Hans Timmer and Richard Newfarmer World Bank December, 2006 Global Economic Prospects, 2007 Managing the Next of Globalization.

Hans Timmer and Richard NewfarmerHans Timmer and Richard Newfarmer

World BankWorld Bank

December, 2006December, 2006

Global Economic Prospects, 2007Global Economic Prospects, 2007Managing the Next of GlobalizationManaging the Next of Globalization

Growth in developing countries will remain strong, Growth in developing countries will remain strong, boosted by improved policies and favorable financial boosted by improved policies and favorable financial conditionsconditions

The global economy has reached a turning point, and The global economy has reached a turning point, and ingredients for a soft-landing are in placeingredients for a soft-landing are in place

But turning points generate uncertainties, and But turning points generate uncertainties, and significant downside risks remainsignificant downside risks remain

Medium-term outlookMedium-term outlook

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 1985 1990 1995 2000 2005

Strong growth in developing economiesStrong growth in developing economies

Real GDP annual percent change

Forecast

Developing

2008

Source: World Bank

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 1985 1990 1995 2000 2005

Strong growth in developing economiesStrong growth in developing economies

Real GDP annual percent change

Forecast

DevelopingDeveloping

High-incomeHigh-income

2008

Developing ex. Developing ex. China & IndiaChina & India

Source: World Bank

Growth now broad-basedGrowth now broad-based

0

5

10

15

20

25

30

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

86-96 96-06

# of developing countries

Average annual GDP growth (%)

Growth now broad-basedGrowth now broad-based

0

5

10

15

20

25

30

35

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

96-06 00-08

# of developing countries

Average annual GDP growth (%)

Developing countries’ policies have improved Developing countries’ policies have improved

percent

-10

0

10

20

30

Av. Tariffs Median Inflation Fiscal Deficit

1980s1980s

2002-20042002-2004

Turning point in commodity marketsTurning point in commodity markets

80

130

180

230

280

330

Jan-03

Jul-03 Jan-04

Jul-04 Jan-05

Jul-05 Jan-06

Jul-06 Jan-07

Jul-07

Metals and minerals

Crude oil

Price indexes, Jan 2003=100ForecastForecast

Tighter monetary policy to contain inflationTighter monetary policy to contain inflation

0

1

2

3

4

5

6

Jan

May

Sep

Ja

n M

ay

Sep

Jan

May

Sep

Ja

n M

ay

Sep

Jan

May

Sep

Percent -- Interest rates

United States

Source: World BankSource: World Bank

2002 2003 2004 2005 2006

3 month t-bill

Core inflation

Turning point in global imbalancesTurning point in global imbalances

Current account balance, billions of dollars, 2002 and 2006, 2008

Source: World Bank.Source: World Bank.

-1000

-800

-600

-400

-200

0

200

400

USA Europe Japan Other HIC East Asia &Pacific (ex

China)

China Europe &Central Asia

OtherDeveloping

20022006

2008

Turning points come with risksTurning points come with risks

Surplus of global liquidity might trigger sudden reversal of credit flows

Global imbalance still large and might trigger sudden reversal in capital flows

Correction in U.S. housing market might trigger sharper slowdown

Disruption in oil supply might trigger renewed upward price spikes

The next wave of globalizationThe next wave of globalization

Over the next 25 years, markets will become more Over the next 25 years, markets will become more integrated, developing countries will like grow faster, integrated, developing countries will like grow faster, and become a major force in the global economyand become a major force in the global economy

However, stresses over income distribution and in However, stresses over income distribution and in labor markets could undermine potential growthlabor markets could undermine potential growth

……and failure to manage environmental pressures and failure to manage environmental pressures entails serious risks entails serious risks

Policy responses to these stresses are so far Policy responses to these stresses are so far inadequate to the challenges, so new efforts are inadequate to the challenges, so new efforts are needed at both the national and multilateral level needed at both the national and multilateral level

Developing countries share of trade will rise as global Developing countries share of trade will rise as global integration intensifies…integration intensifies…

0

5

10

15

20

25

30

1980 2005 2030

US$2001 trln.

Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.

Exports from developing and developed countries, 2005-2030Exports from developing and developed countries, 2005-2030

Developing countries

High-income countries

$27 trln

32%

45%

22%

0

10

20

30

40

50

60

70

80

1980 2005 2030

US$2001 trln

Source: World Bank simulations with Linkage model.Source: World Bank simulations with Linkage model.

GDP of high-income and developing countries (market exchange rates)GDP of high-income and developing countries (market exchange rates)

Developing countries

High-income countries

$72 trln

23%

31%

……and the share of developing countries in global output and the share of developing countries in global output will rise…will rise…

16%

Growth would raise income and reduce absolute povertyGrowth would raise income and reduce absolute poverty

0

200

400

600

800

1000

1200

1400

2000 2030

Average per capita incomes in developing countries are likely to double..Average per capita incomes in developing countries are likely to double..

……and more people from developing countries will enter the ”global middle class”and more people from developing countries will enter the ”global middle class”

South Asia

Europe & Central Asia

East-Asia

Number of people (million)Number of people (million)

Latin AmericaLatin America

Middle EastMiddle East

Africa

Growth would raise incomes and reduce absolute povertyGrowth would raise incomes and reduce absolute poverty Average incomes are likely to doubleAverage incomes are likely to double

……and more people from developing countries will enter the ”global middle class”and more people from developing countries will enter the ”global middle class”

……and sharp reductions in dire absolute poverty and sharp reductions in dire absolute poverty

0

200

400

600

800

1,000

1,200

1,400

1990 2003 2015 2030

East AsiaEast Asia

South AsiaSouth Asia

Sub-Saharan Sub-Saharan AfricaAfrica

OtherOther28%28%

20%20%

8%8%

12%12%

Millions of peopleMillions of people

At global level, some regions lag, notably AfricaAt global level, some regions lag, notably Africa

2005

2030

0

5

10

15

20

25

30

35

40

East-AsiaPacific

South Asia Europe &Central

Asia

MiddleEast &NorthAfrica

Sub-Saharan

Africa

LatinAmerica &

Carib.

Per capita incomes as percent of high-income countriesPer capita incomes as percent of high-income countries

NoteNote: Ratio of PPP-adjusted per capita incomes relative to high-income average. PPP is fixed at base year (2001) level.: Ratio of PPP-adjusted per capita incomes relative to high-income average. PPP is fixed at base year (2001) level.SourceSource: World Bank simulations with Linkage model.: World Bank simulations with Linkage model.

Managing stresses: uneven benefitsManaging stresses: uneven benefits

Within-country income distribution could become unequal Within-country income distribution could become unequal in coming yearsin coming years

Managing stresses: uneven benefitsManaging stresses: uneven benefits

0

5

10

15

20

25

very largelargesmallminimal changesmalllargevery large

Number of countriesNumber of countries

Income inequalityIncome inequalitydecreasedecrease increaseincrease

Note:Note: Based on changes in the Gini-coefficient: very large >|0.05|, large>|0.03|, minimal change <|0.01| Based on changes in the Gini-coefficient: very large >|0.05|, large>|0.03|, minimal change <|0.01|

Source : Bank staff calculationsSource : Bank staff calculations

Ratio of skilled wages relative to unskilled wagesRatio of skilled wages relative to unskilled wages

0

1

2

3

4

5

6

7

EAP ECA LAC MENA SA SSA

20302030

20012001

Managing stresses: uneven benefitsManaging stresses: uneven benefits

Returns to skilled workers will likely rise relative to Returns to skilled workers will likely rise relative to unskilled workersunskilled workers

……while globalization spurs productivity, tensions in labor while globalization spurs productivity, tensions in labor markets could become more severemarkets could become more severe

Africa

Middle East

LatinAmerica

ECA

China

Other Asia

0

10

20

30

40

50

60

70

80

1973 1983 1993 2003 2020 2030Source : For 1973-2003, data from WITS, Bank staff calculations. Projections using the Linkage model for 2020 and 2030.

Share of high-income countries’ imports of manufactures originating in developing Share of high-income countries’ imports of manufactures originating in developing countries (%)countries (%)

Managing stresses: labor marketsManaging stresses: labor markets

0% 100% 200% 300% 400% 500% 600% 700% 800%

IndiaEstonia

RomaniaChinaIsraelBrazil

ArgentinaMauritius

EU-15US

CanadaBarbadosDominica*

AustraliaNorwayGhanaJapan

Growth rate of exports of business services 1994-2003

Source: Data from IMF Balance of Payment Statistics: Business services are defined as Total services minus Transportation, Travel, and Government Services.

Managing stresses: labor marketsManaging stresses: labor markets

……and may take a different form because of services tradeand may take a different form because of services trade

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1990 2000 2010 2020 2030 2040 2050

Others

Large developing countries

High-income countries

Annual carbon emissions (millions of tons)

Source: OECD GREEN model simulations

Managing 3 stresses: environmental pressuresManaging 3 stresses: environmental pressures

Global institutions and policies are still too weak to deal with Global institutions and policies are still too weak to deal with severe environmental pressures severe environmental pressures

Carbon emissions are causing global warmingCarbon emissions are causing global warming

Managing stresses: environmental pressuresManaging stresses: environmental pressures

Global institutions and policies are still too weak to deal with Global institutions and policies are still too weak to deal with severe environmental pressures severe environmental pressures

Carbon emissions are causing global warmingCarbon emissions are causing global warming

… … and overfishing threatens major fisheriesand overfishing threatens major fisheries

10

30

50

70

90

110

Trend 1950-95Trend 1950-95

Trend 1995-2005Trend 1995-2005

Realizing the potential of global integration requires an Realizing the potential of global integration requires an affirmative policy response – domestically and globallyaffirmative policy response – domestically and globally

Domestic policy must enhance competitiveness and ensure that growth is Domestic policy must enhance competitiveness and ensure that growth is broadly sharedbroadly shared Institutional measures to raise productivity and growthInstitutional measures to raise productivity and growth

• Removing barriers to integrationRemoving barriers to integration• Improving investment climateImproving investment climate

Investing in educationInvesting in education Protecting workers – but not jobsProtecting workers – but not jobs

Multilateral collaborationMultilateral collaboration Using development assistance to promote integration of lagging Using development assistance to promote integration of lagging

countriescountries Removing barriers to the products that the poor produceRemoving barriers to the products that the poor produce

• Near-term priority: Doha Development AgendaNear-term priority: Doha Development Agenda

Global trade reform can be pro-poorGlobal trade reform can be pro-poor Percent income gains (losses) by centiles of global distribution if official development assistance were to cease (expressed as difference from baseline scenario of chapter 2)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1 11 21 31 41 51 61 71 81 91

Cumulative population ranked by per capita income

Growth incidence Average

Realizing the potential of global integration requires an Realizing the potential of global integration requires an affirmative policy response – domestically and globallyaffirmative policy response – domestically and globally

Domestic policy must enhance competitiveness and ensure that growth is Domestic policy must enhance competitiveness and ensure that growth is broadly sharedbroadly shared Institutional measures to raise productivity and growthInstitutional measures to raise productivity and growth

• Removing barriers to integrationRemoving barriers to integration• Improving investment climateImproving investment climate

Investing in educationInvesting in education Protecting workers – but not jobsProtecting workers – but not jobs

Multilateral collaborationMultilateral collaboration Using development assistance to promote integration of lagging Using development assistance to promote integration of lagging

countriescountries Removing barriers to the products that the poor produceRemoving barriers to the products that the poor produce

• Near-term priority: Doha Development AgendaNear-term priority: Doha Development Agenda Reinforcing mechanisms to deal with global externalitiesReinforcing mechanisms to deal with global externalities

Hans Timmer and Richard NewfarmerHans Timmer and Richard Newfarmer

World BankWorld Bank

December, 2006December, 2006

Global Economic Prospects, 2007Global Economic Prospects, 2007Managing the Next of GlobalizationManaging the Next of Globalization