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World Bank says most developing countries have recovered from crisis, projects steady global growth

January 19, 2011

World Bank says most developing countries have recovered from crisis, projects steady global growth
Europe and Central Asia recovery continues;
sensitivity to Western European risks remains

WARSAW, January 18, 2011 – The world economy is moving from a post-crisis bounce-back phase of the recovery to slower but still solid growth this year and next, with developing countries contributing almost half of global growth, says the World Bank’s latest Global Economic Prospects 2011.

The World Bank estimates that global GDP , which expanded by 3.9% in 2010, will slow to 3.3% in 2011, before it reaches 3.6% in 2012. Developing countries are expected to grow 7% in 2010, 6% in 2011 and 6.1% in 2012. They will continue to outstrip growth in high-income countries, which is projected at 2.8% in 2010, 2.4% in 2011 and 2.7% in 2012.

Poland’s growth prospects are strengthening. Poland avoided much of the overheating evident in many of Europe and Central Asia's economies prior to the crisis. The country posted solid real GDP growth of an estimated 3.5% in 2010. This acceleration in growth from 1.7% in 2009 was largely supported by a sharp rebound in investment activity, aided by restocking and government programs, and also by recovery in external demand. Poland’s real effective exchange rate is significantly below pre-crisis levels (down 12.4%, as of November 2010 over August 2008)), which is providing a boost to export competitiveness. GDP growth is projected to incrementally accelerate to 4.1% and 4.5% in 2011 and 2012, respectively, reflecting an expected firming in private consumption growth and rising positive contribution to growth of net exports.

In most developing countries, GDP has regained levels that would have prevailed had there been no boom-bust cycle. While steady growth is projected through 2012, the recovery in several economies in emerging Europe and Central Asia and in some high-income countries is tentative. Without corrective domestic policies, high household debt and unemployment, and weak housing and banking sectors are likely to mute the recovery.

In Europe and Central Asia, output is expected to expand by 4.7% in 2010, following a 6.6% decline in GDP during 2009, as several countries undergo intense restructuring. Output in Bulgaria, Kyrgyz Republic, Lithuania, and Romania stagnated or declined in 2010, and is forecast to expand by only 2% in 2011 and 3.3% in 2012. Excluding these countries, growth in the rest of the region is forecast to ease to 4.2% in both 2011 and 2012. The recovery in the region remains particularly sensitive to the situation in high-income Europe where the sustainability of sovereign debt remains a concern.

“On the upside, strong developing-country domestic demand growth is leading the world economy,” said Justin Yifu Lin, the World Bank’s chief economist and senior vice president for development economics. “On the downside, many developing countries with close financial and trade ties with high-income Europe could see much weaker output if sovereign debt concerns in the Eurozone persist.”

Net international equity and bond flows to developing countries rose sharply in 2010, rising by 42% and 30% respectively, with nine countries receiving the bulk of the increase in inflows. Foreign direct investment to developing countries rose a more modest 16% in 2010, reaching $410 billion after falling 40% in 2009. An important part of the rebound is due to rising South-South investments, particularly originating in Asia.

“The pickup in international capital flows reinforced the recovery in most developing countries,” said Hans Timmer, director of development prospects at the World Bank. “However, heavy flows to certain big middle-income economies may carry risks and threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge.”

Most low-income countries saw trade gains in 2010 and, overall, their GDP rose 5.3% in 2010. This was supported by a pick-up in commodity prices, and to a lesser extent in remittances and tourism. Their prospects are projected to strengthen even more, with growth of 6.5% in both 2011 and 2012, respectively.

According to the report, current relatively high food prices are having a mixed impact. In many economies, dollar depreciation, improved local conditions, and rising prices for goods and services means that the real price of food has not risen as much as the U.S. dollar price of internationally traded food commodities.

“However, double-digit price increases of key staples in the past few months are pressuring households in countries with an already-existing high burden of poverty and malnutrition. And, if global food prices rise further along with other key commodities, a repeat of the conditions in 2008 cannot be excluded,” cautioned Andrew Burns, manager of Global Macroeconomics in the World Bank’s Prospects Group.

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