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Global Economic Prospects, 2007Global Economic Prospects, 2007Managing the Next Wave of GlobalizationManaging the Next Wave of Globalization
Hans Hans TimmerTimmer and Richard and Richard NewfarmerNewfarmerWorld BankWorld Bank
December, 2006December, 2006
MediumMedium--term outlookterm outlook
Growth in developing countries will remain strong, Growth in developing countries will remain strong, boosted by improved policies and favorable financial boosted by improved policies and favorable financial conditionsconditions
The global economy has reached a turning point, and The global economy has reached a turning point, and ingredients for a softingredients for a soft--landing are in placelanding are in place
But turning points generate uncertainties, and But turning points generate uncertainties, and significant downside risks remainsignificant downside risks remain
Strong growth in developing economiesStrong growth in developing economies
Real GDP annual percent change
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1980 1985 1990 1995 2000 2005
Forecast
Developing
2008
Source: World Bank
Strong growth in developing economiesStrong growth in developing economies
Real GDP annual percent change
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1980 1985 1990 1995 2000 2005
Forecast
DevelopingDeveloping
HighHigh--incomeincome
2008
Developing ex. Developing ex. China & IndiaChina & India
Source: World Bank
Growth now broadGrowth now broad--basedbased
0
5
10
15
20
25
30
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
86-96 96-06
# of developing countries
Average annual GDP growth (%)
Growth now broadGrowth now broad--basedbased
0
5
10
15
20
25
30
35
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
96-06 00-08
# of developing countries
Average annual GDP growth (%)
Developing countriesDeveloping countries’’ policies have improved policies have improved
percent
-10
0
10
20
30
Av. Tariffs Median Inflation Fiscal Deficit
1980s1980s
20022002--20042004
Turning point in commodity marketsTurning point in commodity markets
80
130
180
230
280
330
Jan-03
Jul-03 Jan-04
Jul-04 Jan-05
Jul-05 Jan-06
Jul-06 Jan-07
Jul-07
Metals and minerals
Crude oil
Price indexes, Jan 2003=100ForecastForecast
Tighter monetary policy to contain inflationTighter monetary policy to contain inflation
0
1
2
3
4
5
6
Jan
May
Sep
Ja
n M
ay
Sep
Jan
May
Sep
Ja
n M
ay
Sep
Jan
May
Sep
Percent -- Interest rates
United States
Source: World BankSource: World Bank
2002 2003 2004 2005 2006
3 month t-bill
Core inflation
Turning point in global imbalancesTurning point in global imbalances
Current account balance, billions of dollars, 2002 and 2006, 2008
Source: World Bank.Source: World Bank.
-1000
-800
-600
-400
-200
0
200
400
USA Europe Japan Other HIC East Asia &Pacific (ex
China)
China Europe &Central Asia
OtherDeveloping
20022006
2008
Turning points come with risksTurning points come with risks
Surplus of global liquidity might trigger sudden reversal of credit flowsGlobal imbalance still large and might trigger sudden reversal in capital flowsCorrection in U.S. housing market might trigger sharper slowdownDisruption in oil supply might trigger renewed upward price spikes
The next wave of globalizationThe next wave of globalization
Over the next 25 years, markets will become more Over the next 25 years, markets will become more integrated, developing countries will like grow faster, integrated, developing countries will like grow faster, and become a major force in the global economyand become a major force in the global economyHowever, stresses over income distribution and in However, stresses over income distribution and in labor markets could undermine potential growthlabor markets could undermine potential growth……and failure to manage environmental pressures and failure to manage environmental pressures entails serious risks entails serious risks Policy responses to these stresses are so far Policy responses to these stresses are so far inadequate to the challenges, so new efforts are inadequate to the challenges, so new efforts are needed at both the national and multilateral level needed at both the national and multilateral level
Developing countries share of trade will rise as global Developing countries share of trade will rise as global integration intensifiesintegration intensifies……
Exports from developing and developed countries, 2005Exports from developing and developed countries, 2005--20302030
0
5
10
15
20
25
30
1980 2005 2030
US$2001 trln.
Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.
Developing countries
High-income countries
$27 trln
32%
45%
22%
……and the share of developing countries in global output and the share of developing countries in global output will risewill rise……
GDP of highGDP of high--income and developing countries (market exchange rates)income and developing countries (market exchange rates)
0
10
20
30
40
50
60
70
80
1980 2005 2030
US$2001 trln
Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.
Developing countries
High-income countries
$72 trln
23%
31%
16%
Growth would raise income and reduce absolute povertyGrowth would raise income and reduce absolute povertyAverage per capita incomes in developing countries are likely toAverage per capita incomes in developing countries are likely to double..double..……and more people from developing countries will enter the and more people from developing countries will enter the ””global middle classglobal middle class””
0
200
400
600
800
1000
1200
1400
2000 2030
South Asia
Europe & Central Asia
East-Asia
Number of people (million)Number of people (million)
Latin AmericaLatin America
Middle EastMiddle East
Africa
Growth would raise incomes and reduce absolute povertyGrowth would raise incomes and reduce absolute povertyAverage incomes are likely to doubleAverage incomes are likely to double……and more people from developing countries will enter the and more people from developing countries will enter the ””global middle classglobal middle class””……and sharp reductions in dire absolute poverty and sharp reductions in dire absolute poverty
0
200
400
600
800
1,000
1,200
1,400
1990 2003 2015 2030
East AsiaEast Asia
South AsiaSouth Asia
SubSub--Saharan Saharan AfricaAfrica
OtherOther28%28%
20%20%
8%8%
12%12%
Millions of peopleMillions of people
Managing stresses: uneven benefitsManaging stresses: uneven benefits
At global level, some regions lag, notably AfricaAt global level, some regions lag, notably Africa
2005
2030
0
5
10
15
20
25
30
35
40
East-AsiaPacific
South Asia Europe &Central
Asia
MiddleEast &NorthAfrica
Sub-Saharan
Africa
LatinAmerica &
Carib.
Per capita incomes as percent of highPer capita incomes as percent of high--income countriesincome countries
NoteNote: Ratio of PPP: Ratio of PPP--adjusted per capita incomes relative to highadjusted per capita incomes relative to high--income average. PPP is fixed at base year (2001) level.income average. PPP is fixed at base year (2001) level.SourceSource: World Bank simulations with Linkage model.: World Bank simulations with Linkage model.
WithinWithin--country income distribution could become unequal country income distribution could become unequal in coming years for many countries
Managing stresses: uneven benefitsManaging stresses: uneven benefits
in coming years for many countries
0
5
10
15
20
25
very largelargesmallminimal changesmalllargevery large
Number of countriesNumber of countries
Income inequalityIncome inequalitydecreasedecrease increaseincrease
Note:Note: Based on changes in the Based on changes in the GiniGini--coefficient: very large >|0.05|, large>|0.03|, minimal change <|coefficient: very large >|0.05|, large>|0.03|, minimal change <|0.01|0.01|
Managing stresses: uneven benefitsManaging stresses: uneven benefitsReturns to skilled workers will likely rise relative to Returns to skilled workers will likely rise relative to unskilled workersunskilled workers
Ratio of skilled wages relative to unskilled wagesRatio of skilled wages relative to unskilled wages
0
1
2
3
4
5
6
7
EAP ECA LAC MENA SA SSA
20302030
20012001
Source : Bank staff calculationsSource : Bank staff calculations
……while globalization spurs productivity, tensions in labor while globalization spurs productivity, tensions in labor markets could become more severe
Managing stresses: labor marketsManaging stresses: labor markets
markets could become more severe
Africa
Middle East
LatinAmerica
ECA
China
Other Asia
01020304050607080
1973 1983 1993 2003 2020 2030Source : For 1973-2003, data from WITS, Bank staff calculations. Projections using the Linkage model for 2020 and 2030.
Share of highShare of high--income countriesincome countries’’ imports of manufactures originating in developing imports of manufactures originating in developing countries (%)countries (%)
Managing stresses: labor marketsManaging stresses: labor markets
……and may take a different form because of services tradeand may take a different form because of services trade
0% 100% 200% 300% 400% 500% 600% 700% 800%
IndiaEstonia
RomaniaChinaIsraelBrazil
ArgentinaMauritius
EU-15US
CanadaBarbadosDominica*
AustraliaNorwayGhanaJapan
Growth rate of exports of business services 1994-2003
Source: Data from IMF Balance of Payment Statistics: Business services are defined as Total services minus Transportation, Travel, and Government Services.
Managing stresses: labor marketsManaging stresses: labor markets
But ChinaBut China’’s surge s surge –– and that of other developing and that of other developing countries countries –– represents more opportunity than threatrepresents more opportunity than threat
Exporting requires importing, and ChinaExporting requires importing, and China’’s imports rapidlys imports rapidly
East-AsiaPacific
Europe and Central Asia
Latin Am.
Middle East and North Africa
South AsiaAfrica
0
20
40
60
80
100
120
140
1985 1990 1995 2000 2005
Imports in USD billionsImports in USD billions
Source: WITS, Bank staff calculationsSource: WITS, Bank staff calculations
Managing 3 stresses: environmental pressuresManaging 3 stresses: environmental pressures
Global institutions and policies are still too weak to deal Global institutions and policies are still too weak to deal with with severe environmental pressures severe environmental pressures
Carbon emissions are causing global warmingCarbon emissions are causing global warming
02,0004,0006,0008,000
10,00012,00014,00016,00018,000
1990 2000 2010 2020 2030 2040 2050
Others
Large developing countries
High-income countries
Annual carbon emissions (millions of tons)
Source: OECD GREEN model simulations
Managing stresses: environmental pressuresManaging stresses: environmental pressures
Global institutions and policies are still too weak to deal Global institutions and policies are still too weak to deal with with severe environmental pressures severe environmental pressures
Carbon emissions are causing global warmingCarbon emissions are causing global warming…… and and overfishingoverfishing threatens major fisheriesthreatens major fisheries
10
30
50
70
90
110
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
Trend 1950Trend 1950--9595
Trend 1995Trend 1995--20052005
Realizing the potential of global integration requires an Realizing the potential of global integration requires an affirmative policy response affirmative policy response –– domestically and globallydomestically and globally
Domestic policy must enhance competitiveness and ensure that groDomestic policy must enhance competitiveness and ensure that growth is wth is broadly sharedbroadly shared
Institutional measures to raise productivity and growthInstitutional measures to raise productivity and growth•• Removing barriers to integrationRemoving barriers to integration•• Improving investment climateImproving investment climate
Investing in educationInvesting in educationProtecting workers Protecting workers –– but not jobsbut not jobs
Multilateral collaborationMultilateral collaborationUsing development assistance to promote integration of lagging Using development assistance to promote integration of lagging countriescountriesRemoving barriers to the products that the poor produceRemoving barriers to the products that the poor produce
•• NearNear--term priority: Doha Development Agendaterm priority: Doha Development Agenda
Global trade reform can be proGlobal trade reform can be pro--poorpoorPercent income gains (losses) by centiles of global distribution if official development assistance were to cease (expressed as difference from baseline scenario of chapter 2)
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1 11 21 31 41 51 61 71 81 91Cumulative population ranked by per capita income
Growth incidence Average
Realizing the potential of global integration requires an Realizing the potential of global integration requires an affirmative policy response affirmative policy response –– domestically and globallydomestically and globally
Domestic policy must enhance competitiveness and ensure that groDomestic policy must enhance competitiveness and ensure that growth is wth is broadly sharedbroadly shared
Institutional measures to raise productivity and growthInstitutional measures to raise productivity and growth•• Removing barriers to integrationRemoving barriers to integration•• Improving investment climateImproving investment climate
Investing in educationInvesting in educationProtecting workers Protecting workers –– but not jobsbut not jobs
Multilateral collaborationMultilateral collaborationUsing development assistance to promote integration of lagging Using development assistance to promote integration of lagging countriescountriesRemoving barriers to the products that the poor produceRemoving barriers to the products that the poor produce
•• NearNear--term priority: Doha Development Agendaterm priority: Doha Development AgendaReinforcing mechanisms to deal with global externalitiesReinforcing mechanisms to deal with global externalities
Global Economic Prospects, 2007Global Economic Prospects, 2007Managing the Next of GlobalizationManaging the Next of Globalization
Hans Hans TimmerTimmer and Richard and Richard NewfarmerNewfarmerWorld BankWorld Bank
December, 2006December, 2006