world economy 2011

8/3/2019 World Economy 2011

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World Economic Situationand Prospects 2011

Global outlook

asdfUnited Nations

New York, 2010

PRE-RELEASE

Embarg1Decee201

11:00

NewYktie

http://www.un.org/esa/policy/wess/wesp.html


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Tis report is a joint product o the United Nations Department o Economic and SocialAairs (DESA), the United Nations Conerence on rade and Development (UNCAD)and the ve United Nations regional commissions (Economic Commission or Arica

(ECA), Economic Commission or Europe (ECE), Economic Commission or LatinAmerica and the Caribbean (ECLAC), Economic and Social Commission or Asia and thePacic (ESCAP) and Economic and Social Commission or Western Asia (ESCWA)).

For urther inormation, please see http://www.un.org/esa/policy or contact:

Mr. Rob Vos

DirectorDevelopment Policy and Analysis Division

Department o Economic and Social AairsRoom DC2-2020United Nations,New York, NY 10017, USA

Phone: +1-212.963.4838Fax: +1-212.963.1061E-mail: [email protected]

Pre-Release

This is a pre-release o Chapter I o the World Economic Situation and Prospects 2011, issued on

1 December 2010 in New York. The ull report, including regional overviews and a detailed analysis

o trends in global trade and nance will be available rom the second ull week o January 2011


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1

Chapter I

Global outlook

mcroeconoic prospects or the world econoyTe road to recovery rom the Great Recession is proving to be long, winding and rocky.

Ater a year o ragile and uneven recovery, growth o the world economy is now decelerat-ing on a broad ront, presaging weaker global growth in the outlook.

Weaknesses in major developed economies continue to drag the global recov-ery and pose risks or world economic stability in the coming years. Tere will be noquick x or the problems these economies are still acing in the atermath o the nancialcrisis. Te unprecedented scale o the policy measures taken by Governments during theearly stage o the crisis has no doubt helped stabilize nancial markets and jump-start arecovery, but overcoming the structural problems that led to the crisis and those that werecreated by it is proving much more challenging and will be a lengthy process. For example,

despite the notable progress made by the banking sector in disposing o its troubled as-sets, many o the banks in major developed countries remain vulnerable to multiple risks.Tose risks include a urther deterioration in real estate markets, more distress in sovereigndebt markets, and continued low credit growth associated with overall economic weaknessand the ongoing deleveraging among rms and households. Persistent high levels o unem-ployment, with increasing numbers o workers that have been without a job or prolongedperiods, are restraining private consumption demand; they are also a continued cause oincreasing housing oreclosures, which are adding to the ragility o the nancial system.roubles with public nances have become daunting as well. Fiscal decits have wideneddramatically and have become a source o political contention. Decits have increased,mainly as a consequence o the impact o the crisis on alling government revenues andrising social benet payments. Te costs o scal stimulus measures have compounded

this situation but, contrary to popular belie, have contributed only in minor part to theincrease in public indebtedness. Yet, rising public debt has engendered political and nan-cial stress in a number o European countries and, more broadly, has undermined supportor urther scal stimuli. However, as Governments shit rom scal stimulus to austerity,the recovery process is being placed in urther jeopardy. Te scal consolidation plans thathave been announced so ar by Governments o developed countries will impact negativelyon gross domestic product (GDP) growth in the outlook or 2011 and 2012.

Tis contrasts with the strong GDP growth in many developing countries andeconomies in transition, which has been contributing to more than hal o the expansiono the world economy since the third quarter o 2009. Te rebound has been led by thelarge emerging economies in Asia and Latin America, particularly China, India and Brazil.Many developing countries have been able to use the policy buers (in the orm o ample

scal space and vast oreign-exchange reserves) they had generated in the years beore thecrisis to adopt aggressive stimulus packages. Tese have helped boost domestic demandand have thus acilitated a relatively quick recovery rom the global downturn. Since thesecond quarter o 2009, low- and middle-income countries have also led the recovery ointernational trade, building on ties among developing countries through global valuechains. Many smaller economies in Arica and Latin America have been able to benetrom these South-South linkages, as well as rom more buoyant international primary

Weaker global growth is

expected in 2011 and 2012

There will be no quick x

or economic problems in

advanced countries

Developing country growth

remains the main driver o

the global recovery


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2 World Economic Situation and Prospects 2011

commodity prices which have rebounded largely on account o the recovery in demandin the large developing economies. Te return o private capital inows to middle-incomecountries has urther supported the recovery. By late 2010, developing country trade andindustrial output had climbed to above pre-crisis levels.

It is uncertain, however, whether the developing countries and economies

in transition can sustain the same robust pace o growth in 2011 and beyond. Despitestrengthened trade ties amongst these countries, they remain highly dependent on demandin the developed countries or their exports. Access to capital ows and ofcial develop-ment nance is also highly conditioned by nancial circumstances and scal stances inadvanced economies. A altering recovery in those economies, on account o the above-mentioned risks, should thus be expected to moderate growth prospects or developingeconomies as well.

In addition, there are also important risks associated with the surge in privatecapital ows to emerging market economies. Tese ows are causing upward pressureon these countries currencies and risk inating domestic asset bubbles. Te return ocapital ows is associated, to some degree, with the strong monetary expansion in themajor developed countries, which has induced investors to seek more protable ventures

given continued weakness in nancial sectors and the real economy in those countries. Ithas led policymakers in the emerging market economies to worry about the competitive-ness o exports and the possibility o sudden capital ow reversals. Tey are respondingby intervening in currency markets and imposing controls on short-term capital inows.Fears o protectionist retaliation by developed countries have increased. As primary com-modities are increasingly seen as alternative nancial assets, short-term capital has alsomoved deeper into commodity markets, risking higher volatility in commodity prices andraising economic insecurity or many developing countries. ogether with the increase involatility in the exchange rates o major reserve currencies (the dollar, the euro and theyen) and a weakening commitment to coordinate policies to redress the global imbalanceseectively, these actors pose increasing risks to the stability o international trade andnance, and, unless addressed in a timely ashion, will impede a strong, sustainable and

balanced recovery o the global economy.Mitigating these risks poses enormous policy challenges. In major developed

economies, macroeconomic policy options are limited by political actors restra ining ur-ther scal st imulus and market responses to sovereign debt distress. Tis has led policymak-ers to rely increasingly on monetary policy. Authorities in the main developed countrieshave cut interest rates urther and moved deeper into quantitative easing, but it is unlikelythat this will sufce to boost aggregate demand and create new jobs, especially as longas nancial sector weaknesses remain and scal stimulus is on the wane. Active incomepolicy could be an alternative or complementary tool or strengthening domestic demand,but it remains largely unused. Te surge in capital ows to emerging and other developingeconomies and the consequent pressures on currencies are complicating the internationalenvironment or developing countries, rendering policies to restructure their economies in

support o sustained growth all the more challenging. Te spillover eects o national poli-cies are signicant and a potential source o renewed instability. Tis once again highlightsthe need or strengthened international policy coordination. In this regard, the waningcooperative spirit among policymakers in the major economies has become an additionalrisk to the recovery o the world economy.

but developing countries

ace challenges

in the outlook


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3Global outlook

Growth prospects

Ater a year o ragile and uneven recovery, global economic growth started to decelerateon a broad ront in mid-2010. Te slowdown is expected to continue into 2011 and 2012.Te outlook is shrouded in great uncerta inty and serious downside risks remain. Premisedon the key assumptions delineated in box I.1, the United Nations baseline orecast or thegrowth o world gross product (WGP) is 3.1 per cent or 2011 and 3.5 per cent or 2012,

which is below the 3.6 per cent estimated or 2010 and the pre-crisis pace o global growth(see table I.1 and gure I.1). Te recovery may suer urther setbacks i some downsiderisks take shape. In such a pessimistic scenariodiscussed urther in box I.4growth othe world economy could slow signicantly, to 1.7 per cent in 2011 and 2.3 per cent in2012. Better outcomes may be expected only through strengthened international policycoordination (see the section on policy challenges and box I.5 below).

Among the developed economies, the United States of America has been on themend rom its longest and deepest recession since the Second World War. Yet, the paceo the recovery has been the weakest in the countrys post-recession experience. At 2.6per cent in 2010, growth is expected to moderate urther to 2.2 per cent in 2011 and to

improve slightly to 2.8 per cent in 2012. At these rates, the level o GDP will return to itspre-crisis peak by 2011, but a ull recovery o employment would take at least another ouryears (see below), leaving the level o output well below potential.

Te growth prospects or Europeand Japan are even dimmer. Assuming con-tinued, albeit moderate, recovery in Germany, GDP growth in the euro area is orecast tovirtually stagnate at 1.3 per cent in 2011 and 1.7 per cent in 2012 (growth in 2010 was 1.6per cent). Many European countries will see even less growth, especially those in whichdrastic scal cuts and continued high unemployment rates are draining domestic demand.Tis is especial ly the case in Greece, Ireland, Portugal and Spain, which are entrapped insovereign debt distress and whose economies will either remain in recession or stagnate.

Japans initially strong rebound, uelled by net export growth, started to alter in thecourse o 2010. Challenged by persistent deation and elevated public debt, the economy

is expected to grow by a meagre 1.1 per cent in 2011 and 1.4 per cent in 2012.Among the economies in transition, the Commonwealth of Independent States

(CIS) and Georgia experienced a rebound in GDP by about 4 per cent on average in 2010,up rom the deep contraction o 6.7 per cent in 2009. Increased external demand andrebounding commodity prices are the drivers o the recovery. Domestic demand remains

weak in most economies, especially in Ukraine. Te recovery has slowed in the course o2010, however. Output growth is not expected to accelerate in the outlook or 2011 and2012. Ater a prolonged period o contraction, output growth in the economies in transi-tion in South-eastern Europe, except or Croatia, returned to positive territory in 2010. Inthis case, too, export growth has been driving most o the recovery so ar, while domesticconsumption and investment demand remain subdued. In 2011 and 2012, the pace orecovery in South-eastern Europe is expected to be rather slow.

Developing countries continue to drive the global recovery, but their outputgrowth is also expected to moderate to 6.0 per cent on average during 2011-2012, downrom 7.1 per cent in 2010. Developing Asia, led by China and India, continues to showthe strongest growth perormance, but GDP growth in these two new economic giants isexpected to experience some moderation in 2011 and 2012.

Growth in Latin America, particularly that in the South American economies,is projected to remain relatively robust at about 4.1 per cent in the baseline orecast. Yet,

The global recovery started

to alter in mid-2010

Slower economic growth

is expected in the United

States, Europe and Japan

Developing country growthis also expected

to moderate during

2011-2012


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Key assumptions or the United Nations

baseline orecast or 2011 and 2012

The orecast presented in the text is based on estimates calculated using the United Nations World

Economic Forecasting Model (WEFM) and is inormed by country-specic economic outlooks pro-

vided by participants in Project LINK, a network o institutions and researchers supported by the

Department o Economic and Social Aairs o the United Nations. The provisional individual country

orecasts submitted by country experts are adjusted based on harmonized global assumptions and

the imposition o global consistency rules (especially or trade ows measured both in volumes and

values) set by the WEFM. The main global assumptions are discussed below. The baseline orecast

does not include any specic assumption about international coordination o macroeconomic poli-

cies. It is also supposed that, other than the changes indicated below, there are no other exogenous

shocks to the global economy. (See box I.4, box I.5 and the section on policy challenges or alterna-

tive scenarios.)

Monetary and fscal policy assumptions or major economies

It is assumed that the United States Federal Reserve (Fed) will hold the ederal unds rate at its current

level o 0.00-0.25 per cent until the ourth quarter o 2011, to be ollowed by a gradual increase in

the rate in 2012. Similarly, the European Central Bank (ECB) is also expected to hold its main policy

rate (the minimum bid rate) at its current level o 1 per cent until the end o 2011, also with a gradual

tightening in 2012. The Bank o Japan is expected to hold its policy rate at virtually 0.00 per cent until

the end o 2011, also with gradual tightening in 2012. The central banks o the three major developed

economies are expected to continue their unconventional measures o quantitative easing.

Fiscal policy in the United States o America is assumed to eature continued implemen-

tation o the remaining parts o the American Recovery and Reinvestment Act o 2009 and extension

o the current tax cuts, but the overall scal policy stance will become negative in 2011 and 2012.

Most economies in the euro area and the rest o Western Europe have announced plans or scal

consolidation, which are reected in the baseline assumptions. The degree and timing o these plans

vary signicantly, but the overall stance or the region will be contractionary. Fiscal stimulus through

public investment spending has already been phased out in Japan, but supportive tax policy meas-

ures are assumed to remain in place.

Fiscal policies among major developing countries and economies in transition are as-sumed to implement or phase out stimulus plans, as has been announced. Additionally, monetary

policy stances vary across countries (see chapter IV or details) and are reected in the baseline as-

sumptions. These include increases in policy interest rates in several o the emerging economies to

reect anticipated moves rom monetary easing back to more neutral monetary stances during 2010

and 2011.

Exchange rates

The exchange rates o major currencies have uctuated signicantly over the past two years. Given

no signicant change in interest dierentials between the United States and the euro area and no

signicant dierence between the two regions growth prospects, it is assumed that the dollar-euro

exchange rate will remain at its current average o 1.35 or the years 2011 and 2012, but with uctua-

tions around that level.

The yen has been appreciating vis--vis both the dollar and the euro, its value reaching

83 yen to the dollar in September 2010, the highest in 15 years, and triggering an intervention o theJapanese Government in oreign-exchange markets. It is assumed that the average exchange rate o

the yen vis--vis the dollar will average 85 yen per dollar or the years 2011 and 2012.

Oil and other commodity prices

The price o Brent crude oil is expected to average $75 per barrel in 2011 and $80 per barrel in 2012.

The prices o non-oil commodities are assumed to uctuate around their current levels in the ore-

cast period o 2011 and 2012.

Box I.1


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5Global outlook

this implies a marked moderation rom the 5.6 per cent GDP growth estimated or 2010.Brazil continues to act as the engine o regional growth, with strong domestic demandhelping to boost the export growth o neighbouring countries. Te subregion also benetsrom improved terms o trade and strengthened economic ties with the emerging econo-mies in Asia.

Table I.1growth o world output, 20062012

Annual percentage change

Change from UnitedNations forecast of

June 2010c

2006 2007 2008 2009 2010a 2011b 2012b 2010 2011

World outputd 4.0 3.9 1.6 -2.0 3.6 3.1 3.5 0.6 -0.1

o which:

Developed economies 2.8 2.5 0.1 -3.5 2.3 1.9 2.3 0.4 -0.2

Euro zone 3.0 2.8 0.5 -4.1 1.6 1.3 1.7 0.7 -0.2

Japan 2.0 2.4 -1.2 -5.2 2.7 1.1 1.4 1.4 -0.2

United Kingdom 2.8 2.7 -0.1 -4.9 1.8 2.1 2.6 0.7 -0.2

United States 2.7 1.9 0.0 -2.6 2.6 2.2 2.8 -0.3 -0.3

Economies in transition 8.3 8.6 5.2 -6.7 3.8 4.0 4.2 -0.1 0.6

Russian Federation 8.2 8.5 5.2 -7.9 3.9 3.7 3.9 -0.4 0.7

Developing economies 7.3 7.6 5.4 2.4 7.1 6.0 6.1 1.2 0.2

Arica 5.9 6.1 5.0 2.3 4.7 5.0 5.1 0.0 -0.3

Nigeria 6.2 7.0 6.0 7.0 7.1 6.5 5.8 0.6 -0.5

South Arica 5.6 5.5 3.7 -1.8 2.6 3.2 3.2 -0.1 -0.3

East and South Asia 8.6 9.3 6.2 5.1 8.4 7.1 7.3 1.3 0.2

China 11.6 13.0 9.6 9.1 10.1 8.9 9.0 0.9 0.1

India 9.6 9.4 7.5 6.7 8.4 8.2 8.4 0.5 0.1

Western Asia 6.1 5.1 4.4 -1.0 5.5 4.7 4.4 1.3 0.6

Israel 5.7 5.4 4.2 0.8 4.0 3.5 3.0 1.1 0.4

Turkey 6.9 4.7 0.7 -4.7 7.4 4.6 5.0 3.9 1.3

Latin America and the Caribbean 5.6 5.6 4.0 -2.1 5.6 4.1 4.3 1.6 0.2

Brazil 4.0 6.1 5.1 -0.2 7.6 4.5 5.2 1.8 -1.1

Mexico 4.9 3.3 1.5 -6.5 5.0 3.4 3.5 1.5 0.6

o which:

Least developed countries 7.6 8.1 6.7 4.0 5.2 5.5 5.7 -0.4 -0.1

Memorandum items:

World tradee 9.3 7.2 2.7 -11.4 10.5 6.6 6.5 .. ..

World output growth withPPP-based weights 5.1 5.2 2.7 -0.8 4.5 4.0 4.4 0.6 0.0

Source: UN/DESA.

a Partly estimated.

b Forecasts, based in part on Project LINK and baseline projections o the United Nations World Economic Forecasting Model.

c See World economic situation and prospects as of mid-2010 (E/2010/73), available rom http://www.un.org/esa/policy/wess/wesp2010les/wesp10update.pd.

d Calculated as a weighted average o individual country growth rates o gross domestic product (GDP), where weights are based on GDP in 2005prices and exchange rates.

e Includes trade in goods and non-actor services. Previous WESP reports reported growth o merchandise trade only.
http://www.un.org/en/development/desa/policy/wesp/wesp_archive/2010wespupdate.pdfhttp://www.un.org/en/development/desa/policy/wesp/wesp_archive/2010wespupdate.pdfhttp://www.un.org/en/development/desa/policy/wesp/wesp_archive/2010wespupdate.pdfhttp://www.un.org/en/development/desa/policy/wesp/wesp_archive/2010wespupdate.pdf


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Te economic recovery in Western Asia is also expected to moderate rom 5.5per cent in 2010 to 4.7 per cent in 2011 and 4.4 per cent in 2012. At this pace, averageannual output growth will be below the rates prevailing in the years beore the crisis. Teuel-exporting economies o the region have not levelled oil production ater the cutbacksmade in response to the global recession.

Economic recovery has been solid but below potential in most countries in

Africa. In South Arica especial ly, the regions largest economy, output growth remains sub-par as a result o, inter alia, weak manuacturing export growth. Elsewhere in the region,the economic recovery has been supported by the rebound in the demand or and priceso primary commodities as well as by increases in public investments in inrastructure,oreign direct investment (FDI) in extracting industries and improvements in conditionsor agricultural production. In the outlook, the economic growth in the region is expectedto remain somewhat below pre-crisis rates, averaging about 5.0 per cent or 2011-2012.

On the other hand, ormidable challenges remain in the long-run developmento many low-income countries. Although average per capita income growth or these coun-tries is expected to return to near pre-crisis rates in the outlook (gure I.2), it will not besufcient to ully make up or the setbacks caused by the crisis. In particular, the recoveryin many o the least developed countries (LDCs) will be below potential. Per capita income

growth among LDCs is expected to reach about 3 per cent per annum during 2010 and2011, which is well below the annual average o 5 per cent achieved during 2004-2007. TeLDCs ace diverging conditions. Bangladesh and the LDCs in East and Southern Arica areshowing strong economic growth, while production in the Sahel, West Arica and parts o

Asia is suering either rom adverse weather conditions or rom ragile political and securitysituations, or both (see box I.2 or the economic prospects or the LDCs).

Overall, the number o countries experiencing declines in per capita incomedropped signicantly, rom 52 in 2009 to 12 in 2010 (table I.2). During 2010, 45 developing

The recovery in least

developed countries will

be below potential in

the near term

Figure I.1

Growth of the world economy, 2004-2012

Percentage change

4.0

3.6

4.1 4.03.5

1.6

-2.0

3.6

3.1

-3

-2

-1

0

1

2

3

4

5

2004 2005 2006 2007 2008 2009 2010a 2011b 2012b

Baseline

Optimistic

Pessim

istic

Source: UN/DESA andProject LINK.

Note: See box I.1 orthe baseline orecast

assumptions. The pessimisticscenario reers to a situation

o enhanced macroeconomicuncertainty in the outlook

(see box I.4), while theoptimistic scenario is oneo limited, but improved,

international policycoordination (see box I.5).

a Estimates.

b United Nations orecast.


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7Global outlook

Figure I.2

Growth of GDP per capita, by level of development, 2000-2012

Percentage

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000 2002 2004 2006 2008 2010 2012

Source: UN/DESA and ProjectLINK.

Lower middleincome countries

Upper middle

income countriesLeast developedcountries

High-incomecountries

Low-incomecountries

Prospects or the least developed countriesa

Most least developed countries (LDCs) have weathered the crisis relatively well owing to their limited

exposure to the international nancial system and, in the case o a number o non-uel exporters,

their relatively low exports-to-gross domestic product (GDP) ratios. Yet, none o the LDCs have been

immune to the synchronized global slowdown, which depressed exports and reduced investment.

The crisis has set back the progress made in these countries towards achieving the millennium devel-

opment goals (MDGs). The welare losses suered in late 2008 and early 2009 will be long-lasting, as

nearly all LDCs will see a recovery well below pre-crisis growth rates in the outlook or 2011 and 2012.

The outlook diers signicantly across countries, however.

A number o LDCs have been severely aected by natural disasters. Haiti was hit by a

catastrophic earthquake, with damage totalling about 120 per cent o the countrys GDP or 2009.

Droughts in the Sahel have severely aected Chad, Mauritania and especially Niger, where up to

hal the population has aced acute ood shortages. In Benin, months o heavy rain resulted in the

worst ooding since 1963. Meanwhile, a number o countries, including Aghanistan, the Democratic

Republic o the Congo, Haiti and Liberia, obtained some nancial relie through debt relie or debt

restructuring.

Economic activity in most LDCs improved in 2010 along with the recovery in interna-

tional trade and the rebound in many commodity prices. In addition, growth in several economies

was supported by increased government spending. Aggregate growth or the group will accelerate

rom 4.0 per cent in 2009the lowest rate in over a decadeto about 5.5 per cent in 2010-2012,

with signicant divergence among the poorest and structurally handicapped nations (see gure).

Nevertheless, growth will remain well below the annual average o 7.2 per cent during the period

2003-2008. In the ve uel-exporting LDCs, growth is orecast to decelerate rom an annual average

o 9.2 per cent in 2003-2008 to 4.6 per cent in 2010-2012, with oil output declining in Equatorial Guinea

Box I.2

a While the group o leastdeveloped countries (LDCs)

includes 49 economies, onlythe 37 members or whichmacroeconomic data areavailable are covered here.For details on the denitiono the category o LDCs,see http://www.un.org/esa/policy/devplan/.
http://www.un.org/en/development/desa/policy/cdp/index.shtmlhttp://www.un.org/en/development/desa/policy/cdp/index.shtmlhttp://www.un.org/en/development/desa/policy/cdp/index.shtmlhttp://www.un.org/en/development/desa/policy/cdp/index.shtml


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and growth decelerating to about 5 per cent in Angola. By contrast, growth or uel-importing LDCs

will accelerate rom 5.5 per cent in 2009 to 6.1 per cent in the outlook period, only marginally below

the 6.3 per cent average during the period 2003-2008. Yet, these aggregate gures mask consider-

able variation in both subgroups.

The economies o several LDCs in East and Southern Arica are expected to perorm

strongly in the near term, with GDP projected to grow at 6 per cent or more in 2011-2012. This ex-

pectation is based in part on available macroeconomic policy space, improved governance and

planned increases in public expenditures, especially inrastructure. GDP growth alone will not sufce

to meet major development challenges. For example, in countries like Mozambique, despite high

and sustained GDP growth or many years, ood insecurity remains a central concern. It is likely that

continuing ood price hikes will lead to growing ood security pressures in other LDCs as well.

Growth in most West Arican LDCs, except Liberia, will continue to be rather modest

owing to severe gaps in inrastructure, especially insufcient power generation capacity and high

transport costs, which are not expected to be overcome in the near term.

Bangladeshthe most populous LDCproved to be relatively resilient to the nan-

cial crisis owing to robust domestic demand, partly supported by increased government spending.

During 2010, however, GDP growth was hampered by a slowdown in industrial output owing to

energy shortages, slower growth in remittance inows and, early in the year, a sharp deceleration in

the garments sector as a result o weak demand rom Europe and the United States. With investment

spending expected to strengthen, GDP growth is orecast to pick up slightly, to 6.0 per cent in 2011

and 6.2 per cent in 2012.

Political instability and ragile security conditions are aecting economic develop-ment in a number o LDCs, including the Comoros, Eritrea, Haiti, Madagascar, Nepal, Somalia, Togo

and Yemen. For these countries, any lasting progress in the medium run will ultimately depend on

improved domestic stability and security. There are also concerns regarding the situation in many

coastal West Arican LDCs (the Gambia, Guinea, Guinea-Bissau, Liberia, Senegal and Sierra Leone),

where drug trafcking is undermining the security situation as well as eorts to strengthen govern-

ance and the promotion o the rule o law.

As the recovery is proceeding at dierent speeds, all LDCs ace two common downside

risks. First, the slowdown and scal tightening in developed economies threaten to aect aid ows in

the near term. Second, any deterioration in global ood markets will accentuate the problem o ood

insecurity, particularly or the 21 LDCs that heavily depend on ood aid. b

Box I.2 (contd) Divergence in economic performance in least developed countries, 2003-2011

AnnualGDPgrowthrateinpercentage

2003-2007 2008 2009 2010 2011

20

10

0

-10

b Food and AgricultureOrganization o the United

Nations (FAO), Countriesin crisis requiring external

assistance or ood, GlobalInormation and Early

Warning System (GIEWS),September 2010. Available

rom http://www.ao.org/giews/english/hotspots/

index.htm (accessed on 28October 2010).

Source: UN/DESA andProject LINK.

Note: The ve horizontalbars, rom bottom to top,

correspond to the minimum,the mean o the rst quartile,

the median, the mean o

the third quartile and themaximum value o the interquartile range between the

third and rst quartiles o thedistribution o the observed

data. The outliers arerepresented by the dots.


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9Global outlook

Table I.2Frequency o hih nd low rowth o per cpit output, 20082012

Nuber o

countries

onitored

Decline in gDP per cpit

growth o gDP per cpit

exceedin 3 per cent

2008 2009 2010a 2011b 2012b 2008 2009 2010a 2011b 2012b

Nuber o countries

World 160 29 95 20 11 7 72 21 59 66 73

o which:

Developed economies 35 16 33 6 5 2 6 0 4 6 8

Economies in transition 18 0 10 2 0 0 15 3 10 12 15

Developing countries 107 13 52 12 6 5 51 18 45 48 50

o which:

Arica 51 6 19 7 5 4 25 11 17 21 22

East Asia 13 2 8 1 1 1 4 3 12 11 12

South Asia6 2 0 0 0 0 4 2 3 3 3

Western Asia 13 1 8 0 0 0 7 1 3 4 5

Latin America 24 2 17 4 0 0 11 1 10 9 8

Memorandum items:

Commonwealth o Independent States 12 0 5 1 0 0 10 3 10 11 11

Least developed countries 39 5 13 8 5 4 20 8 9 15 15

Sub-Saharan Aricac 44 6 17 7 5 4 21 9 13 17 17

Landlocked developing countries 25 2 8 2 1 1 17 8 13 12 14

Small island developing States 17 4 7 3 1 1 7 2 4 6 5

Shared Percente o world popultiond

Developed economies 15.3 11.3 14.4 1.3 1.1 0.2 1.2 0.0 2.1 0.9 1.4

Economies in transition 4.7 0.0 3.4 0.1 0.0 0.0 3.6 0.6 4.1 4.3 4.5Developing countries 80.0 6.1 17.4 1.5 0.4 0.4 61.5 50.3 65.9 63.8 65.5

o which:

Arica 14.3 1.1 3.5 0.9 0.4 0.4 9.8 5.2 7.8 8.3 8.3

East Asia 29.9 0.1 4.0 0.0 0.0 0.0 25.2 25.1 29.9 28.6 29.9

South Asia 24.3 3.9 0.0 0.0 0.0 0.0 21.6 21.1 21.7 22.0 22.3

Western Asia 3.0 1.1 2.1 0.0 0.0 0.0 0.7 0.1 1.2 1.5 1.9

Latin America 8.5 0.2 7.8 0.6 0.0 0.0 5.2 0.0 6.8 5.2 5.2

Memorandum items:

Commonwealth o Independent States 4.3 0.0 3.1 0.1 0.0 0.0 3.3 0.6 4.1 4.2 4.3

Least developed countries 11.1 0.5 2.1 1.0 0.4 0.4 8.2 4.7 6.2 7.1 6.5

Sub-Saharan Aricac 8.9 1.1 2.6 0.9 0.4 0.4 5.8 2.6 3.7 4.3 3.8

Landlocked developing countries 5.1 0.3 0.8 0.3 0.2 0.2 3.9 2.8 3.3 3.0 3.2

Small island developing states 0.8 0.3 0.2 0.2 0.0 0.0 0.5 0.0 0.3 0.3 0.4

Source: UN/DESA, including population estimates and projections rom World Population Prospects: The 2008 Revision.

a Partly estimated.

b Forecast, based in part on Project LINK and baseline projections o the United Nations World Economic Forecasting Model.

c Excluding Nigeria and South Arica.

d Percentage o world population or 2005.


12/48


countries achieved per capita growth rates o 3 per cent or more, which is sometimes consid-ered the minimum rate needed to acilitate substantial poverty reduction. In comparison,beore the crisis in 2007, there were 68 developing countries with welare increases abovethat threshold. In sub-Saharan Arica, 13 countries registered per capita growth o morethan 3 per cent in 2010, compared with 23 in 2007. In the outlook, 48 developing countries

are expected to have per capita growth o more than 3 per cent in 2011, and 50 in 2012.

Outlook or employment

Next to the continued nancial ragility in developed countries, the lack o remunera-tive employment growth is probably the weakest link in the recovery. Between 2007 andthe end o 2009, at least 30 million jobs were lost worldwide as a result o the globalnancial crisis.1 Even this number most likely underestimates the true depth o the jobscrisis, since it is based on ofcial labour statistics, which in many developing countriesonly account or ormal sector employment in urban areas and hence may not includethose pushed into precarious employment in the inormal sector or underemployment inlow-productivity rural economic activities. Owing to the below-potential pace o output

growth in the recoveryparticularly in developed economieswhich barely matched thenatural growth rate o the labour orce, ew new jobs have been created to hire back those

workers who have been laid o. Meanwhile, as more Governments are embarking on scaltightening, including tax hikes and spending cuts, the prospects or a ast recovery oemployment look even gloomier.

Only a ew developed economies, such as Australia and Germany, have seena discernable improvement in labour markets. In the United States, the labour marketimproved slightly in early 2010, only to alter again later, in particular as state and localGovernments started to lay o workers. Te unemployment rate may increase to 10 percent in early 2011, up rom 9.6 per cent in the third quarter o 2010. All projections indi-cate that it will take more than a ew years beore the unemployment rate in the UnitedStates alls to its pre-crisis level.

In the euro area, despite improvements in Germanys job market, the averageunemployment rate has continued to drit upwards, reaching 10.1 per cent in 2010, uprom 7.5 per cent beore the crisis. In Spain, the unemployment rate more than doubled,to 20.5 per cent. It also increased dramatically in Ireland, where it reached 14.9 per cent in2010, and in other countries in the region. In France, unemployment edged up along aver-age lines or the euro area. In the outlook, unemployment in Europe is expected to comedown at only a snails pace. In Japan, the improvement in the labour market was marginalduring 2010, with the unemployment rate expecting to remain above 5 per cent in 2011.

A jobless recovery such as the one being aced at present by the developedcountries is not uncommon in the recent history o the business cycle. However, the timeneeded or employment levels to recover to pre-recession levels has become successively

longer. Data or the United States indicate that ater each recession during the 1950s and1960s it took about one year to recover the jobs lost in the downturn. In the 1970s and1980s, it took between one and two years, but ater the recession o the early 1990s andater the 2001 dotcom crisis, the period or job recovery lengthened to two and a hal yearsor more (gure I.3). odays Great Recession, however, has caused a aster and steeper rise

1 See International Monetary Fund (IMF) and International Labour Organization (ILO), The

challenges o growth, employment and social cohesion, discussion document rom the Joint ILO-

IMF conerence in cooperation with the oce o the Prime Minister o Norway, 13 September

2010, Oslo, Norway. Available rom http://www.osloconerence2010.org/discussionpaper.pd.

Thirty million jobs have

been lost worldwide

because o the crisis

It may take several years

or employment to return

to pre-crisis levels in

developed economies


13/48

11Global outlook

in the rate o unemployment in the United States than in any previous downturn. It hasalready been three years since employment started to all in 2007, longer than any previousepisode, and it is yet to see any signicant recovery. At the present pace o job recovery, it

will take many more years or employment to be back at pre-crisis levels.A ew interrelated actors explain the lagging recovery in the job markets o major

developed economies. First, the pace o GDP growth in the recovery phase has become less

and less robust ater each business cycle. Second, rapid technological progress, along withstructural economic change, especially in the orm o a smaller share o manuacturing and alarger share o services in the economy, explain why purely cyclical movements have becomeless important than structural actors in determining the upward and downward swingsin developed economies. In earlier business cycle episodes, workers who lost jobs duringthe downturn would, or the most part, be able to regain employment relatively quicklyin the upturn in the same sector, i not the same company, in which they had been work-ing. Nowadays, however, more and more job losses during the downturn tend to becomepermanent, orcing the unemployed to nd jobs in other sectors during the recovery. Tisoten means workers have to acquire dierent skills, and ones that are highly dependentupon the development o new industrial sectors in the economy. In addition, the history onancial crises suggests that when a recession is caused or accompanied by a banking crisis,

the recovery o output, employment and real wages is much more protracted.Te longer term employment consequences o the present crisis are already

becoming visible. Workers have been without a job or more time, and in some coun-tries youth unemployment has reached alarming heights. Te share o the structurallyor long-term unemployed has increased signicantly in most developed countries since2007. In the United States, or instance, the share o workers who have been unemployedor 27 weeks or more has been rising at a disturbing pace during 2010; about hal o the

Long-term unemployment

is rising and youth

unemployment is reaching

alarming heights

Figure I.3

Post-recession employment recovery in the United States,

1973, 1980, 1981, 1990, 2001 and 2007

Percentage

-7

-6

-5

-4

-3

-2

-1

0

1

0 6 12 18 24 30 36

Number of months from start of recession

Degreeofe

mploymentbelow

(-)orabove(+)pre-recession

level

2007

19811973

19802001 1990

Source: UN/DESAcalculations, based on datarom U.S. Department o

Labor, Bureau o LaborStatistics(www.bls.gov/ces).

Note: Data reer to civilianemployment, seasonablyadjusted, or workers16 years o age and older.


14/48


workers without a job are now in that position. Te situation is equally worrisome in manyEuropean countries.

Unemployment and underemployment rates are very high among young peo-ple (15 to 24 years o age), both in developed and developing regions. At the end o 2009,there were an estimated 81 million unemployed young people, and the rate o global youth

unemployment stood at 13.0 per cent, having increased by 0.9 percentage points rom2008. Tis represents a signicant acceleration compared with the 0.6 percentage pointincrease seen in the rate o youth unemployment between 1998 and 2008.

Persistent high unemployment, stagnant or declining real wages and subduedoutput recovery can push the economy into a vicious circle and entrap it in a protractedperiod o below-potential growth, or, in some cases, it may even cause a double-dip reces-sion. High unemployment and lower real wages will constrain the recovery in householdconsumption, which in turn will drag output growth; below-potential output growth will,or its part, constrain employment growth. Te longer this vicious circle lasts, the higherthe risk o cyclical unemployment becoming structural, thereby impairing potentialgrowth o the economy in the longer run. For younger workers who stay without a jobor a prolonged period, the likely implications will seriously jeopardize uture earnings

opportunities as a result o their being deprived o years o working experience. Workers in developing countries and economies in transition have been se-

verely aected by the crisis a lso, though the impact in terms o job losses emerged later andwas much more short-lived than in developed countries. Most job losses occurred in exportsectors and were greatest during the last quarter o 2008 and the rst quarter o 2009 whenglobal trade collapsed. Where domestic demand was also aected, urther job losses oc-curred in other parts o the economy, especially in construction. Te impact on aggregateunemployment rates was sotened by the absorption o many workers into the inormalsectors and, in act, even allowed aggregate employment levels to continue to grow during2009, albeit only weakly. Te consequence is that while the impact on open unemploy-ment rates has been muted, many more workers have ended up in vulnerable jobs withlower pay. Te International Labour Organization (ILO) estimates that the proportion o

workers earning less than $2 per day increased by 3 percentage points, implying that thenumber o working poor increased by about 100 million during 2009 (gure I.4).

With the recovery in production, employment also started to rebound inmany developing countries and economies in transition rom the second hal o 2009.Improvements in employment conditions are also noticeable in some CIS countries, includ-ing Belarus, the Russian Federation and Kazakhstan. In East Asia, the strong economicgrowth in the rst hal o 2010 was reected in a visible decline in unemployment rates.

Job growth was strongest in the manuacturing, construction and services sectors. By theend o the rst quarter o 2010, unemployment rates had already allen back to pre-crisislevels in most East Asian economies. Employment levels were also back up to pre-crisislevels by the rst quarter o 2010 in a number o other developing countries, including

Argentina, Brazil, Chile, Colombia, Egypt, Mexico, Peru, the Philippines and urkey.

Despite this rebound in employment in parts o the world during 2010, theglobal economy would still need to create at least another 22 million new jobs in order toreturn to the pre-crisis level o global employment. At the current speed o the recovery,this would take at least ve years, according to recent estimates by the ILO.2 Tis is al-most entirely on account o the weak recovery in advanced countries and the increasinglystructural nature o unemployment in those countries.

2 ILO, World o Work Report 2010: From one crisis to the next? (Geneva: International Institute or

Labour Studies).

High unemployment is the

Achilles heel o the recovery

in developed economies

Recovery o employment

has been aster in

developing countries


15/48

13Global outlook

Prospects or achieving the millennium development goals

Te economic downturn in 2009 and the consequent increase in unemployment and vul-nerable employment, compounded in some cases by retreats in social spending, have causedimportant setbacks in the progress towards the millennium development goals (MDGs).Estimates presented in the 2010 issue o the present report pointed to the possibility o

between 47 million and 84 mill ion more people alling into or staying in extreme povertybecause o the global crisis.3 While signicant, these setbacks are not large enough tochange expectations o achieving the millennium target o halving global poverty rates by2015 (rom 1990 levels). At the present pace o economic growth in developing countries,this target is within reach or the world as a whole, although it would not be met in sub-Saharan Arica and possibly parts o South Asia.4 However, meeting the poverty reductiontarget is not secured elsewhere either given the uncertainties surrounding growth o the

world economy and structura l problems in many developing economies that aect theirability to create remunerative employment or large parts o their populations.

Furthermore, the crisis has also caused setbacks in the progress towards otherMDGs and has signicantly increased the challenge o achieving targets or universalprimary education, reducing child and maternal mortality and improving environmental

3 United Nations, World Economic Situation and Prospects 2010 (United Nations publication,

Sales No. E.10.II.C.2), table I.3. These estimates refer to people living on less than $1.25 per day

and are similar to those of the World Bank, which estimates about 64 million additional poor

by 2010 compared with had the crisis not taken place (see also World Bank, Global Economic

Prospects 2010: Crisis, Finance and Growth (Washington, D. C.: World Bank, January)).

4 See IMF and World Bank, Global Monitoring Report 2010: The MDGs ater the Crisis (Washington,

D.C.: IMF and World Bank), table 4.1. Available rom http://siteresources.worldbank.org/

INTGLOMONREP2010/Resources/6911301-1271698910928/GMR2010WEB.pd.

The crisis has caused

important setbacks in

progress towards the MDGs

Accelerating progress to

achieve the MDGs will pose

enormous macroeconomic

challenges in manycountries

Figure I.4

Proportion of working poor, 2003, 2008 and 2009

Percentage

0

10

20

30

40

50

60

70

80

90

Sub-Saharan

Africa

SouthAsia

NorthAfrica

EastAfrica

WesternAsia

LatinAmericaand

theCaribbean

South-East

Asia

Economiesin

transition

2003

2008

2009

Source: International

Labour Organization, GlobalEmployment Trends January

2010 (Geneva: ILO).

Note: Data reer to theproportion o workersearning less than $2 per day(purchasing power parity).


16/48


and sanitary conditions. Despite increasing scal constraints, many Governments in de-veloping countries made laudable eorts during the crisis to protect the most vulnerable bydirecting a signicant proportion o stimulus measures at pro-poor and socia l protectionprogrammes.5 Countries that managed to do so, such as Bolivia and Ecuador, were ableto mitigate the impact o the crisis on education and health outcomes, but nonetheless

could not avoid certain setbacks. Accelerating progress towards the MDGs has becomemore costly as a consequence, both in these cases and even more so in countries that didnot manage to protect social spending during the crisis (see box I.3). Te requirements orstepping up economic growth and social spending had posed signicant macroeconomicchallenges even beore the crisis, but they have become all the more pressing in cases

where setbacks have been the greatest. In Nicaragua, or instance, additional spendingrequirements or education, health, water and sanitation have increased to about 11 percent o GDP annually between 2010 and 2015 in order to meet the MDG targets, up rom8 per cent o GDP in a scenario absent the impact o the global crisis. In Ecuador, theadditional requirements are signicantly less, despite a stronger drop in GDP growth, asthe Government managed to protect social spending better during the crisis.

5 See, or instance, Yongzheng Yang and others, Creating Policy Space in Low-Income Countries during

the Recent Crises (Washington, D. C.: IMF, 2009), which shows that in 16 out o 19 low-income

countries an average o about 24 per cent o the total announced scal stimulus was directed at

pro-poor and social protection programmes.

Impact o the crisis and macroeconomic challengesto meeting the millennium development goals

Slower or negative per capita income growth has undoubtedly caused setbacks in the progress

towards the millennium development goals (MDGs) in many developing countries. How much? That

is more difcult to answer as it depends on country conditions. Slower growth aects household

incomes and job creation, which will have a direct impact on income poverty (MDG1). But some parts

o the economy, such as export sectors, have been hit harder than others in most economies, and

the degree o the impact will also depend on how many poor nd employment in export activities

or how much an expansion o inormal sector employment pushes down the average remuneration

in that part o the economy. Less income will also aect access to social services and hence progress

towards the other MDGs. But that impact will urther depend on the scal space countries have to

protect spending on education, health and basic sanitation during the crisis. In cases where setbackswere unavoidable, accelerating progress to meet the MDGs by 2015 will provide an even greater chal-

lenge or spending strategies and macroeconomic policies. To take account o all the interactions

at work, to estimate the macroeconomic costs o achieving the MDGs and to evaluate alternative

nancing strategies, an economy-wide macro-micro ramework was applied to a reasonable number

o developing countries.a As indicated in the body o the chapter, the macroeconomic challenges o

accelerating progress towards the MDGs dier widely across countries. This is illustrated urther by

the six country cases discussed below.

Under a scenario o the observed impact o the crisis on output growth and govern-

ment spending during 2008-2010 and a projected slow and gradual economic recovery towards 2015,

Nicaragua and the Philippines would suer a setback o 2 percentage points in poverty reduction,

whereas Bolivia, Ecuador and Kyrgyzstan would experience a setback o about one percentage point

(see table). In the case o Uzbekistan, setbacks or all o the MDGs have been minimal as the country

barely suered any downturn and was thus able to sustain spending towards the MDGs. In the other

countries, dierences in the impact on projected outcomes or primary school completion rates, childand maternal mortality and access to drinking water and sanitation by 2015 can be attributed in part

to dierent responses to adjusting social spending during the crisis. Bolivia and Ecuador managed to

Box I.3

a For a description o themethodology, see Marco

V. Snchez and others,Public Policies for Human

Development(London:

Palgrave, 2010), chapters1 and 3. The country-level

analysis was conductedby national researchers

and government expertswith technical support

rom the Department oEconomic and Social Aairs

o the United Nations(UN/DESA) and the World

Bank. The methodologyinvolves, inter alia, a

detailed microeconomicanalysis o determinants oMDG achievement, which

is used as an input to a

dynamic economy-widemodelling ramework called

MAMS (MAquette or MDGSimulations).


17/48

15Global outlook

protect spending better than Kyrgyzstan and the Philippines, where setbacks have been relatively

larger. Based on announced social spending plans, in Nicaragua the impact may have been less severe

(as shown in the table), than in a situation where social spending had been scaled down.

In the ace o these setbacks, the Governments o Ecuador, the Philippines and

Nicaragua would need to spend an additional 1.0-1.5 per cent o GDP per year between 2010 and

2015 in order to meet the MDG targets or education, health and basic services, compared with the

pre-crisis scenario (see gure). In the cases o Bolivia and Kyrgyzstan, the additional cost o achieving

these MDGs would be 0.7 per cent and 0.5 per cent o GDP, respectively; the extra cost would be

negligible in the case o Uzbekistan. While these additional costs may seem manageable, they come

Box I.3 (contd)

Ipct o the crisis on mDg chieveent by 2015, selected countries

Percentage point increase in the gap towards the 2015 target, unless otherwise indicated

Bolivia Ecuador Nicaragua Kyrgyzstan Uzbekistan Philippines

MDG 1: Poverty(income less than $1.25 a day, PPP) 0.8 0.8 2.2 1.3 n.a. 2.1

MDG 2: Completion rateo primary education 0.6 2.4 0.3 0.1 0.1 6.4

MDG 4: Child mortality(deaths per 1,000 live births) 1.7 1.3 1.3 3.2 0.1 1.4

MDG 5: Maternal mortality(deaths per 1,000 live births) 8.0 6.1 4.7 5.3 0.1 12.0

MDG 7a: Access to drinking water 0.9 2.1 0.5 0.0 0.1 1.8

MDG 7b: Access to basic sanitation 2.2 4.8 1.8 1.8 0.2 0.7

Source: UN/DESA, based on simulation results using the MAMS modelling ramework adapted to each country context. The original countrymodels were adapted specically to each context by national researchers and government experts, with technical support provided by UN/DESAand the World Bank.

Additional public spending needed to achieve MDG targets for

education, health and water and sanitation by 2015

Percentage of GDP; average annual cost for 2010-2015

1.0

1.1

0.5

0.7

1.5

0.2

0.0 2.0 4.0 6.0 8.0 10.0

Nicaragua

Bolivia

Kyrgyzstan

Uzbekistan

Ecuador

Philippines

Pre-crisis

Crisis

Source: UN/DESA, based onsimulation results using theMAMS modelling rameworkadapted to each countrycontext. The original countrymodels were adaptedspecically to each contextby national researchers andgovernment experts, withtechnical support providedby UN/DESA and the WorldBank.


18/48


Unortunately, the mood or scal tightening also seems to be taking hold inmany developing countries, even in those with a policy intention o saeguarding prioritysocial spending.6 Tis is a worrying trend, particularly where GDP growth is moderatingbecause o weaker export growth and continued weak domestic demand, and also becauseprotecting social spending is not the same as the signicant expansion needed in mostcountries that still display large shortalls in MDG achievement. Te difculties in mostlow-income countries in sustaining (or increasing) expenditure patterns has thus ar beencaused mainly by substantial declines in tax revenue rather than major declines in ofcial

6 A recent study by UNICEF concluded that real government expenditure in about one quarter

o 126 developing countries is expected to contract in 2010-2011 (see Isabel Ortiz and others,Prioritizing expenditures or a recovery or all: A rapid review o public expenditures in 126

developing countries, Social and Economic Policy Working Paper (New York: United Nations

Childrens Fund (UNICEF), 2010)). Moreover, another study has ound that two thirds o the 56

low-income countries surveyed are cutting budget allocations in 2010 to one or more priority

pro-poor sectors, which include education, health, agriculture and social protection (see Katerina

Kyrili and Matthew Martin, The impact o the global economic crisis on the budgets o low-

income countries, research report or Oxam International (Oxord, United Kingdom: Oxam GB,

July 2010)).

on top o the already considerable MDG spending requirements prior to the crisis (given pre-existing

shortalls). As a result, the challenge or Nicaragua would be to increase spending or education,

health and basic services by 9.5 per cent o GDP during 2010-2015. The required eorts would be o

a similar magnitude in Bolivia and Kyrgyzstan, while in Ecuador, the Philippines and Uzbekistan the

estimated additional macroeconomic costs in these policy simulations would be in the order o 3.0-5.0 per cent o GDP. Such impacts may be even larger in many countries that are poorer than these

lower middle income countries. Clearly, additional costs o this magnitude may stretch government

nances and could lead to steep increases in public debt or demand ineasible increases in domestic

tax burdens. The situation would be even more pronounced absent a simultaneous acceleration o

economic growth.

The additional government spending or the achievement o the MDGs could have

a counter-cyclical impact. Further analysis shows, however, that without a broader set o accom-

panying growth-stimulating policies, even large increases in social spending may be partially o-

set by macroeconomic trade-os. For instance, in a scenario where all additional spending was

nanced through oreign borrowing (as assumed in the simulations discussed above) signicant real

exchange-rate appreciation would have a negative impact on export and investment growth. Similar

macroeconomic trade-os would be induced i additional aid inows covered the additional costs

o achieving the MDGs. In alternative nancing scenarios in which the tax burden were increased or

the Government were to borrow on domestic capital markets, private consumption or investmentspending, or both, would be aected and thus lower the aggregate growth eects. Such trade-os

tend to be stronger where the MDG spending strategy is not accompanied by productivity improve-

ments. Better education and health outcomes are likely to have a positive impact on overall labour

productivit y. However, as assumed in the present analysis, such an impact is not likely to take shape in

the short run. Education cycles are long and todays improvements in the health status o the young

will take time beore they translate into higher labour productivity. Much o the productivity growth

eects o additional action taken today to accelerate progress towards the MDGs will likely take eect

ater 2015. The MDG strategy may thus pose important intertemporal macroeconomic trade-os.

These would need to be addressed by broader economic policies that strengthen employment and

productivity growth, such as inrastructure investments, credit policies and other support measures

ostering investments in economic diversication and counteracting exchange-rate appreciation.

Such policies would urther need the support o an enabling external environment, especially in

the orm o a stronger recovery o export demand. This in turn, however, will require strengthened

international policy coordination, as discussed in the body o the chapter.

Box I.3 (contd)


19/48

17Global outlook

development assistance (ODA). However, the outlook or more generous aid delivery inthe near uture is sombre, and this will make the achievement o the MDGs all the morechallenging in many developing countries.

Continued low ination

Ination is expected to remain low worldwide during 2010-2012 (annex tables A.4-A.6).Except or a ew Asian developing economies, ination should not be o much concern topolicymakers in most countries in the near outlook.

In several developed economies, aggregate price levels actually declined (dea-tion) during the nadir o the recession in 2009, but with the recovery in aggregate demand,ination returned, though at low levels. During 2010, ination ranged between 1 and 2per cent in most developed countries. Deation persists in Japan, however.

With the huge amounts o liquidity provided by the central banks o developedcountries, the extremely low interest rates and the widening government decits, someanalysts have been warning o risks o escalating ination. However, not only have thecurrent rates o headline ination stayed at very low levels despite the massive monetary

expansion, inationary expectations, as measured by ination-indexed bonds and variousbusiness surveys, also remain muted. As explained in the section on policy challenges be-low, much o the liquidity provided by the central banks has been retained in the bankingsystem, with hardly any growth in credit supplies to the real economy. Te stagnation incredit growth, along with wide output gaps and elevated unemployment in most developedeconomies, should give rise to little concern that ination would escalate much in the nearuture. Moreover, central banks in developed economies have already announced plansto withdraw liquidity once the recovery has matured in order to pre-empt any surge inination.

Among developing countries and economies in transition, South Asia is a causeor some concern as regards ination. Consumer price ination is expected to average 11.0per cent in 2010 in this subregion.Te continuing strong inationary pressures in most

countries o the region reect a combination o supply- and demand-side actors. Teseinclude higher uel prices, part ly as a result o reduced subsidies, strong demand or manu-actured goods and rapidly rising ood prices, which account or a large share o consumerprice indices. While ood price ination has eased somewhat in the second hal o 2010owing to good harvests, it has still pushed the general price level higher. In India, thecentral bank continues to be particularly concerned with ination, which has remainedpersistently high despite signicant monetary t ightening in 2010. In Pakistan, consumerprice ination increased sharply in the second hal o the year as the disastrous oodso July and August destroyed crops and rural inrastructure, leading to ood shortagesand driving up ood prices urther. Rapidly rising ood prices have also exerted upwardpressure on consumer prices in some East Asian economies, most notably in China, where

authorities have started to reduce the monetary stimulus injected during the nancialcrisis.In other developing regions, ination rates have also increased during 2010, but onlymodestly, such that ination is stil l below pre-crisis levels.

Ination poses no

present danger

except in parts

o South Asia


20/48


Interntionl econoic conditions or developincountries nd econoies in trnsition

Returning, but risky, capital ows

During 2010, net private capital inows to emerging economies7

continued to recoverrom their precipitous decline in late 2008 and early 2009. A better economic perormanceo emerging economies has been conducive to the recovery o private inows. In addition,the extremely low nominal interest rates and unprecedented scale o quantitative easingin major developed economies have led international investors to relocate unds towardsemerging markets in search o higher returns. Te expectations o currency appreciationin emerging economies and improved prospects or the prices o primary commoditiesthat many emerging economies export have heightened perceptions o much higher prot-ability in these markets, and much o the increase in nancial ows appears to be shortterm and speculative in nature.

Net private inows to these economies are estimated to be above $800 billionin 2010, a more than 30 per cent increase rom the previous year, though stil l about $400

billion lower than the pre-crisis peak levels registered in 2007. Te momentum o thecapital inows to these economies tapered o somewhat in late 2010, and the outlook or2011 is or only a slight increase in the inows.

FDI inows remain the largest component, accounting or more than 40 percent o the total inows to emerging economies in 2010. However, the increase in in-ows o portolio equity has been strongest among the dierent types o capital owsand increased by 25 per cent in 2010. While inows o portolio equity to Asia accountor the lions share, the rebound in inows to Latin America has also been particularlystrong, doubling the amount o inows received in 2009. In the outlook or 2011, somemoderation is expected. An important part o the increase in equity inows in 2010 wasrelated to a reallocation in the portolios o major institutional investors, including pen-sion unds, which some observers expect to be a one-o adjustment, moderating the

prospect o any large increases in the near outlook. Te appetite or investing in emergingmarkets may also moderate because those equities now look more expensive than they dida year ago. Yet, the prospects or private capital ows remain subject to great uncertaintygiven the risks o urther exchange-rate instability and global monetary conditions, asdiscussed below.

International bank lending to emerging economies a lso resumed in 2010 aternegative net ows in 2009. Even so, the share o bank lending in total private capital owsto emerging markets is still ar below that o the pre-crisis period and reects the ongoingprocess o deleveraging in international banks. Non-bank lending has recovered morevigorously, as both private and public sectors in emerging economies managed to increaseissuance o bonds in developed countries and take advantage o low interest rates. With theimproved outlook in emerging markets and positive perceptions o investors, the externalnancing costs or emerging economies have allen back to pre-crisis levels.

While private capital returned, emerging economies also signicantly steppedup their own investments abroad. Direct investments rom countries like China continued

7 The reerence is to a group o some 30 developing countries and economies in transition, which

are well integrated into the global economy through trade and nance linkages. For more details,

see Institute o International Finance, Capital ows to emerging market economies, IIF Research

Note, 4 October 2010. Available rom http://www.ii.com/press/press+161.php.

A surge in private capitalows is posing policy

concerns in emerging

economies

Capital outows rom

emerging markets continue

to increase


21/48

19Global outlook

to increase and private residents in emerging markets sought sae havens in assets abroad.Outows ell in 2009, to increase again in 2010 and 2011. New FDI by rms establishedin emerging economies, destined especially towards commodity production in other de-veloping countries, explain a large part o the increase.

In addition, developing countries and economies in transition have continued

to accumulate oreign-exchange reserves in 2010, adding about $500 billion to the total o$5.4 trillion by the end o 2009. A large proportion was accumulated by developing coun-tries in Asia, particularly China, which is holding about $2.6 trillion in oreign-exchangereserves. During the trough o the crisis, the last quarter o 2008 and the rst o 2009,developing countries tapped into this buer, and reserve holdings dropped by about $300billion in the aggregate (gure I.5). Te recovery o exports and the subsequent return ocapital ows acilitated the resumption o the growth in reserve holdings.

Many low-income economies have weaker policy buers and l imited access tocapital markets. As detailed in chapter III, stagnation in ows o ODA and shortalls inthe delivery on commitments made by donor countries to increase those ows in supporto the achievement o the MDGs, estimated at $20 billion in 2010, are limiting scope orcounter-cyclical responses in low-income countries. Te shortcomings in ODA delivery

were compensated to some degree through increased unding and reorm o multilateralnancial acilities.8 In January 2010, countries that qualied to draw on concessional re-sources obtained enhanced access to International Monetary Fund (IMF) acilities undermuch simplied conditions. By 30 April 2010, 30 low-income countries had arrangedconcessional IMF programmes total ling almost $5 billion, up rom $0.2 billion in 2007.Multilateral development banks also sharply boosted their lending. While the majority o

8 United Nations, MDG Gap Task Force Report 2010: The Global Partnership for Development at

a Critical Juncture (United Nations publication, Sales No. E.10.I.12).

as do their reserve

holdings

Figure I.5

Foreign reserve accumulation by developing countries,

first quarter 2007-second quarter 2010

Trillions of US dollars

20082007 2009 2010

0.0

1.0

2.0

3.0

4.0

5.0

6.0

I II III IV I II III IV I II III IV I II

Use of reservesduring trough

of crisis

Other developing countries

China

Source: IMF, StatisticsDepartment COFERdatabase; and InternationalFinancial Statistics.


22/48


their outlays were non-concessional, there were very signicant increases in concessionallending as well. In particular, the International Development Association o the WorldBank committed $14 billion in loans in 2009, a 20 per cent increase over 2008, to bedisbursed over several years.

Rebounding world trade, volatile commodity prices

World trade continued to recover in 2010, but the momentum o the strong growthobserved in the rst hal o the year started to peter out in the second. Te volume oexports o many emerging economies, including Brazil, China, India and other developingeconomies in Asia, have already recovered to, or beyond, pre-crisis peaks. In contrast,exports o developed economies have not yet reached ull recovery and were still 8 per centbelow the pre-crisis peaks seen in the third quarter o 2010 (gure I.6). In the outlook,

world trade is expected to grow by about 6.5 per cent in 2011 and 2012, moderating romthe 10.5 per cent rebound in 2010.

At the height o the crisis, the value o imports o the European Union (EU),Japan and the United States plummeted by almost 40 per cent between July 2008 and

April 2009 and triggered the worldwide collapse in international trade.9 Despite thegradual recovery o the past two years, the value o imports o the three largest developedeconomies was still about 25 per cent below pre-crisis peaks by August 2010. Te exportrecovery in these economies is mirrored in the ast growth o imports by countries in East

Asia and Latin America. For instance, in China the contribution o net exports to GDP

9 The volume o imports o the three major developed economies ell by about 18 per cent during

that period, compounded by a decline o about 24 per cent in import prices. These estimates are

based on the same source as that or gure I.6.

The rebound in world trade

decelerated during 2010

Figure I.6

Volume of world merchandise trade, January 2005-August 2010

Index, 2005=100

2005 2006 2007 2008 2009 2010

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Emerging economies

Developed economies

World

80

90

100

110

120

130

140

150

Source: CPB NetherlandsBureau or Economic

Policy Analysis.


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21Global outlook

growth was negative during 2010, implying that the contribution o Chinas net importsto GDP growth in the rest o the world has been positive.

Te question is, however, whether emerging economies can continue to act asthe engines o world trade growth in the outlook. As discussed in the previous section,there is reason not to be overly optimistic in this regard. Te dynamics o the initial phase

o the recovery seems to be ading, especially as growth in developed countries remainssluggish. Without a stronger recovery in import demand rom developed economies, ex-port growth o developing countries is also bound to slow, given their continued highdependence on advanced country markets. Furthermore, as some major surplus countries,like China, are reorienting growth to rely more on domestic demand, growth o importdemand is likely to slow given the lower import propensity o domestic demand compared

with that o export production.Te value o world trade received a boost as most commodity prices have re-

bounded. Te world price o crude oil uctuated at about $78 per barrel during 2010,up rom an average o $62 or the year 2009. In the outlook or 2011, global oil demandis expected to increase urther, but at a more moderate pace than in 2010. Most o thedemand growth will continue to come rom emerging economies, especially China and

India. Te eorts towards achieving greater energy efciency in these countries are beingoset by the economic expansion and higher living standards which keep up the demandor ossil-uel based energy. In contrast, oil demand in developed economies is expectedto register a modest decline, owing to the combination o subdued economic growth andurther efciency gains, as well as the progressive substitution o conventional uel withethanol and other biouels.

On the supply side, uel-producing countries that are not members o theOrganization o the Petroleum Exporting Countries (OPEC) are expected to post a smallincrease in output in 2011, driven by oil production increases in Brazil, Azerbaijan andColombia. Tese expansions will outweigh the all in production among oil producers inadvanced economies, mainly caused by the decline in output rom maturing oil elds inEurope. OPEC producers, however, retain ample spare output capacity. As a result, oil

prices are expected to decrease somewhat in 2011, to uctuate at about $75 per barrel, andto edge up to about $80 per barrel in 2012.

World prices o metals ollowed a similar trend in 2010, being sensitive tochanges in the prospects or output growth in emerging economies, especially China.Chinas demand or copper, aluminium and other base metals is estimated to account orabout 40 per cent o the world total. In the outlook or 2011 and 2012, global demandor metals is expected to stabilize at 2010 levels, partly reecting sluggishness in worldinvestment demand. No major changes in supply conditions are expected in the short run.Consequently, metal prices are expected to edge up only slightly in 2011 and 2012.

Food prices declined during the rst ha l o 2010, but rebounded in the second.World ood prices are much more sensitive to changes in supply conditions than those odemand. Te expansion o global acreage in response to higher prices during 2005-2008

and avourable weather patterns in key producing areas helped increase global ood sup-plies considerably during 2009 and early 2010. In mid-2010, however, drought and resin the Russian Federation, Ukraine and, to a lesser extent, North America aected theharvests o basic staples, especially wheat, leading to a spike in prices or these crops. Tespike was short lived, in part because o ample availability in global wheat inventoriesand because the Russian Federation and Ukraine have only minor shares in global wheattrade. Speculation in wheat markets thus seems to have had a strong inuence on grain

Financial market trends

are exacerbating the

volatility in ood and other

commodity prices


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prices in the third quarter o 2010. On the demand side, emerging economies continueto account or much o the growth or major crops during 2010-2012. Nonetheless, alsoin the outlook or 2011 and 2012, ood prices will remain vulnerable to any supply shockand speculative response in commodity derivatives markets. Te latter uncertainty appliesto all commodity markets as a result o their increased nancialization,10 which has also

enhanced the inuence o exchange-rate uctuations on commodity price volatility.

Declining remittances

Te global nancial crisis also triggered a visible decline in worker remittances to developingcountries and economies in transition, rom $336 billion in 2008 to $315 billion in 2009.Tis 6 per cent drop presents a relatively small shock or developing countries as a whole(0.1 per cent o their combined GDP), but the impact diers signicantly across regionsand countries (table I.3). Countries in Latin America and the Caribbean, Central Asia andEastern Europe were hardest hit. Te most severe impact was experienced in Kyrgyzstan,the Republic o Moldova and ajikistan, where the decline in remittance income repre-sented between 8 and 16 per cent o GDP. In several Central American and Caribbean

countries, including Haiti, the impact ranged rom between 1 and 2 per cent o GDP,while in South-eastern European countries it was between 2 and 3 per cent. Remittanceincomes in these regions were strongly aected by rising unemployment among migrant

workers in the Russian Federation, Western Europe and the United States.In South Asia, in contrast, remittance ows increased as dependence on mi-

gration to Western Asia proved to be a stabilizing actor during the crisis, especially asconstruction activities in the Gul States remained robust. As a result, worker remittances

10 See Chapter II and United Nations Conerence on Trade and Development (UNCTAD), Trade and

Development Report 2009: Responding to the global crisis (United Nations publication, Sales No.

E.09.II.D.16), or urther discussion.

Table I.3Trends in worker reittnces to developin countries nd econoies in trnsition, 2004-2009

Percentage

2004 2005 2006 2007 2008 2009

Impact of crisisa

(percentageof GDP)

Remittancesas a shareof GDP

all developin countries 17.3 21.0 18.4 23.1 15.9 -6.0 -0.1 1.9

Least developed countries 12.8 10.3 18.4 23.9 31.2 7.6 0.4 5.0

Low-income countries 15.3 21.5 23.9 24.0 29.4 1.0 0.1 6.8

Lower middle income countries 12.4 22.6 18.6 29.2 19.7 -2.7 -0.1 2.5

Upper middle income countries 25.9 18.6 16.8 13.3 5.7 -14.9 -0.2 1.1

East Asia and the Pacic 23.4 25.1 14.2 23.8 20.7 -0.4 0.0 1.5

Europe and Central Asia 49.1 43.6 24.1 36.0 13.3 -20.7 -0.3 1.4

Latin America and the Caribbean 17.9 15.8 18.1 6.9 2.1 -12.3 -0.2 1.5

Middle East and North Arica 13.2 8.4 4.6 21.4 9.8 -8.1 -0.3 3.1

South Asia -5.5 18.2 25.3 27.1 32.6 4.9 0.2 4.7Sub-Saharan Arica 34.5 16.4 34.8 48.5 14.1 -2.7 -0.1 2.3

Source: World Bank, Development Prospects Group.

a Calculated as the proportion o remittances in GDP in 2008 times the growth rate o remittances in 2009.


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23Global outlook

to Bangladesh, Nepal and Pakistan actually increased, and were also a actor in keeping upresource ows to the Philippines in East Asia and to several Arican countries.

Exchange-rate eects also had a bearing on ows, with the depreciation othe Russian rouble aecting remittance ows to Central Asian and Eastern Europeancountries, especially during the rst hal o 2009. Depreciation o national currencies in

the Philippines and other South Asian countries, in contrast, appears not only to haveincreased the domestic value o remittances, but also to have provided an incentive ormigrants to buy long-term assets at home.11

As a result o these diverging patterns, remittance incomes to low-incomecountries proved resilient during the crisis, while mostly middle-income countries saw anadverse shock. In the outlook, some rebound in remittance ows may be expected during2010-2012 but, given the persistent high unemployment in important recipient countrieso migratory ows as well as rising anti-immigrant sentiments in those countries, therebound will be weak at best. Increased exchange-rate instability, as discussed below, posesa risk to the rebound and stability o remittance ows in the outlook.

Uncertinties nd risksKey uncertainties and risks to the baseline scenario or 2011 and 2012 remain on thedownside. A much weaker recovery o the world economy is ar rom a remote possibility,especially as continued high unemployment, nancial ragility, enhanced perceptions osovereign debt distress and inadequate policy responses could urther undermine businessand consumer condence in the developed countries. For the dynamic developing countriesand economies in transition, the recent surge in capital inows is posing challenges togrowth and stability, especially in the orm o currency appreciation and risk o domesticcredit and asset price bubbles. Tese challenges are closely related to the nancial weak-nesses and policy stances in developed countries. Further large-scale quantitative easing inthe United States is likely to push down the value o the dollar and send even more money

owing into the aster-growing economies o Asia and Latin America, where rates o returnare higher. Heightened tensions over currency and trade have already led to deensive inter-ventions in emerging market economies in eorts to keep exchange rates competitive and tocurb the ow o capital into their economies. Such tensions are compounding the increasedvolatility in exchange rates among the major reserve currencies which emerged during 2010as a result o uncoordinated quantitative easing strategies in Europe, Japan and the UnitedStates. Failure to arrive at more coordinated policy responses aimed at a more benign globalrebalancing will put the process o economic recovery and the stability o nancial marketsat urther risk. Te importance o each o these risks is weighed below.

Risks associated with sovereign debt and scal austerity

Te dire outlook o the global economy in the second hal o 2008 propagated unprec-edented scal expansion in most developed economies and several developing countries.

Arguably, the scal stimulus and coordinated monetary expansion stabilized the global

11 See Dilip Ratha, Sanket Mohapatra and Ani Silwal, Migration and Development Brie, No. 12,

(Washington, D. C.: World Bank, Development Prospects Group, April 2010). Available rom

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1110315015165/

MigrationAndDevelopmentBrie12.pd.

The rebound in worker

remittances will likely be

weak in 2011-2012

Early retreat to scal

austerity, enhanced

exchange-rate volatility and

weaker policy coordination

pose major downside

risks to the recovery


26/48


economy in the atermath o the nancial meltdown in the United States, preventingemployment collapses o the type experienced during the Great Depression. Despite a stillragile recovery, the sense o urgency and the will to move scal and monetary policies intandem dissipated during 2010 over worries that scal susta inability, especially in devel-oped countries, was in jeopardy. Te sovereign debt distress in several Southern European

countries became a source o global nancial turmoil in early 2010 and also led to greaterconcerns among policymakers that urther increases in public debt might lead to higherinterest rates down the road, increasing the debt-service burden and crowding out privateinvestment. Te response to these concerns is a lready evident in the orm o scal austerityplans, especially in European countries. Further quantitative easing in the orm o centralbank purchases o government securities has been the answer to keep interest rates low.Such policy responses are raising concerns at the other end o the spectrum: there are earsthat the phasing out o scal stimulus and a quick retreat to scal austerity would riskurther deceleration o the recovery, prolong high unemployment and be sel-deeating,and that budget decits and public debt ratios as a share o GDP would continue to risebecause o insufcient output growth and despite the scal tightening. How should thesetwo sides o the coin be assessed in the present-day context?

First, it is clear that budget decits have widened sharply and that public debtwill increase urther in the near term. Te average decit or developed economies soaredto 10 per cent o GDP by the end o 2009, with public debt reaching over 80 per cent.Te decit is estimated to decline to about 9 per cent in 2010, mainly on account o thephasing-out o the government spending associated with the bailout o the nancial sectorin the United States. Many developed economies continued to experience decit increases.Te projected decits or 2011 suggest an improvement by 1 percentage point o GDP,premised on continued GDP growth as delineated in the baseline, smooth implementa-tion o announced scal consolidation plans and accommodative capital markets. Underconservative assumptions, the public debt o developed countries will continue to increase,surpassing 100 per cent o GDP, on average, in the next ew years.

It should be emphasized, however, that while scal stimulus measures may

have added to the widening o budget decits and rising debt burdens, the impact o thecrisis itsel (in particular through lower tax revenues) has had the greatest bearing onprojected uture public debt ratios.12

Te second question is whether this situation is likely to cause rapid upward-spiralling debt growth as perceptions o emerging debt stress push up interest rates (as wellas risk premium) on government securities, thereby putting greater pressure on decitsto widen and on public debt to increase. Tese kinds o dynamics have clearly aectedGreece, Ireland, Portugal, Spain and several economies in Eastern Europe, countries thatstill have a relatively limited tax capacity, making the vicious orces at work more power-ul. Yet, despite these experiences, evidence that there would also be strong dynamicsbetween public indebtedness and the cost o servicing the debt in developed countriesis scanty. During the present crisis, real interest rates have remained low and have even

seen a decline despite mounting public debt in the United States, the major economies othe euro area and Japan. Tere is also not much historical evidence to support the claim

12 The IMF estimates that only about 20 per cent o the projected increase in public debt o the

developed countries belonging to the Group o Twenty (G20) is due to scal stimulus measures

and nancial rescue operations undertaken in response to the crisis. Revenue loss explains about

hal o the debt increase, and debt dynamics another 20 per cent. See IMF, Navigating the scal

challenges ahead, Fiscal Monitor, 14 May 2010, p. 14. Available rom http://www.im.org/external/

pubs/t/m/2010/m1001.pd.

Public debt o developedcountries will rise to over

100 per cent o GDP

but in most countries

the cost o higher debt

remains very low


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25Global outlook

or such dynamics to emerge unde

world economy 2011

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