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Emerging Markets Must Speed Up Rate Increases, World Bank Says

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Emerging Markets Must Speed Up Rate Increases
People sit in a small park outside the World Bank headquarters in Washington. The World Bank, which was established after World War II to fight poverty, offers financial and technical assistance to countries, including $1.5 billion in loans to help improve India’s rural roads last year. Photographer: Mannie Garcia/Bloomberg

June 7 (Bloomberg) -- Emerging-market economies, growing almost three times faster than their developed counterparts, need to speed spending cuts and interest-rate increases as they fight inflation and overheating, the World Bank said.

The Washington-based institution lowered its growth forecast for the world economy this year to 3.2 percent from a January estimate of 3.3 percent, to reflect Japan’s earthquake and political unrest in the Middle East and North Africa. The World Bank left unchanged a prediction for a global rebound to 3.6 percent in 2012.

“Developing countries are at a point where they really have put the crisis-fighting stage of the recovery behind them,” Andrew Burns, the World Bank’s manager of global macroeconomics, told reporters today. “They now need to be reorienting themselves towards establishing the conditions that are going to allow them to have strong growth in years to come.”

While developed nations contend with high unemployment and a European debt crisis that poses risks to global growth, many emerging economies have not yet taken advantage of their strong expansion to remove the fiscal stimulus enacted to cushion the global recession, according to the World Bank. Real interest rates are low or negative in many countries even as policy makers from India to Peru raise borrowing costs because of inflation, according to the bank.

Developing nations also need to allow more exchange rate flexibility, the World Bank’s Global Economic Prospects report said.

Indonesia, South Africa

The World Bank, which was established after World War II to fight poverty, offers financial and technical assistance to countries, including $1.5 billion in loans to help improve India’s rural roads last year.

High-income economies are seen growing 2.2 percent this year and 2.7 percent in 2012, today’s report said. That compares with 6.3 percent and 6.2 percent in the emerging regions, which include nations from Indonesia to South Africa, according to the bank’s report.

The bank cut its forecast for a U.S. expansion to 2.6 percent this year from the January estimate of 2.8 percent. The agency expects 2.9 percent growth next year and recent economic data point to a “growth pause,” Burns said. He said the bank doesn’t see a “double-dip” scenario as a likely outcome in the U.S.

Oil Demand

Emerging markets now account for almost half of global crude-oil demand and China absorbs 40 percent of the world’s metal supplies, contributing to the increase in prices observed since the recovery, the bank said in the report. Oil prices are up 37 percent in the past year. Copper surged to a record $10,190 a metric ton on the London Metal Exchange on Feb. 15 as mining companies struggled to keep pace with rising consumption.

The commodities developments call for a change in mindset from those countries, which have become key players and must embrace the challenges and responsibilities that come with it, Burns said.

“Developing countries are going to increasingly have to not look at these as external events that are imposed upon them,” such as an oil price shock, Burns said. “Increasingly these are reflections of a strong growth that they have.”

China’s growth will slow to 9.3 percent this year, from 10.3 percent in 2010, and rise 8.7 percent in 2012, the bank said. India will grow 8 percent this year and 8.4 percent next year, it said.

The rise in commodity prices and strong capital inflows have contributed to faster inflation, which in developing countries was close to 7 percent in April from a year earlier, more than 3 percentage points higher than in July 2009, according to the report.

Inflation Tools

Policy makers “will need to make fuller use of all the tools at their disposal to keep inflation under control,” the World Bank said. “While the more unstable capital inflows that characterized the third quarter of 2010 have abated, many of the underlying conditions that attracted those flows remain in place.”

The World Bank also estimated that domestic food prices in developing countries may increase this year and next, even if international prices decline.

Risks to the global economy also include continued turmoil in Arab countries, where civil unrest has lifted oil prices. Higher energy costs could also push food prices further, the bank said.

Persistent uncertainty on the fiscal situation of countries in the euro region, as well as debt levels in the U.S. and Japan, represent another threat, according to the report.

The World Bank projects growth of 1.7 percent in 2011 and 1.8 percent in 2012 in the 17-country euro area, compared with a forecast in January for 1.4 percent growth this year and 2 percent next year. Japan will expand 0.1 percent this year and 2.6 percent in 2012, compared with forecasts for 1.8 percent and 2 percent growth seen at the beginning of the year.

“Further financial stress may emerge, as monetary policy in high-income countries begins to tighten,” the bank said.

The World Bank based its projections on market prices.

To contact the reporter on this story: Sandrine Rastello in Washington at

To contact the editor responsible for this story: Christopher Wellisz at Washington at

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