Global Development Finance 2004

Harnessing Cyclical Gainsfor Development

Washington DCApril 2004

Outlook for the global economy

The global recovery has found firm footing, and is largely driven by rebound in investment

Developing countries continue to grow faster than high-income countries; improved macro policies key to this success

Global growth likely peaks this year and the prospects are for somewhat slower growth in 2005

Capital stock adjustment drives the cycle

2.1

3.0

4.0

1.4

1.8

2.6

3.7

3.1 3.0

1998 1999 2000 2001 2002 2003 2004 2005 2006

Contribution ofinvestment

Other contributions

World GDP growthPercent

Source: World Bank

Momentum of global economy at peak World industrial production and merchandise export volumes, excludes China, 3m/3m saar

-10

-8

-5

-3

0

3

5

8

10

13

15

18

20

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

Source: World Bank, DECPG

Exports

Forecast

Industrial production

Commodity prices are soaring Petroleum and non-energy weighted price indices, current US dollars, 1990=100.

60

70

80

90

100

110

120

130

140

150

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

Source: World Bank, DECPG

Petroleum

Non-energy

…yet inflation remains subdued Consumer price inflation, median for Developing- and GDP weighted mean for High-income.

0

5

10

15

20

25

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Source: World Bank, DECPG

Developing

High-income

Interest rates continue to be low

0

1

2

3

4

5

6

7

Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04

Central bank policy ratesPercent

Euro Zone

United States

Japan

Source: National Agencies

Trade: Developing countries outperform OECD

Exports and imports (GNFS), 2003, percentage change

1.3

1.7

7.3

5.4

13.5

16.4

21.1

2.2

4.3

6.4

1.1

14.1

13.2

23.6

0 5 10 15 20 25

High-income OECD

Sub-Saharan Africa

Middle East &North Africa

Latin America &Caribbean

Europe & CentralAsia

South Asia

East Asia & Pacific

Imports

Exports

Percent

Source: World Bank

Developing economies are key to growth Industrial production excl. construction indices, seasonally adjusted, Jan 2000=100.

90

95

100

105

110

115

120

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

* Kinks stem from shifting Lunar New Year not accounted for by seasonal adjustment. Source: World Bank, DECPG

Developingexcl. China

High-income

Developing economies are key to growth Industrial production excl. construction indices, seasonally adjusted, Jan 2000=100.

90

100

110

120

130

140

150

160

170

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

* Kinks stem from shifting Lunar New Year not accounted for by the seasonal adjustment. Source: World Bank, DECPG

Other Developing

China*

High-income

Policies have fostered environment for growth

All Developing 1990s 2003

GDP 3.4 4.8

Cont. of Inv. 0.6 2.6

CAB -1.4 1.1

MFN Tariffs 25.4 13.5

Fiscal Balance -7.1 -3.6

Inflation 8.4 3.90

1

2

3

4

5

6

1990 1992 1994 1996 1998 2000 2002 2004 2006

Uptrend in Developing country growth

Prospects for slower growth in 2005

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2002 2003 2004 2005 2006

Source: World Bank

GDP growth

Developing countries

OECD

2002 2003 2004 2005 2006

OECD countries 1.4 2.0 3.1 2.6 2.5

Developing 3.4 4.8 5.4 5.2 5.0

East Asia 6.7 7.7 7.4 6.7 6.3

ECA 4.6 5.5 4.9 4.8 4.7

Latin America -0.6 1.3 3.8 3.7 3.5

Mid-East & North Africa

3.3 5.1 3.7 3.9 4.0

South Asia 4.3 6.5 7.2 6.7 6.5

Sub-Saharan Africa

3.3 2.4 3.4 4.2 3.9

Policy challenges

High-income countries: pursue fiscal adjustment, orderly realignment of current account imbalances and deliberate transition to higher interest rates.

Low- and middle-income countries: use current favorable environment to consolidate fiscal balances, and avoid excessive accumulation of short-term debt.

Per capita income growth and population in developing countries (1998 – 2003).

(16) (8) (16) (16) (14)Number of countries

(14)Falling 0 and 1% 1% and 2% 2% and 3% 3% and 4% Above 4%

325

446

605

381

1,428

1,638

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Av

era

ge

Po

pu

lati

on

(M

n.)

, 1

99

8-2

00

3

Per capita income growth rate (%), 1998-2003

-120

-100

-80

-60

-40

-20

0

20

40

60

80

1997 1998 1999 2000 2001 2002 2003

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Developing countries remain net capital exporters to the developed world

$ billion

CA as a share of GDP (right axis)

Percent

Developing countries’ current account balance

0

200

400

600

800

1000

1200

1996 1997 1998 1999 2000 2001 2002 2003

EAP Developing countries

Foreign exchange reserves have risen sharply, especially in East Asia $ billion

44.0

145.8

21.8

36.8

98.2

15.0

0

20

40

60

80

100

120

140

160

Debt/GDP Debt/Exports Debtservice/Exports

1999 2003

Selected debt indicators

Percent

Developing countries’ external liability position has improved

0

50

100

150

200

250

300

350

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*

$286 in 1997

$ billion

$200 in 2003Net private flows

Private capital flows recovered in 2003…but remain well below 1997 peak

-50

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003

$ billion

Net private equity flows

Net private debt flows

Bond issuance and ST bank lending lead the recovery

300

400

500

600

700

800

900

1000

Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 Mar-04

The risk premium on developing country debt has declined steadily

EMBIG spreads

Basis points 938 points (Sep., 2002)

424 points (Mar., 2004)

0

20

40

60

80

100

120

140

160

180

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*

$ billion

Net FDI inflows

All developing countries

Latin America

After 1990s surge, recent FDI flows are down

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

DevelopingCountries

Least DevelopedCountries

Sub-Saharan Africa

2002

2003

FDI-GDP Ratio

Despite FDI concentration, Poor Countries receive sizeable share

Aid has started to increase…but much more effort is needed

OECD DAC nominal ODA flows

0.2

0.22

0.24

0.26

0.28

0.3

0.32

0.34

0.36

1990 1992 1994 1996 1998 2000 2002 2004 2006

As % of OECD GNI

Monterrey target, 2006

Trade finance is a key source of finance for less creditworthy countries

0

20

40

60

80

1980-82

1983-85

1986-88

1989-91

1992-94

1995-97

1998-00

2001-03

Percent of total bank lending

Trade finance by commercial banks, by investment rating, 1980-2003

Investment grade

Non-investment grade and non-rated

Remittances are a growing and stable source of finance, especially in poor countries

Remittances as % of GDP

2.9

1.0

1.3

Low-income Lower middle-income

Upper-middle income

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

International investment in developing country infrastructure has declined since 1997

$ billion

Total international investment in developing country infrastructure

East Asia

Latin America

Concluding messages

1. Developing countries must maintain improvement in fundamentals, and avoid excessive debt accumulation

2. More effort is needed to expand aid flows

3. Sustainability of private capital flow recovery depends on careful management of developed country macro imbalances