WASHINGTON (Reuters) - Developing countries can prepare for the threat of a global recession by improving policies to generate growth and jobs, diversifying economies, bolstering their banking sectors and readying social safety nets, the World Bank’s top economists said on Wednesday.
Bank chief economist and senior vice president Justin Yifu Lin told a round table in Washington that the sentiment in the international economic community had abruptly changed from a feeling of general confidence in global recovery six months ago to “alarming uncertainty” now facing policy-makers.
“We once again are seeing the financial markets in the world in turmoil,” Lin said, adding that the creditworthiness of several countries “on both sides of the Atlantic” was now in question, fueling the general crisis of confidence.
This was a worrying scenario for the world’s developing countries, as investors and consumers across the globe might now be inclined to hold back out of caution.
“We still hope for the best,” Lin said, but he added: “For the developing countries, it is very important for them to prepare.”
Lin, and the World Bank’s top economists covering regions from East Asia to Africa and Latin America, warned that while many regions had weathered remarkably well the 2008-2009 financial crisis, this meant that their economic defenses might not be as sturdy now to face another global recession.
“The fiscal cushions are not as strong anymore as they were in 2008,” Augusto de la Torre, the bank’s chief economist for Latin America and the Caribbean, told the round table on “Developing Countries and the Global Economic Outlook”.
Lin urged developing countries to gird their economies for another downturn by identifying new drivers of growth, overhauling banking regulations to protect their banking sectors against transmitted financial shocks and fine-turning policies to sustain productivity and job creation.
Shanta Devarajan, chief economist for Sub-Saharan Africa for the World Bank, said African governments should ready “safety net” policies to help cushion the poorest sectors of their countries against the shortages and hardships that could result from a global economic downturn.
But they should avoid the temptation to slap on price controls, he added.
“The big challenge is how to diversify our economies,” Devarajan said, noting the dependence of many African economies on primary commodities exports, especially to Europe.
South Asia had suffered only a “glancing blow” from the previous 2008 crisis, and had recovered quickly, said the bank’s chief economist for that region, Kalpana Kochhar.
But she said the region’s countries urgently needed investment to help absorb the huge numbers of workers entering the labor force. “They need to focus on capital accumulation to generate jobs,” she said.
Bert Hofman, the World Bank’s chief economist for East Asia and the Pacific, including China, said that while growth predictions for that region had been ratcheted down a few notches to reflect the current global uncertainties, they were still high, close to 8 percent.
“In case really bad weather hits, the region still looks pretty good in terms of fiscal space,” he said.
De la Torre too saw his Latin American region in relatively resilient form with “improved shock absorbing capacity” to confront a downturn. However, Central American and Caribbean economies in the region were weaker.
In the Middle East and North Africa, oil-importing countries faced risk to their trade and remittances from Europe if the sovereign debt crisis in that continent worsened.
At the same time, the ability of oil-exporting countries in the region to respond to an international economic crisis could be reduced if oil prices declined, said Caroline Freund, the World Bank chief economist for Middle East and North Africa.
Editing by Diane Craft