges in developing economies

January 2015, Chapter 3

Revenue mobilization in South Asia: Policy challenges and recommendations

January 2015, Box 2.3

Fiscal policy in low-income countries

January 2015, Box 3.1

What affects the size of fiscal multipliers?

January 2015, Box 3.2

Chile’s fiscal rule—an example of success

January 2015, Box 3.3

Narrow fiscal space and the risk of a debt crisis

January 2015, Box 3.4

160

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G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 19

Prospects Group:
Selected Other Publications on the Global Economy, 2015-19
Commodity Markets Outlook

Column1

Food price shocks: Channels and implications

April 2019, Special Focus

The implications of tariffs for commodity markets

October 2018, Box

The changing of the guard: Shifts in industrial commodity demand

October 2018, Special Focus

Oil exporters: Policies and challenges

April, 2018, Special Focus

Investment weakness in commodity exporters

January 2017, Special Focus

OPEC in historical context: Commodity agreements and market fundamentals

October 2016, Special Focus

Energy and food prices: Moving in tandem?

July 2016, Special Focus

Resource development in an era of cheap commodities

April 2016, Special Focus

Weak growth in emerging market economies: What does it imply for commodity markets?

January 2016, Special Focus

Understanding El Niño: What does it mean for commodity markets?

October 2015, Special Focus

How important are China and India in global commodity consumption

July 2015, Special Focus

Anatomy of the last four oil price crashes

April 2015, Special Focus

Putting the recent plunge in oil prices in perspective

January 2015, Special Focus

Inflation in Emerging and Developing Economies
Inflation: Concepts, evolution, and correlates

Chapter 1

Understanding global inflation synchronization

Chapter 2

Sources of inflation: Global and domestic drivers

Chapter 3

Inflation expectations: Review and evidence

Chapter 4

Inflation and exchange rate pass-throughChapter 5

Inflation in low-income countries

Chapter 6

Poverty impact of food price shocks and policies

Chapter 7

High-Frequency Monitoring

Column1

Global Monthly newsletter

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G

lobal growth has continued to soften this year. A modest

recovery in emerging market and developing economies
continues to be constrained by subdued investment, which isdampening prospects and impeding progress toward achieving
critical development goals. Downside risks to the outlook
remain elevated, and policymakers continue to face major
challenges to boost resilience and foster long-term growth.
In addition to discussing global and regional economic
developments and prospects, this edition of Global Economic

Prospects includes analytical essays on the benefits and risksof government borrowing, recent investment weakness inemerging market and developing economies, the pass-throughof currency depreciations to inflation, and the evolution of
growth in low-income countries.

Global Economic Prospects is a World Bank Group Flagship
Report that examines global economic developments andprospects, with a special focus on emerging market anddeveloping economies, on a semiannual basis (in January andJune). The January edition includes in-depth analyses of topicalpolicy challenges faced by these economies, while the June
edition contains shorter analytical pieces.

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