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World Bank lowers projections on global economic outlook

World Bank says structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated.

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The World Bank on Wednesday called on developing countries to speed up their efforts and invest more in domestic structural reforms if they are to achieve a broad-based economic growth necessary to end extreme poverty in their domain.

The World Bank Group President, Jim Yong Kim, noted in the Bank’s Global Economic Prospects, GEP, report released on Wednesday that the present generation of developing countries were headed for a year of disappointing growth if they do not take the advice seriously.

The report had revealed that first quarter weakness in 2014 slowed down the pace of economic activities around the world, particularly in the developing countries.

“Growth rates in the developing world remain far too modest to create the kind of jobs we need to improve the lives of the poorest 40 per cent (of the population),” Mr. Kim said.

“Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation,” he said.

He noted the impact of bad weather in the US, the crisis in Ukraine, rebalancing in China, political strife in several middle-income economies, slow progress on structural reform, and capacity constraints, saying they are all contributing to a third straight year of sub five percent growth for the developing countries as a whole.

Consequently, he said the bank resolved to lower its forecasts for developing countries, with growth projected at 4.8 per cent this year, down from its January estimate of 5.3 per cent.

He said signs point to strengthening in 2015 and 2016 to 5.4 and 5.5 per cent, respectively, with China expected to grow by 7.6 per cent this year. This would, however depend on the success of rebalancing efforts.

“If a hard landing occurs, the reverberations across Asia would be widely felt,” the report stated.

Despite first quarter weakness in the United States, the Bank said the recovery in high-income countries was gaining momentum, pointing out that these economies were expected to grow by 1.9 per cent in 2014, accelerating to 2.4 per cent in 2015 and 2.5 per cent in 2016.

The Euro Area, on the other hand, was on target to grow by 1.1 per cent this year, while the United States economy, which contracted in the first quarter due to severe weather, was expected to grow by 2.1 per cent this year, down from the previous forecast of 2.8 per cent.

The global economy, the report said, is expected to gather steam as the year progresses, with a projection to expand by 2.8 per cent this year, strengthening to 3.4 and 3.5 per cent in 2015 and 2016, respectively.

Using 2010 purchasing power parity weights, global growth would be 3.4, 4.0 and 4.2 per cent in 2014, 2015 and 2016, respectively.

High-income economies would contribute about half of global growth in 2015 and 2016, compared with less than 40 per cent in 2013.

The acceleration in high-income economies, the bank said, would be an important impetus for developing countries, with high-income economies projected to inject an additional $6.3 trillion to global demand over the next three years.

This would be significantly more than the $3.9 trillion increase they contributed during the past three years, and more than the expected contribution from developing countries.

According to the Senior Vice President and Chief Economist of the Bank, Kaushik Basu, the financial health of economies have improved.

He said that with the exception of China and Russia, stock markets have done well in emerging economies, notably, India and Indonesia, even though they are not completely out of the woods yet.

A gradual tightening of fiscal policy and structural reforms, he said, were desirable to restore fiscal space depleted by the 2008 financial crisis.

The report observed that national budgets of developing countries have deteriorated significantly since 2007.

In almost half of developing countries, the report said government deficits were in excess of three per cent of gross domestic product, GDP, while debt-to-GDP ratios have risen by more than 10 percentage points since 2007.

It stressed the need to tighten fiscal policies in countries where deficits remained large, including Ghana, India, Kenya, Malaysia, and South Africa.

In addition, the structural reform agenda in many developing countries, which has stalled in recent years, needs to be reinvigorated in order to sustain rapid income growth.

“Spending more wisely rather than spending more will be key. Bottlenecks in energy and infrastructure, labour markets and business climate in many large middle-income countries are holding back GDP and productivity growth”.

“Subsidy reform is one potential avenue for generating the money to raise the quality of public investments in human capital and physical infrastructure,” said Lead Author of the report, Andrew Burns.

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