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Recoupling or Switchover: Developing countries in the global economy Otaviano Canuto Vice President and Head of Network Poverty Reduction and Economic Management The World Bank

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Recoupling or Switchover:Developing countries in the global economy

Otaviano CanutoVice President and Head of Network

Poverty Reduction and Economic ManagementThe World Bank

Cyclical Coupling and Trend Decoupling

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

World Output Growth 1961 - 2012(% Change)

AdvancedDeveloping Countries

Source: World Bank WDI and DEC Interim Forecasts April 2010.

Developing countries have been resilient in partbecause trend output remains de-coupled

Pace of recovery in production mixedacross developing regionsindustrial production, ch% (3m/3m saar)

Source: World Bank data

-40

-30

-20

-10

0

10

20

30

40

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Latin America

Europe and Central Asia

East Asia and Pacific

South Asia

Beyond China and India…

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

< -6% -6 to -4 -4 to -2 -2 to 0 0 to 2 2 to 4 4 to 6 > 6%

Freq

uenc

y

Frequency Distribution of GDP Growth in 2009 - Developed and Developing

GDP Growth in 2009 (%)

Developing countries (122). Median growth: +2.13%.

High Income OECD (25) Median growth: -3.72%.

Legacy of the crisis on growth trends of advanced economies

-20

0

20

40

60

80

100

120

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

Pre crisis trend

Actual output

Source: IMF WEO April October 2009. Output = logarithm of real GDP per capita. 100 equals trend in year 7. First year of crisis at t = 0. Years on x axis. (Example: Korea 1997).

Output Loss

7

G20 Countries: General Government Debt to GDP Ratios (2000 – 2015)

Source: IMF, Fiscal Monitor, May 2010

Bumpy road to fiscal stability in advanced economies

Source: IMF, WEO April 2010

Household Balance Sheet Deleveraging

-7.5

-5

-2.5

0

2.5

5

7.5

10

12.5

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

United States: Personal Savings Rate and Current Account Balance (as % of GDP)

1960 - 2009:3

Personal Saving Rate

Current Account Balance

10Source: US Bureau of Economic Analysis

Jobless recovery in advanced countries

Source: IMF, World Economic Outlook, April 2010

Decomposition of the CumulativeChange in the Unemployment Rate during theGreat Recession

Growth interdependence

C

B

Developing countries(growth rates)

Advanced countries (growth rates)

A

A B Reverse coupling B C Locomotive switchover

AC0AC1

DC0

DC1

Toward a locomotive switchover?

Share of global GDP - PPP (%)

13

0

20

40

60

80

1980 1985 1990 1995 2000 2005 2010 2015

Advanced economies Emerging and developing economies Developing Asia

Source: IMF (WEO, April 2010)

Scope for autonomous growth versusgravity forces toward a low-growth path

I. (Overall) low degree of leverage [public and private balance sheets in good shape]

II. Technological convergence gap

III. Trade, structural change and global rebalancing of demand and supply

IV. Social trickle-down of growth

V. Natural resources as a blessing or a curse

I. Potential pitfalls on the way to leveraging developing-country balance sheets

• Public sector management capacities and appropriate governance mechanisms

• Increased leverage and higher financial fragility

• Crowding-out by debt issues from developed countries

• Higher overall costs of finance

• Risks of asset market bubbles

Signs of monetary tightening in some emerging market countries

Sources: JP Morgan and DECPG (World Bank) staff calculations

3.95

4.00

4.05

4.10

4.15

4.20

4.25

4.0

4.5

5.0

5.5

6.0

6.5

7.0

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

Emerging Europe

Latin America

Emerging Asia (right)

Official interest rate (GDP-weighted regional averages, percent)

Private capital flows to developing countries: at the start of a new boom-bust cycle?

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Private Debt Flows

Portfolio equity flows

Foreign direct investment

Private Capital Flows to Developing Countries 1970-2010 (percent of GDP)

Source: World Bank data and staff estimates; Institute for International Finance. 17

II. Convergence gap and non-rival use of existing technologies

• Obstacles to more rapid technology diffusion: Information asymmetries and uncertaintiesComplementary factors: reliable infrastructure; access to finance; educated labor force Institutional factors and investment climate Institutional barriers to competition

• On the other hand: global changes have favored technology transfer

III. Trade and structural change as vents for surplus labor

• Lewis type of structural change and growth performance

• Lumpiness in products, space , and time

• Rising international trade and recent technological changes have facilitated structural change

• Cases of “moving on”, after “breaking in”

Over-absorption in Advanced Economies supported growth-cum-structural-change in Developing

Countries

Source: IMF staff estimates (WEO, April 2010)CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, and Thailand; DEU+JPN: Germany and Japan; OCADC: Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Turkey, and United Kingdom; OIL: Oil

exporters; ROW: rest of the world; US: United States.

0%

20%

40%

60%

80%

100%

1996 1998 2000 2002 2004 2006 2008

BRICs Other LMICs USA Other HICs EU 25

Share of world trade for developing countriesshare of world imports in percent

Source: World Bank, UN-COMTRADE.

Over one third of developing countries exports go to other developing countries – and rising fast…

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Share of Developing Country Markets in Developing Country Exports

1962 - 2008

22

Approaching one quarter of developing countries’ manufactured exports go to other developing

countries…and rising

0.0

5.0

10.0

15.0

20.0

25.0

1973 1970 1980 1990 2000 2007

Intra-Developing Countries' Manufactured Exports

(% of total manufactured exports)

Rising South-South Trade:including low-income countries

24

0 10 20 30 40 50 60

Europe & Central Asia

Middle East & North Africa

Sub-Saharan Africa

South Asia

East Asia & Pacific

Latin America & Caribbean

export growth in LICs due to GDP growth in major import markets, 2000-2008 (%)

BRIC

Other LMICs

USA

EU25

Other HICs

Source: Canuto, O. et al, Export-led growth v2.0, Economic Premise n.3, Feb 2010

Towards an export-led growth v2.0?

• Export-led growth still limited in geography and sector coverage

• Present level of imbalances is relatively recent• Weight of oil prices in global imbalances• Global imbalances are concentrated in a few

countries• It suffices to have domestic absorption rising

faster than output in developing countries as a whole

• Policy interests around exchange-rate realignments

Most developing country exports are negligible compared to OECD imports

0

5

10

15

20

Sao

Tom

e an

d …Co

mor

osM

arsh

all I

sland

sSt

. Vin

cent

and

the …

Solo

mon

Isla

nds

Sier

ra Le

one

Haiti

Togo

Nepa

lGu

inea

Geor

gia

Mal

iSw

azila

ndZi

mba

bwe

Mac

edon

ia, F

YRCu

baBo

livia

Hond

uras

Guat

emal

aUz

beki

stan

Cost

a Ri

caM

oroc

coAz

erba

ijan

Rom

ania

Ukra

ine

Chile

Indo

nesia

Mal

aysia

7 more account for another 4.5%

Cumulative Developing Country Exports in 2007(As Percent of OECD Imports)

130 developing countries account for 2.5% of OECD imports.

One country (China) accounts for 10.5% of OECD imports

Global Imbalances are concentrated in a few countries

-1.5

-1

-0.5

0

0.5

1

1.5

2

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Current Account Balances(Percent of World GDP)

OECD *

Rest of World

* Ex. Korea

-0.5

0

0.5

1

1.5

2

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Rest of World Current Account Balances(Percent of World GDP)

Developing Countries ex. China

Non-OECD High Income

China

LPI 2010 – performance varies around the world

Source: Connecting to Compete, World Bank, 2010No data

Logistics friendly

Logistics unfriendlyPartial performersConsistent performers

G20 use of selected temporary trade barriers

0

500

1000

1500

2000

2500

3000

3500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

China as exporterDeveloping economy as exporter (non-China)Developed economy as exporter

By import source, 1997-2009, unique product-exporter combinations

Source: Global Anti-dumping Database; World Bank.

IV. Social trickle-down of growth

Whither the prices of natural resources?

31

0

20

40

60

80

100

120

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Crude Oil Price: 1900-2011(constant 2008 $/bbl)

Forecasts

Source: Through 1900-2009: BP Statistical Review of World Energy and through 2010-2011: World Bank estimates

Source: World Bank

V. Natural resources as a blessing or a curse

20.0

30.0

40.0

50.0

60.0

70.0

80.0

AFR LAC MNA All ECA EAP SAS

Developing Countries: Commodity Exports Share (%) in 2003-07 *

* As % of merchandise exports. Simple averages for country groups. Source: World Bank World Development Indicators.

To conclude…• Yes, there is a scope for a switchover where

developing countries as a whole take on a greater role as global locomotive and move global growth forward, offsetting forces toward a negative recoupling deriving from less buoyancy in advanced countries.

• Nevertheless comprehensive homework in terms of domestic policies and reforms will be fundamental to accomplish that mission