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Global Economic Prospects 2009: Commodities at the Crossroads - Full Report

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The release of this year's Global Economic Prospects finds the world economy at a crossroads. Markets all over the world are engulfed in a global economic crisis, with stock markets sharply down and volatile, almost all currencies having depreciated substantially against the dollar, and risk premiums on a wide range of debt having increased by 600 or more basis points. Commodity markets too have turned a corner. Following several years of increase, prices have plummeted, and although well above their 1990s levels, they have given up most of the increases of the past 24 months. This year's Global Economic Prospects analyzes the implications of the crisis for low- and middle-income countries, including an in-depth look at long-term prospects for global commodity markets and the policies of both commodity producing and consuming nations. The government responses to the recent price boom are also analyzed in this year's edition. Producing-country governments have been more prudent than during earlier booms, and because they have saved more of their windfall revenues, they are less likely to be forced to cut into spending now that prices have declined. The spike in food prices tipped more people into poverty, which led governments to expand social assistance programs. Ensuring such programs are better targeted toward the needs of the very poor in the future will help improve the capacity of governments to respond effectively the next time there is a crisis.

The eruption of the worldwide financial crisis has radically recast prospects for the world economy. Global Economic Prospects 2009: Commodities at the Crossroads analyzes the implications of
the crisis for low- and middle-income countries, including an in-depth
look at long-term prospects for global commodity markets and the
policies of both commodity producing and consuming nations.


Developing countries face sharply higher borrowing costs and reduced access
to capital. This will cut into their capacity to finance investment spending—
ending a five-year stretch of developing-country growth in excess of 6 percent
annually. The looming recession presents new risks, coming as it does on the
heels of the recent food and fuel crisis.


Commodity markets, meanwhile, are at a crossroads. Following decades of low
prices and weak investment in supply capacity, commodity prices first spiked—
spurred on by five years of very fast developing-country growth—and have now
plummeted in response to the financial crisis.


In the longer run, commodities are not expected to be in short supply. Prices
should be higher than they were in the 1990s but much lower than in the
recent past. These higher prices should provide producers with sufficient
incentive to discover new supplies, improve output from existing resources,
and promote greater conservation and substitution with more abundant
alternatives. At the same time, slower population growth will ease the pace at
which commodity demand grows. Policies to limit carbon emissions and boost
agricultural investment, along with the dissemination of efficient techniques,
should also contribute to this long-term outcome.


This year’s Global Economic Prospects also looks at government responses to the
recent price boom. Producing-country governments have saved more of their
windfall revenues, and are therefore less likely to be forced to cut into spending
now that prices have declined. The spike in food prices tipped more people
into poverty, which led governments to expand social assistance programs.
These programs need to be better targeted to the needs of the very poor so
that governments can respond effectively the next time there is a crisis.


For additional information, please visit www.worldbank.org/prospects.
An online companion to the prospects section of this report, including
access to additional data and analysis not reported here, is also available at
www.worldbank.org/globaloutlook.


“While developing countries
entered this tumultuous


period with much improved
fundamentals, this crisis is


expected to test severely both
them and the international


financial system. In the longer
run, even after developing-


country growth recovers,
commodity supply should keep


pace with demand, but policy
will need to foster conservation


efforts and technological
progress. In particular, if poor


countries are to maintain
domestic food self-sufficiency,


governments will need to
strengthen investment in rural


infrastructure, agricultural
research, and technological


outreach.”


—Justin Yifu Lin
Senior Vice President and


Chief Economist
The World Bank




2009Commodities at the Crossroads


Global
Economic
Prospects


SKU 17799


ISBN 978-0-8213-7799-4


G
lobal E


conom
ic Prospects


2009


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Global
Economic
Prospects


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2009


Global
Economic
Prospects
Commodities at the Crossroads


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The cutoff date for the data used in this report was November 20, 2008. Dollars are current
U.S. dollars unless otherwise indicated.


© 2009 The International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
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All rights reserved


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This volume is a product of the staff of the International Bank for Reconstruction and
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this volume do not necessarily reflect the views of the Executive Directors of The World Bank
or the governments they represent.


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ISBN: 978-0-8213-7799-4
eISBN: 978-0-8213-7801-4
DOI: 10.1596/978-0-8213-7799-4


ISSN: 1014-8906


Cover photos: Oil platform worker in Urucu, Brazil by Hervé Collart/Corbis (left); Molten steel
being poured in Tangshan, China by Yang Liu/Corbis (top right); Farmers in Kenya by Curt
Carnemark/The World Bank (bottom right)
Cover design: Critical Stages


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Foreword xi


Acknowledgments xiii


Abbreviations xv


Overview 1


Chapter 1 Prospects for the Global Economy 15
Financial markets 19
Outlook for high-income OECD countries 24
Outlook for the developing countries 27
World trade 36
Commodity markets 39
Key risks and uncertainties 45
Long-term prospects and poverty forecast 46


Chapter 2 The Commodity Boom: Longer-Term Prospects 51
Characteristics of the current commodity price boom 53
The roots of the boom in commodity prices 57
Long-term demand prospects 64
Long-term supply prospects 74
Projections 85
Conclusions 89


Chapter 3 Dealing with Changing Commodity Prices 95
Commodity dependence and growth 98
Managing primary commodity booms 102
Poverty impacts of higher commodity prices 113
Dealing with high food and fuel prices 121
The international response to high commodity prices 127
Conclusions 131
Technical Annex: Sensitivity Analysis 132


v


Contents


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Appendix: Regional Economic Prospects 141
East Asia and the Pacific 141
Europe and Central Asia 147
Latin America and the Caribbean 153
Middle East and North Africa 159
South Asia 166
Sub-Saharan Africa 171


Figures
O.1 The recent commodity boom was the largest and longest of any boom


since 1900 4
O.2 Real commodity prices in local currency units increased by between 75 and


150 percent but have fallen since 4
O.3 Slower growth should ease commodity demand 5
O.4 Technological progress has reduced the quantity of commodities used per unit


of GDP 5
O.5 Oil prices are having a direct impact on food prices 8
O.6 On average, poor countries are dependent on commodities but relatively


resource poor 9
O.7 Primary commodity exporters are exhibiting fewer signs of the behaviors linked to the


“resource curse” 10
O.8 Exchange rates, inflation, and government expenditures in new versus established oil


exporters, 2001–06 10
1.1 GDP growth 18
1.2 Emerging market equities are hit hard as turbulence evolves to crisis 22
1.3 Emerging-market bond spreads widen, especially for corporates 22
1.4 Private debt and equity flows decline by a third in 2008 23
1.5 Change in GDP in the United States, Europe, and Japan 25
1.6 The contribution of U.S. domestic demand to GDP growth 25
1.7 U.S. household wealth falls sharply in the last quarters 26
1.8 GDP to decline across the OECD 26
1.9 East Asian countries show steep falloff in output growth 27
1.10 Output growth in Latin America, South Asia, and Europe and


Central Asia is fading 28
1.11 Investment was the driving force for growth in developing countries 28
1.12 Developing-country GDP growth is expected to fall below 5 percent in 2009 30
1.13 Headline inflation is easing across industrial countries 30
1.14 Inflation in emerging markets surged on higher food and energy prices 30
1.15 Key developments in 2008 for East Asia and the Pacific 33
1.16 Sovereign bond spreads widen across Europe and Central Asia 33
1.17 In Latin America and the Caribbean, current accounts of largest


economies diverge 34
1.18 Oil revenues, recovery from drought underpin growth in the Middle East and North


Africa in 2008 35
1.19 South Asian production slips in the last months 36
1.20 In Sub-Saharan Africa, primary commodity exports increased as prices surged 36
1.21 World trade is expected to decline in 2009 for the first time since 1982 37


C O N T E N T S


vi


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1.22 Decline in high-income import growth affects developing-country exports 37
1.23 Developing-country exports have been strong, even outside China 37
1.24 Developing-country current account surpluses to wane after 2008 38
1.25 Current account balances for commodity-exporting and -importing developing-country


groups (excluding China) 39
1.26 Almost all currencies have depreciated against the dollar 39
1.27 Commodity prices surged before retreating in the second half of 2008 40
1.28 Crude oil prices correct sharply after unprecedented run-up 40
1.29 Grains prices show sharp declines from recent peaks 43
1.30 Most vulnerable countries will benefit from the decline in grains and oil prices 45
1.31 First-round income impact of lower commodity prices will be positive in more than


half of developing countries 45
1.32 Revised poverty estimates following from new price survey 49
2.1 The recent commodity boom was the largest and longest of any


boom since 1900 55
2.2 The real local currency price of commodities rose much less than the real


dollar price 56
2.3 Oil and metal prices led this boom, with food prices rising only much later 56
2.4 Global growth lasted longer and was stronger during the recent commodity boom than


in earlier ones 57
2.5 Dormant capacity helped keep oil prices low in the 1990s 59
2.6 Real spending by major American multinational oil companies declined by 60 percent


in the 1980s 59
2.7 Global metal demand also fell during the transition 59
2.8 Real food prices were broadly stable in developing countries until mid-2007 61
2.9 Most of the decline in global grain stocks reflects lower stocks in China 63
2.10 Outside of China, only wheat stocks are unusually low 63
2.11 Demand for most commodities has grown less rapidly than GDP but more rapidly


than population 64
2.12 The quantity of most commodities used per unit of GDP was declining


until recently 65
2.13 Metal intensities have declined steadily in high-income countries but have reversed in


China since 1993 69
2.14 Metal intensities in China are much higher than elsewhere 70
2.15 Weaker population growth should slow demand for food 71
2.16 Per capita grain demand tends to stop rising when income reaches


around $5,000 72
2.17 Demand for edible oils grew much faster than population in Asia 72
2.18 Food crop prices have become sensitive to oil prices 73
2.19 Output of virtually all commodities has increased since 1965 74
2.20 Almost all of the additional oil supply since the 1970s has come from


nontraditional sources 75
2.21 Rather than declining, known oil reserves keep rising 75
2.22 Gas reserves are almost as large as oil reserves 76
2.23 Agricultural productivity has been rising rapidly over the past 20 years 80
2.24 For key crops, most of the increase in output was due to increased yield, not increased


area planted 81
2.25 Yield growth has decelerated recently 81


C O N T E N T S


vii


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2.26 The stock of unused but potentially arable land is enormous 82
2.27 Developing countries spend less on agricultural R&D than high-income countries 83
3.1 More-diversified developing countries grew more rapidly from 1980 to 2006 98
3.2 Poorer countries are more dependent on nonfuel primary commodities 98
3.3 On average, poor countries are dependent on commodities but relatively


resource poor 99
3.4 Government spending by primary commodity exporters responded less to export


booms in this decade than in the 1980s 103
3.5 Public expenditures in Sub-Saharan Africa grew much less quickly in the 2000s than


in the 1980s 103
3.6 Oil-exporting countries with large reserves spent a smaller portion of their revenue


from the recent boom in oil prices, 2000–06 105
3.7 Imports and current account positions suggest more savings from commodity revenues


by oil exporters than by nonfuel commodity exporters 106
3.8 Primary commodity exporters limited the real appreciation of their currencies during


the recent boom 107
3.9 Many oil exporters are suffering significantly higher inflation 107
3.10 New oil exporters are experiencing more macroeconomic volatility than established


producers 108
3.11 Commercial bank lending to commodity-dependent economies in Sub-Saharan


Africa is rising 108
3.12 Corruption is highest among fuel exporters, although the difference has


narrowed 109
3.13 The increased grain bill could exceed 5 percent of GDP in more than


20 countries 116
3.14 Real food prices in developing countries rose less than prices of internationally traded


foods 119
3.15 Developing countries have responded to rising food prices with a variety


of policies 122
3.16 Countries have tended to expand cash transfers and school feeding programs when


responding to higher food prices 122
3.17 After India banned rice exports, international prices rose 124
A1 GDP growth eases in several East Asian economies 142
A2 Export growth in East Asia turns down on falling OECD demand 143
A3 Exchange rates decline sharply as carry trades unwind 144
A4 Gross capital inflows to East Asia contracted 40 percent in 2008 144
A5 Deepening global financial crisis affects Europe and Central Asia 148
A6 Core inflation is rising in several countries of Europe and Central Asia 152
A7 Contributions to GDP growth in Latin America and the Caribbean 153
A8 Bond spreads have increased sharply for many Latin American countries 155
A9 Exchange rates in Latin America and the Caribbean fell sharply against the dollar in


late 2008 155
A10 Inflation still high in Latin America and the Caribbean despite sharp falloff in food


and fuel prices 156
A11 Current account positions in the Middle East and North Africa set to shift


dramatically 161
A12 Markets in the Middle East and North Africa are hard hit by


financial crisis 161


C O N T E N T S


viii


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A13 Inflation rises across the Middle East and North Africa 162
A14 Notable slowing of growth across the Middle East and North Africa in 2009 166
A15 Key international finance links in South Asia, 2007 169
A16 Bond spreads for African countries jumped after mid-September 173
A17 African headline inflation jumps as food prices skyrocket 174
A18 Economic growth to slow in Sub-Saharan Africa 178


Tables
O.1 Food price hikes and consumption shares vary by region 11
O.2 Higher food prices have increased both the incidence and severity of poverty


worldwide 12
1.1 The global outlook in summary 17
1.2 High-income OECD countries: growth and related indicators 25
1.3 Developing regions: growth and related indicators 29
1.4 Forecast of commodity prices 40
1.5 Poverty in developing countries by region, selected years 47
2.1 Principal characteristics of major commodity booms 55
2.2 Comovement among major commodity prices, 1960–2007 60
2.3 Impact of a 10 percent increase in incomes on commodity demand 65
2.4 Modern goods make less intensive use of commodities 65
2.5 Fundamental economic factors drive future commodity demand 66
2.6 Energy demand is projected to slow in the baseline scenario 69
2.7 Energy demand could decline further under more aggressive climate


change policies 69
2.8 Developing countries will account for most of the projected demand for various foods,


2000–30 72
2.9 Historically, estimates of oil reserves have kept pace with production 76
2.10 Increased investment has stabilized reserve-to-production ratios for some


commodities 77
2.11 Oil’s share in global energy supply is projected to decline 78
2.12 Potential gains from extending the green revolution remain large 82
2.13 With some exceptions, yield growth for key agricultural commodities has been highest


in South and East Asia 83
2.14 Agricultural sector simulation results, 2005–30 86
2.15 Energy sector simulation results, 2005–30 87
3.1 Non-oil or resource-rich countries have higher per capita incomes than resource-


dependent countries, 2006 99
3.2 Ratios of reserves to production vary greatly among oil exporters 105
3.3 Assets in sovereign wealth funds grow in commodity-exporting countries 107
3.4 Country studies suggest that high oil prices have large poverty impacts 115
3.5 Higher food prices raise poverty more in urban areas than in rural areas 117
3.6 Observed real price shocks and food shares of consumption vary across developing


regions 119
3.7 Poverty effects of the changes in relative food prices 120
3.8 Fiscal costs of selected antipoverty measures vary widely 122
3.9 Increasing rice self-sufficiency can be more costly than relying on imports 124
3A.1 Sensitivity analysis 132
A1 East Asia and Pacific forecast summary 142


C O N T E N T S


ix


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A2 East Asia and Pacific country forecasts 146
A3 Europe and Central Asia forecast summary 148
A4 Europe and Central Asia country forecasts 151
A5 Latin America and the Caribbean forecast summary 154
A6 Latin America and the Caribbean country forecasts 158
A7 Middle East and North Africa forecast summary 160
A8 Middle East and North Africa country forecasts 164
A9 South Asia forecast summary 168
A10 South Asia country forecasts 170
A11 Sub-Saharan Africa forecast summary 172
A12 Sub-Saharan Africa country forecasts 176


Boxes
1.1 Chronology of recent developments in the financial crisis 20
1.2 Commodity prices and inflation in developing countries 31
1.3 Impact of commodity prices on external balances and capital flows 41
1.4 The impact of the new price survey on poverty estimates 48
2.1 Commodity price cycles 54
2.2 Developing-country growth and global commodity demand in the recent past 58
2.3 The historical link between crude oil and other commodity prices 62
2.4 Alternative fuels for transportation 68
2.5 Understanding the rise in Chinese metal intensities 70
2.6 Declining costs of resource extraction 75
2.7 The rise of biofuel production 79
2.8 State-owned firms and output efficiency 80
2.9 Genetically modified crops—the next green revolution? 84
3.1 The impact of severe shocks on economic progress 100
3.2 Efforts to capture a larger share of windfall commodity revenues 104
3.3 Combating the corrupting influence of high commodity revenues 109
3.4 Successful sovereign wealth funds 110
3.5 National and international marketing strategies 111
3.6 Malawi government hedging of maize price and supply risks, 2005–08 113
3.7 Critical assumptions underlying the estimation of the poverty impact


of food price increases 118
3.8 Conditional cash transfers are most effective in getting money to the poor 126
3.9 Removing fuel subsidies in Ghana 127
3.10 The international response to rising food prices 128


C O N T E N T S


x


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xi


EACH YEAR, Global Economic Prospectsexplores critical “here and now” eco-nomic developments relevant to low-
and middle-income countries. Past editions
have examined the sustainability of developing-
country growth over the long term, importance
for developing countries of international and
regional trade liberalization, and migration
and remittances. Last year’s report looked at
the pace and determinants of technological
diffusion in developing countries.


This year’s Global Economic Prospects
finds the global economy at a crossroads,
transitioning from a sustained period of very
strong developing country–led growth to one
of substantial uncertainty as a financial crisis
rooted in high-income countries has shaken fi-
nancial markets worldwide. Commodity mar-
kets too are at a crossroads with the very high
prices of 2007 and early 2008 having fallen by
more than half in many instances.


Great uncertainty surrounds the implica-
tions of this crisis for developing countries. Ini-
tially, the repercussions for developing coun-
tries of the financial turmoil that characterized
2007 and the first half of 2008 were limited.
However, since September 2008, the intensifi-
cation of the banking crisis, the collapse of sev-
eral global financial players, and the sharp in-
crease in emerging market bond spreads have
dramatically altered the outlook for develop-
ing countries. These events constitute the kind
of disorderly adjustment that has been dis-
cussed in previous reports as a risk. Material-
ized, it implies a sharp slowdown for develop-


ing countries and the possibility that serious
crises may emerge.


While the measure of that slowdown and its
near-term implications for growth and incomes
are important, governments in developing
countries also need to be mindful of the longer-
term implications of their policy response.
Thus, while countercyclical policy may help re-
duce the short-term costs of the slowdown,
care must be exercised to react prudently so as
not to endanger longer-term fiscal sustainabil-
ity and growth prospects. For as serious as the
coming slowdown may be, developing-country
growth is expected to recover after the crisis is
over.


Commodity markets have seen spectacular
swings over the past 24 months as enormous
tensions first built up and were then released.
The extended and sharp rise in commodity
prices prompted concerns that the world was
transitioning into a new phase of commodity
scarcity—a concern that the recent dramatic
drop in commodity prices has only partially
alleviated. Long-term supply and demand
prospects for commodities suggest that while
commodity prices are likely to be higher than
they were during the 1990s and early 2000s
(when they were depressed by excess supply),
the recent peaks that have been observed are
unlikely to be the new norms. Over the long
run, demand for commodities is not expected
to outstrip supply. Even though per capita in-
comes in developing countries are expected to
continue rising rapidly, population growth is
slowing and with it global GDP growth. As a


Foreword


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F O R E W O R D


xii


result, the pace at which commodity demand
expands should also ease. Assuming that effi-
ciency with which commodities are both em-
ployed and produced continues to improve as
it has done over the past few decades, supply
should keep pace with demand.


However, policy will need to be supportive
if such a positive result is to materialize. In
particular, agricultural yields have declined in
recent years. Unless governments in develop-
ing countries and aid agencies take concrete
steps to increase investment in rural infra-
structure, agricultural research and develop-
ment, and agricultural extension services, it is
possible that global agricultural productivity
growth will slow. Higher food prices would
follow and many countries that are now self-
sufficient in food (notably those that still have
fast growing populations) would become large
net importers of food. On the energy side,
policies to combat carbon emissions would
help slow the depletion of hydrocarbon re-
sources, by speeding both demand-side and
supply-side substitution toward cleaner energy
sources. If successful in slowing global warm-
ing, these could also help prevent the very
large agricultural productivity losses predicted
by some in the second half of this century.


The recent boom in commodity prices has
challenged policy makers in both producing
and consuming countries. Encouragingly,
commodity producers appear to have man-
aged their windfall revenues more prudently
than in the past. Instead of expanding spend-
ing programs in line with increased revenues,
many have saved a much larger share of these
revenues—reducing the likelihood that they
will need to cut back spending in a procyclical
manner now that commodity prices (and


global growth) have declined. However,
countries with new-found commodity wealth
or newly independent commodity-rich states
have not shown similar restraint and may
encounter more difficulties during the current
downturn.


Higher food prices are estimated to have
increased global poverty by some 130–155
million people. Most countries responded to
the food crisis by expanding existing social
safety net programs, which made good sense
given the profound and long-term conse-
quences that increased malnutrition could
generate. However, in many instances the re-
sponse was poorly targeted and expensive.
Now that food prices are declining, countries
need to take steps to revamp their social wel-
fare systems so that they are better targeted
and that the next time a similar crisis comes
along, additional spending will be more effec-
tive in limiting poverty impacts.


At the international level, steps need to be
taken to prevent producing countries from ex-
acerbating shortfalls by introducing export
bans or by withholding stocks from the global
market. An international scheme to share in-
formation about private and public stocks and
coordinate their management during times of
crisis is worth pursuing. Similarly, funding for
international food aid programs should be
made more predictable, and agencies should
be endowed with a line of credit that would
allow them to respond rapidly to future food
emergencies in a way they cannot at present.


Justin Yifu Lin
Senior Vice President and


Chief Economist
The World Bank


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THIS REPORT WAS produced by staff from the World Bank’s Development Prospects Group.Andrew Burns was the lead author and manager of the report, with direction from UriDadush. The principal authors of the report were John Baffes, Donald Mitchell, Elliot
(Mick) Riordan, Shane Streifel, Hans Timmer, and William Shaw. The report was produced under
the general guidance of Justin Yifu Lin.


Several people contributed substantively to chapter 1. Elliott (Mick) Riordan and Hans Timmer
were its main authors. The Global Trends Team, under the leadership of Hans Timmer, was
responsible for the projections. The projections and regional write-ups were produced by Teng
Jiang, Annette De Kleine, Elliot (Mick) Riordan, Cristina Savescu, and Ani Silwal, in coordina-
tion with country teams and the offices of the regional Chief Economists and PREM directors
including Luca Barbone, Marcello Guigale, August Kouame, Ernesto May, Vikram Nehru, Ritva
Reinikka, Sudir Shetty, and Augusto de la Torre. The short-term commodity price forecasts were
produced by John Baffes, Betty Dow, Donald Mitchell, and Shane Streifel. The remittances fore-
casts were produced by Sanket Mohapatra, while Shaohua Chen from the Development Research
Group and Dominique van der Mensbrugghe generated the long-term poverty forecast.


John Baffes, Andrew Burns, William Shaw, and Shane Streifel were the main authors of Chap-
ter 2, with written contributions from Donald Mitchell, Marian Radetzki, Varun Kshirsagar,
Denis Medvedev, and Dominique van der Mensbrugghe. Chapter 3 was written by Donald
Mitchell and William Shaw with written contributions from Ataman Aksoy, Margaret Grosh, and
Rafael de Hoyos Navarro. Both Chapters 2 and 3 benefited from the expert research assistance of
Varun Kshirsagar and Teng Jiang.


The accompanying online publication, Prospects for the Global Economy (PGE), was produced
by a team led by Cristina Savescu and comprised of Sarah Crow, Betty Dow, Kathy Rollins, Ani
Silwal, Cybele Arnaud, and Ying Yu, with technical support from Gauresh Rajadhyaksha. The
translation process was coordinated by Jorge del Rosario (French and Spanish) and Li Li
(Chinese). A companion pamphlet highlighting the main messages of the commodities section of
the report was prepared by Kavita Watsa and Roula Yazigi.


Several reviewers offered extensive advice and comments throughout the conceptualization
and writing stages. These included Charles Blitzer, Christopher Delgado, Sebastien Dessus,
Christopher Gilbert Sheldon, Santiago Herrera, Justin Yifu Lin, William Maloney, William Martin,
Celestin Monga, Vikram Nehru, Marian Radetzki, Ana Revenga, Alexander Sarris, Katherine
Sierra, Luiz Pereira da Silva, Claudia Paz Sepulveda, and Daniel Villar.


Marty Gottron edited the report. Hazel Macadangdang managed the publication process
and Merrell Tuck-Primdahl managed the dissemination activities. Book design, editing, and
production were coordinated by Aziz Gökdemir of the World Bank’s Office of the Publisher,
along with Stephen McGroarty, Denise Bergeron, Andrés Meneses, and Susan Graham.


xiii


Acknowledgments


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xv


Abbreviations


ASEAN Association of South Eastern Asian Nations


CEE Central and Eastern European countries


CIS Commonwealth of Independent States


CPI consumer price index


EMBI Emerging Markets Bond Index


EMBIG Emerging Markets Bond Index Global


EU European Union


FDI foreign direct investment


FSU former Soviet Union


GCC Gulf Cooperation Council


GDP gross domestic product


GFRP Global Food Crisis Response Program


GIDD Global Income Distribution Dynamics Model


IDA International Development Association (World Bank)


IEA International Energy Agency


IMF International Monetary Fund


IPO initial public equity offering


LSMS Living Standards Measurement Survey


MSCI Morgan-Stanley Composite Index


OECD Organisation for Economic Co-operation and Development


OPEC Organization of Petroleum Exporting Countries


PPP purchasing power parity


PCSC Programme Complémentaire de Soutien à la Croissance


RIGA Rural Income-Generating Activities


saar seasonally adjusted annualized rate


toe tonne of oil equivalent


UAE United Arab Emirates


WFP World Food Programme


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1


Overview


The release of this year’s Global EconomicProspects finds the world economy at a
crossroads. Markets all over the world are en-
gulfed in a global economic crisis, with stock
markets sharply down and volatile, almost all
currencies having depreciated substantially
against the dollar, and risk premiums on a wide
range of debt having increased by 600 or more
basis points. Commodity markets too have
turned a corner. Following several years of in-
crease, prices have plummeted, and although
well above their 1990s levels, they have given
up most of the increases of the past 24 months.


Chapter 1 of this report examines the
medium-term implications of this crisis for
developing-country growth, inflation, and
world trade. Chapter 2 looks at longer-term
supply and demand prospects in commodity
markets. It takes into account the long-term
growth prospects of developing countries
and their rising share in world GDP (gross
domestic product), the declining quality of
new pools of resources, and the influence
of technology on both demand and supply.
Finally, chapter 3 reports on the poverty im-
pacts of high commodity prices and examines
the effectiveness of policies in both produc-
ing and consuming countries in dealing with
the challenges posed by periodic bouts of
high commodity prices.


This report does not deal with water, fish,
or timber, all commodities of critical impor-
tance to developing countries and the globe
but which fall outside the scope of this report
either because of their public-goods character
or, in the case of timber, because of its treat-
ment in a recent report (World Bank 2007).


The global financial crisis threatens short-
term prospects in developing countries
The banking crisis that erupted in September
2008, following more than a year of less acute
financial turmoil, has substantially reinforced
the cyclical downturn that was already under
way. Following the insolvency of a large num-
ber of banks and financial institutions in the
United States, Europe, and the developing
world, financial conditions have become
much tighter, capital flows to developing
countries have dried up, and huge amounts of
market capitalization have evaporated.


The crisis began in high-income countries,
but developing countries have been caught up
in its wake. As of mid-November, developing-
country equity markets had given up almost all
of their gains since the beginning of 2008 and
initial public offerings had disappeared. Risk
premiums, which had risen to more than 800
basis points on sovereign bonds and 1,000 on
commercial debt, have declined but remained
well above 600 basis points in every develop-
ing region. As corporate bonds had been one
of the most important source of developing-
country finance, these developments suggest
that a sharp slowing in developing-country
investment growth is to be expected. Bank
lending and foreign direct investment inflows
were also down, but less dramatically. The in-
creased volatility and losses emanating from
the banking sector have caused investors
worldwide to sell stocks and increase their
holdings of less risky assets, notably U.S. trea-
suries. As a result, the currencies of virtually
every developing country in the world has de-
preciated vis-à-vis the dollar.


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Following a series of efforts by central banks
and governments to resolve the growing crisis
through liquidity injections and various ad
hoc measures, policy makers have now acted
forcefully to restore confidence in the interna-
tional banking system, including the partial
nationalization of nine banks and trillions of
dollars in rescue plans introduced by govern-
ments in the United States and Europe and
recent multilateral meetings to address weak-
nesses in the global financial architecture. At
the time of this writing (November 20, 2008),
it is too soon to judge the effectiveness of these
measures in restoring confidence in the bank-
ing system. However, they do constitute the
kind of forceful and credible action that has
been needed, and interbank lending rates have
fallen substantially and although they remain
volatile, stock and bond markets have greeted
these measures favorably.


Notwithstanding these steps, growth
prospects for both high-income and develop-
ing countries have deteriorated substantially,
and the possibility of a very deep global reces-
sion cannot be ruled out.


Even before the emergence of a full-blown
financial crisis in September 2008, global
growth showed significant weakening. Eco-
nomic growth slowed sharply in Europe and
Japan and in many developing countries in
the second quarter of 2008. In the United
States, the continued disruption in financial
markets and the fall in housing prices caused
domestic demand to fall in 6 of the past 12
quarters. However, strong export growth—
driven in part by developing-country import
demand—spared the U.S. economy from re-
cession until recently when its GDP declined
0.5 percent in the third quarter of 2008. In
developing countries, overall GDP growth
also remained robust in the first half of the
year. However, slower growth in high-income
countries and the weakening of capital inflows,
in combination with commodity-price-
induced losses in real income, generated a
sharp deceleration in industrial production,
investment, and international trade beginning
in the third quarter.


At the same time, rising commodity prices
and tight capacity in many countries (following
years of very fast growth fueled by ample liq-
uidity) caused both headline and core inflation
to pick up throughout the world, with headline
inflation rising by some 5 percentage points
among developing countries. Weaker growth
and falling commodity prices have already
caused inflationary pressures to ease in some
countries. However, the significant losses in real
income endured by many people in developing
countries and the still overheated state of some
of their economies could generate second-
round price increases that either push inflation
higher or stabilize expectations at high levels.


The combination of a relatively strong
first half and a much weaker second half is
expected to cause GDP growth to slow to 1.3
percent in high-income countries and to 6.3 per-
cent in developing countries in 2008. The slow-
down is projected to intensify in 2009 because
most of the real-economy side effects of the
banking crisis will be felt in the final months of
2008 and the first two quarters of 2009.


The main mechanism for the slowdown in
both developing and high-income countries
will be through investment, which for 2009 is
expected to decline 3.1 percent in high-income
countries. In developing countries, investment
growth is projected to slow sharply to 3.4 per-
cent in 2009 from more than 13 percent in
2007. Because low-income countries have less
access to international capital markets, the
slowdown will affect them mainly through in-
direct mechanisms, including slower global
growth, lower commodity prices, slackening
remittance receipts, and partial scaleback in
aid flows.


Overall global GDP growth is projected to
decline to 0.9 percent in 2009, with develop-
ing economies expanding by 4.5 percent—well
below the 7.9 percent growth rate recorded in
2007. International trade should decelerate
sharply, with global export volumes declining
for the first time since 1982. As a result, both
commodity prices and inflation are projected
to ease, with oil prices averaging about $75 a
barrel in 2009 and food prices projected to


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decline by about 23 percent compared with
their average for 2008.


This financial crisis and the expected
abrupt slowing of global growth come at a
moment when developing countries consid-
ered as a whole are more vulnerable than they
have been in the recent past. Higher commod-
ity prices have raised the current account
deficits of many oil-importing countries to
worrisome levels (they exceed 10 percent of
GDP in about one-third of developing coun-
tries), and after having increased substantially,
the international reserves of oil-exporting
developing countries are now declining as a
share of their imports. Moreover, inflation is
high, and fiscal positions have deteriorated
both for cyclical reasons and because govern-
ment spending has increased to alleviate the
burden of higher commodity prices.


Thus, even in the baseline scenario, where
the rapid equity declines of September and
October are assumed to end and where credit
begins to thaw as recent policy actions im-
prove financial market confidence, a number
of developing countries are likely to be sub-
jected to substantial strains, possibly including
bank failures and currency crises. In these very
uncertain circumstances, policy makers must
place a premium on reducing the likelihood
of domestic turmoil, by reacting swiftly and
forcefully to emerging difficulties, including, if
necessary, seeking assistance from the Interna-
tional Monetary Fund (IMF).


Uncertainty continues to cloud the outlook
While this sober outlook represents a likely
outcome, a wide range of outcomes remains
possible. The financial turmoil could intensify
further, sparking a prolonged credit crunch
and global recession. A milder downturn is
also possible, if credit conditions do not dete-
riorate as much as anticipated in the baseline.


At the time of this writing, the possibility
that the situation in high-income countries will
deteriorate substantially cannot be ruled out.
Should credit markets fail to respond to the ro-
bust policy interventions taken so far, the con-
sequences for developing countries could be


O V E R V I E W


3


very serious. Global financing conditions
would deteriorate rapidly, and apparently
sound domestic financial sectors could find
themselves unable to borrow or unwilling to
lend—both in international and domestic mar-
kets. Such a scenario would be characterized
by a long and profound recession in high-
income countries and substantial disruption
and turmoil, including bank failures and cur-
rency crises, in a wide range of developing
countries. Sharply negative growth in a number
of developing countries and all of the attendant
repercussions, including increased poverty and
unemployment, would be inevitable.


Although a receding concern, high inflation
in developing countries, remains a problem, es-
pecially if the financial turmoil is resolved rela-
tively quickly. While global growth would still
slow in 2009 under such a scenario, the sub-
stantial policy stimulus that has been introduced
could cause growth in both developing and de-
veloped countries to surge in 2010, reigniting in-
flationary pressures and forcing a subsequent
tightening of policy and a second bout of slow-
ing growth. Policy in countries that currently
have large current account deficits and high in-
flation needs to be particularly vigilant. These
economies continue to be vulnerable and in-
vestors skittish; under these conditions, their
currencies are likely to remain particularly sen-
sitive to changing market perceptions.


The commodity market boom has come to
an end
The sharp rise in commodity prices over the
past five years, like the earlier booms of the last
century, was associated with a period of strong
economic growth (partly fueled by relatively
loose fiscal and monetary policy) and a period
of global uncertainty, and it has generated
significant inflationary pressures. This most
recent boom has been the most marked of the
past century in its magnitude, duration, and
the number of commodity groups whose prices
have increased (figure O.1).


The strength and duration of the boom
mainly reflected the resilience of GDP growth
between 2003 and 2008.


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In the oil and metals sector, the supply pres-
sures that built up over the past five years and
which drove prices to record heights stemmed
mainly from slow-growing supply capacity.
That slow growing supply capacity resulted
because for much of the 1990s rising demand
in the rest of the world was met by the slow
reabsorption of idle capacity created follow-
ing the 1980 oil shock and the collapse of
demand in the former Soviet bloc when these
formerly communist countries began to allo-
cate resources according to market signals. As
a result of this idle capacity, prices remained
low in the oil and metals sectors and firms did
not have the economic incentives to increase
productive capacity.


Furthermore, because of low prices and be-
cause incremental demand was being met by this
capacity, investment in the oil and metals indus-
tries plummeted, and the sectors that supplied
the inputs necessary for exploration and ex-
ploitation atrophied. That in turn created a mis-
match between the underlying rate of growth of
supply capacity and demand.When the spare ca-
pacity was exhausted in the early 2000s, supply
was no longer able to keep pace with strength-
ening demand, and prices began to rise.


The story in agricultural markets is different.
Food-based demand for agricultural crops has
been relatively stable. However, diversion of
food crops toward biofuel production has
increased sharply. Between 2003 and 2007,


two-thirds of the global increase in maize pro-
duction went to biofuels. Although the initial
impact was confined to the maize market, as
farmers switched land away from wheat and
soybean production to grow maize, the price of
these commodities also began to rise. Higher oil
and fertilizer prices also increased food produc-
tion costs, especially in high-income countries
where they can account for as much as 30 per-
cent of overall costs. This factor, plus biofuel de-
mand for grains, has made the price for these
products much more sensitive to changes in oil
prices. Finally, a series of poor wheat crops in
Australia compounded the situation, driving
down stocks and contributing to the price rise.


In addition to these fundamental drivers,
agricultural prices have been influenced both by
increased investor interest in these commodities
as an asset class and by government policies, in-
cluding the decision by several countries to im-
pose export bans. All of these factors are driven
by forward-looking expectations and may have
exacerbated both the upward rise in prices dur-
ing 2007–08 and their more recent decline.


Commodity prices are declining in
response to slower GDP growth
Like earlier commodity booms, this one has
come to an end. Prices in all commodity markets
have fallen sharply since July 2008 (figure O.2),


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


4


50
Jan.
2000


Jan.
2001


Jan.
2002


Jan.
2003


Jan.
2004


Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


100


150


200


250


300


Figure O.2 Real commodity prices in local
currency units increased by between
75 and 150 percent but have fallen since


Energy


Food


Metals and minerals


Source: World Bank.


Real local currency commodity price indexes, CPI-deflated
(Jan. 2000 5 100)


80


130


180


230


280


330


380


1900


Source: Grilli and Yang (1988) for 1900 to 1947; World Bank for
1948 to 2008.


1920 1940 1960 1980 2000


Real non-energy commodity prices, index (1977–79 5100)


1917 (just prior to WW I)
1951 (postwar rebuilding)


2008 (forecast)


1974 (first oil crisis)


Figure O.1 The recent commodity boom was
the largest and longest of any boom
since 1900


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reflecting slower GDP growth, increased sup-
plies and revised expectations. Because com-
modity prices reflect forward-looking
expectations, the sharp slowing of growth that
is expected over the next year has caused
prices to decline rapidly even though the un-
derlying supply and demand tensions are little
changed from just a few months ago when
these prices were close all-time highs.


Some metals prices have already fallen to
pre-boom levels and the dollar price of many
internationally traded foods has fallen back to
their 2006 levels. While much weaker GDP
growth is projected to cause commodity prices
to ease further in the short run, they should
nevertheless remain higher than they were dur-
ing the 1990s. Real food prices are projected to
decline by 26 percent between 2008 and 2010,
energy prices to fall by 27 percent, and metals
prices to decline by 32 percent.


In the longer term, growth in the demand
for commodities should ease
The strength, breadth (in terms of the number of
commodities whose prices have increased), and
duration of the current commodity boom have
prompted speculation that the global economy
is moving into a new era characterized by rela-
tive shortage and permanently higher (and even
permanently rising) commodity prices.


This outcome does not appear likely. Over
the next two decades, slower population
growth andweaker (though still strong) income
growth are projected to cause trend global GDP
growth to ease (figure O.3) and, with it, the de-
mand for commodities. As discussed later, the
extent to which commodity demand does slow
and how easily supply is able to keep pace with
demand will very much depend on the policy
environment, the pace of technological change,
and external factors such as climate change.


Moderating demand for metals depends
critically on increased efficiency in China
Over the past 50 years, a combination of con-
servation measures, technological change, and
changes in the structure of global GDP (ser-
vices tend to be less commodity-intensive than


manufactured goods) has reduced the quantity
of metals and energy required to produce a
unit of GDP by an average of 0.9 and 0.8 per-
cent a year respectively (figure O.4). The food
intensity of GDP has also declined as an in-
creasing share of the world’s population has
reached income levels where per person de-
mand for basic food commodities is stable.


Beginning in the middle 1990s, the decline
in metals intensities began to reverse. That re-
versal is explained almost entirely by increas-
ing metal intensities in China, which began


O V E R V I E W


5


0


1


2


3


4


5


6
Growth of GDP, annual average (percent)


Figure O.3 Slower population growth should
result in weaker GDP and commodity demand


1990s 2000s 2015–30


Contribution
to GDP
growth from
population
growth


Contribution
to GDP
growth
from per
capita
incomes


Source: World Bank LINKAGES model.


H
ig


h-
in


co
m


e
co


u
n


tri
e


s D
ev


e
lo


pi
n


g
co


u
n


tri
e


s


Figure O.4 Technological progress has
reduced the quantity of commodities used
per unit of GDP


0.70
1971 1977 1983 1989 1995 2001


0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Commodity intensity of demand index (1971 5 1.00)


Source: World Bank calculations, using data from the World
Bureau of Metal Statistics, the IEA, and the FAO.


Energy Metals
Metals (excluding China) Food


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in 1995 and grew even more sharply at the
beginning of the 2000s. The uptick in metals
intensities was associated with the investment,
manufacturing, and export booms in that
country. Currently, metal intensity in China is
four times higher than in developed countries
and twice as high as in other developing coun-
tries. China’s metal intensities are expected
to stabilize in coming years and then begin to
fall as the country’s very high investment rate
declines and the transitional shift in global
manufacturing capacity from high-income
countries to China slows.


Assuming China’s metal intensity stabilizes
and then falls in coming years, global demand
for metals—which has outpaced GDP in recent
years—should first realign itself with GDP
growth over the next few years and then decline
further during the next decade, reaching about
2.7 percent a year in the period 2015–30.


Future energy demand depends on
improving automobile efficiency
Demand in the energy sector will depend
critically on the pace at which energy effi-
ciency continues to improve, especially in the
transport sector. Since 1970 conservation ef-
forts and technological progress have reduced
energy demand by 56 percent, compared with
a no-change scenario (IEA 2006). With some
75 percent of future energy demand expected
to come from the transport sector, especially
from developing countries, the pace of future
energy demand growth (and its composition)
will depend heavily on future efficiency gains
in car technology.


Prospects for such improvements are good,
if policy continues to be supportive of both
conservation and efficiency measures. Already
existing technologies—available either in ini-
tial rollout phases or as prototypes (flex-fuel
and hybrid cars, plug-in hybrids, and electric
and hydrogen-powered vehicles)—could help
to more than double fuel efficiency. An ambi-
tious (and successful) policy to speed the de-
velopment and diffusion of these technologies
could see the share of these vehicles rise to
90 percent in the high-income world and to


75 percent in developing countries by 2050,
substantially reducing private transportation’s
dependency on liquid fuels.


In the baseline scenario, demand for oil is
expected to continue rising to around 114 mil-
lion barrels a day (mb/d) by 2030 (compared
with 87 mb/d today). Energy demand is pro-
jected to grow somewhat more quickly as coal,
natural gas, and non-fossil-fuel energy sources
increase their share in total energy supply. The
extent to which this shift occurs will depend
importantly on the policy environment. A
more proactive stance toward restraining car-
bon emissions could speed the pace at which
alternative energies become economically
viable and reduce the expected increase in
reliance on coal-powered electrical plants.


Over the next 20 years, supplies of
extracted commodities are likely
to remain ample
The pace at which the growth in supply capac-
ity in the oil and metals sectors catches up to
demand will depend on how quickly capacity in
the heavy and specialized equipment and labor
supply sectors can be restored. Years of low
prices and weak investment have reduced
capacity in these sectors, and as a result,
delivery times and costs of inputs have more
than quadrupled in many instances. High prices
for these components are speeding the allevia-
tion of these constraints. With the expected
slowing of global GDP growth and lower com-
modity prices, investment demand has eased
and prices for these specialized investment
goods are expected to fall further. Nevertheless,
deliveries are projected to continue trailing
demand for some time, and prices will remain
relatively high for the next several years.


Over the longer run, the price of extracted
commodities should fall—although they are
not expected to fall to their levels in the
1990s. Higher prices than in the past will be
required to ensure that firms continue to in-
vest in new capacity.


Although the absolute quantity of fossil
fuels and metals in the earth’s crust is declin-
ing and the quantity that is extracted each


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6


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year is rising, there appears little likelihood
that the world will run out anytime soon. His-
torically, proven reserves of both metals and
oil have tended to rise even more rapidly than
production, remaining surprisingly constant in
the case of oil at about 40 years of production.
In part, that is because measured reserves,
rather than being an accurate count of the re-
sources remaining in the ground, bear a closer
resemblance to the inventory of product that
firms can readily bring to the market. So long
as firms have ample “known reserves” for ex-
pected future demand, they have little incen-
tive to find more.


As production increases and more known
reserves are brought into service, additional
reserves will likely be discovered. In general,
these newer reserves tend to be of lower qual-
ity and higher cost than existing ones. How-
ever, historically improvements in extraction
technology have advanced quickly enough to
keep the cost of exploiting new sources stable
or even falling, despite increased remoteness
and poorer quality. The projected long-term
price of a barrel of oil of $75 (real 2008 dol-
lars) is based on the expectation that such a
price will be sufficient to incite additional
output from high-cost sources such as the
Canadian oil sands.


Even if certain resources do become scarce,
ample alternatives exist. For example, if the
pace at which new oil reserves are discovered
declines, the rising price for oil will make
alternative sources of energy (including coal,
natural gas, nuclear, and renewable alterna-
tives) more competitive and induce increased
conservation and technological change. Simu-
lations suggest that if oil production fails to
rise between now and 2030, oil prices might
double but most of the energy shortfall would
be met by increased coal and natural gas con-
sumption—albeit at higher cost.


Food demand will slow with lower
population growth, but biofuels could
expand crop demand very rapidly
Because an increasing share of the world’s
population has reached income levels where


O V E R V I E W


7


demand for most primary food commodities
no longer rises with income, demand for food is
expected to slow—broadly in line with weaker
population growth. However, the potential
role of biofuel demand for food crops greatly
complicates the picture. Given today’s tech-
nology, maize can be profitably transformed
into ethanol at oil prices in excess of $50 a
barrel. Above that price, every percentage
point increase in the barrel price of oil causes
maize price to rise by 0.9 percent (figure O.5),
which means the maize market is effectively
tied to the oil market (this relationship is not
statistically significant when oil is below $50 a
barrel). Moreover, because farmers have re-
sponded to high maize prices by increasingly
growing maize in fields where they once grew
wheat and soybeans, prices of these (and other)
commodities have also become increasingly
sensitive to oil prices.


Given that the energy market is much
larger than the market for maize (if all the
world’s maize were used to produce biofuels,
it would only meet 8 percent of energy de-
mand), biofuel demand has the potential to
change permanently the nature (and price)
of agricultural commodities. The International
Energy Agency (IEA), for example, suggests
that biofuel demand for grains could increase
by 7.8 percent a year over the next 20 years
(compared with 1.2 percent annual increases
for food demand). If this prognosis is borne
out, 40 percent of global grain production
could be going to biofuels by 2030.


It is probably premature to argue that the
nature of these markets is permanently
changed. On the one hand, technological im-
provements are likely to lower the cost of
producing ethanol from maize (and sugar),
which in turn will lower the threshold oil
price above which these food crops become
sensitive to oil prices. However, technological
change may also give rise to alternative
sources of energy that make ethanol produc-
tion from food crops uneconomic. Such alter-
natives might include biofuels made from cel-
lulose or other nonfood sources, solar power,
or hydrogen-based systems. In these cases, the


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new, stronger connection that has been cre-
ated between the energy market and the grain
markets would be broken, and food prices
would likely fall significantly.


Strong productivity growth and unused
crop land should ensure adequate food
supply at the global level
Food supplies are unlikely to fall short of de-
mand. Over the past 30 years, agricultural
productivity has improved much faster than
demand; as a result, agricultural output has
increased rapidly even as the share of agricul-
tural workers in total employment has steadily
declined and prices fallen.


Longer-term prospects are somewhat
clouded by the gradual exhaustion of the easy
productivity gains offered by the green revolu-
tion. In addition, climate change threatens
yields in many developing countries, although
most of this effect is not likely to be felt until
after 2030. Assuming that policies are put
in place to expand infrastructure and facili-
tate the diffusion of the new technologies
(including biotechnologies) that have sustained
agricultural productivity in high-income coun-
tries, agricultural output should more than keep
pace with food demand over the long term.


However, if developing countries are not
successful in combating recent trends for yields
to decline by increasing investment in rural
agriculture and through the spread and adop-
tion of more productive seed varieties and
farming techniques, there is a real risk that
many countries, notably in Africa (where pop-
ulation growth is expected to be faster), will
move from a position of being broadly self-
sufficient in food to being net food importers.
Most of the shortfall would be met by produc-
tion from high-income countries, where pro-
ductivity growth has not slowed.


Even if biofuel demand increases substan-
tially, enormous potential exists for bringing
additional (albeit lower productivity) land into
cultivation. That said, if biofuel-related de-
mand for crops is much stronger or productivity
performance disappoints, future food supplies
may be much more expensive than in the past.


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8


Figure O. 5 Oil prices are having a direct
impact on food prices
Oil price per barrel versus food price per ton


a. Soybeans vs. Crude Oil Prices


0


100


200


300


400


500


600


700


Crude oil ($/bbl)


Crude oil ($/bbl)


Soybeans ($/ton)


b. Wheat vs. Crude Oil Prices


0


100


0 20 40 60 80 100 120 140


0 20 40 60 80 100 120 140


Crude oil ($/bbl)
0 20 40 60 80 100 120 140


200


300


400


500
Wheat ($/ton)


c. Maize vs. Crude Oil Prices


0


50


100


150


200


250


300


350
Maize ($/ton)


Source: World Bank.


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O V E R V I E W


9


0


10


20


30


40


50


60


70


0


10


20


30


40


50


60


70


Primary exports per capita
(left axis)


Primary exports/exports
(right axis)


Value of per capita primary
commodities in exports
(US$ thousands)


Source: World Bank.


Share of primary
commodities in total


merchandise exports (%)


Figure O.6 On average, poor countries are
dependent on commodities but relatively
resource poor


Low-income
countries


Lower-middle-income
countries
Upper-middle-income
countries


High-income
countries


for resource dependence to generate poor
growth outcomes. These include:


• The tendency for government spending
in resource-dependent countries to rise
in booms and fall procyclically during
busts;


• The tendency for strong revenue inflows
to cause an excessive real appreciation
of the currency that hurts the competi-
tiveness of the nonresource sectors of
the economy; and


• The tendency for large commodity-
based revenues to foster rent-seeking
behavior, corruption, and even political
violence.


Encouragingly, during the course of the re-
cent commodity boom, fiscal spending in
resource-dependent developing countries has
been much more prudent than during earlier
booms. Partly as a result, the currencies of
most countries have appreciated by less than
in the past. Moreover, corruption among com-
modity exporters has improved relative to
diversified exporters (figure O.7), suggesting
that perhaps this mechanism for reducing the
development potential of resource wealth has
been weakened as well.


Exceptions include newly independent
commodity exporters or states with newly
found resource wealth. Government spending
in these countries has kept pace with or even
exceeded export revenues, and their currencies
have appreciated much more strongly than
those with more experience of commodity
booms (figure O.8). With prices now sharply
lower, such countries may be encountering
additional fiscal pressures. In addition, oil ex-
porters with relatively low reserves are not
saving significantly more than those with high
reserves and, as a result, may be exacerbating
the competitiveness problems of their non-oil
sectors. That, in turn, could be creating a
future problem, because these countries, unlike
those with ample reserves, will have to rely on
their non-resource-based sectors to generate
most of the growth in coming years.


Simulations suggest that under these unfavor-
able circumstances, food crop prices could be as
much as 30 percent higher than in the baseline
scenario.


Commodity-producing countries are
managing the revenue windfall better than
they have in the past
Historically, countries whose economies are
heavily dependent on commodities exports
have tended to grow less quickly than those
with more diverse economies. This tendency
mainly reflects low GDP and underdevelop-
ment of their nonresource sectors rather than
the actual quantity of resources held by these
countries. Indeed, measured by per capita
value-added from resources, high-income
countries tend to be more resource rich than
developing countries, while their large nonre-
source sectors mean they are also less resource
dependent (figure O.6).


Resource dependence need not result in
slow growth. But to realize the potential of
resource wealth, governments need to avoid
following policies that exacerbate the tendency


10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 9




commodities, such as agricultural producers,
where the benefits of high prices are less con-
centrated. Encouragingly, much of the spend-
ing appears to be directed toward investment
goods, which should contribute to future
production potential. In a number of African
countries, however, investment spending has
been financed by heavy bank borrowing,
which may pose significant problems as loans
become due, now that commodity prices have
declined and access to credit has become
much more difficult.


High commodity prices pose challenges for
the poor, especially in consuming nations
For consuming nations, high commodity
prices pose a number of challenges. In the case
of heavily traded commodities such as oil,
sharp price hikes can pose serious balance of


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


10


Figure O.8 Exchange rates, inflation, and
government expenditures in new versus
established oil exporters, 2001–06
% change


Real exchange
rate with US$


Percentage
change in
CPI, 2008


Change in
government
expenditure/


GDP, 2001–07


Source: World Bank and IMF data.


Note: New producers are defined as countries dependent on oil
that began production after 1985 or were established as a country
after 1985, including Azerbaijan, Chad, Equatorial Guinea,
Kazakhstan, Sudan, and the Republic of Yemen (Turkmenistan
lacks data for inflation and the real exchange rate). The
established producers include Algeria, Angola, Republic of Congo,
Gabon, Islamic Republic of Iran, Libya, Nigeria, Oman, and
República Bolivariana de Venezuela. The real exchange rate with
the United States (rather than the trade-weighted real exchange
rate as in figure 3.5) is reported here to include sufficient countries
for a useful comparison between the two groups.


a. Real exchange rate with the U.S. dollar, where increase
indicates appreciation. Data for Equatorial Guinea are for
2001–04.
b. Percentage change in consumer price index in 2008.
c. Change in ratio of government expenditure to GDP from
2001 to 2007.


210


0


10


20


30


40


50


60


New producers


Established producers


Figure O.7 Primary commodity exporters are
exhibiting fewer signs of the behaviors
linked to the “resource curse”


Percentage change in the share of GDP


a. Government expenditures have increased by much less
than export revenues


26


24


22


0


2


4


6


8


1980s 2000s


Index


21.0


20.8


20.6


20.4


20.2


0.0


1996


Be
tte


r
W


o
rs


e


2006


Source: World Bank.


b. The currencies of commodity exporters have appreciated
modestly


c. Corruption in commodity exporting countries
has declined


Percentage change in trade-weighted real effective
exchange rate


Source: IMF data; World Bank staff calculations.


Note: Increase indicates appreciation.


Source: Kaufmann, Kraay, and Mastruzzi 2007; World Bank data.


Change in
exports/GDP


Change in government
expenditures/GDP


220


215


210


25


0


5


10


Non-oil exporters Oil exporters


1980s boom


Recent boom


Oil and mineral exporters


Agricultural exporters


Diversified exporters


In addition, spending from resource rev-
enues in the private sector remains high. This
is especially true for exporters of non-oil


10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 10




payment difficulties and increase the vulnera-
bility of net importers. In the case of food
commodities, which are mainly consumed in
the same country in which they are pro-
duced, the issue for most countries is one of a
transfer of wealth between producers and
consumers. That said, some countries are sig-
nificant net importers of food and have suf-
fered significant balance of payment impacts
from high food prices as well. Both fuel and
food prices have boosted inflation and cut into
real incomes in developing countries.


In general, economic policy should not re-
sist changes in relative prices but should seek
to assist adjustment to changing circum-
stances. However, the magnitude of the
changes over the past several years has been
unusually large with important implications
for inflation, balance of payments, and poverty
in developing countries. Moreover, because
high food prices can increase malnutrition
among the very poor, resulting in permanent
cognitive and physical damage, even a tempo-
rary but large hike in food prices demands a
prompt and well-targeted policy response.


At the global level, the cost of higher food
and fuel prices to consumers in developing
countries during 2008 is estimated to have
been about $680 billion. The price increases
had major macroeconomic effects. High oil
prices increased current account deficits in a
number of countries by as much as 5 percent
of their GDP. Both food and fuel price in-
creases have led to a sharp uptick in inflation.
In addition, by increasing costs, the food and
fuel increases have increased the number of
poor and the extent of their poverty. In gen-
eral, higher food prices have had a more pro-
nounced effect on poverty, because households
in poor countries spend 50 percent or more of
their income on food and only 10 percent on
fuel. Moreover, for very poor households, food
tends to claim an even higher share in expen-
ditures, and fuel a much lower share. Finally,
the poverty impacts are likely to be more sig-
nificant because the demand for food is more
inelastic than household demand for fuels, be-
cause the former can be replaced by biomass.


Not all foods prices have risen by as much as
the prices for rice, maize, and wheat, however.
Moreover, during 2007 and the first half of
2008, the dollar was depreciating so that local
currency prices rose by less than the dollar
prices. As a result, the real-local-currency in-
crease in the price of food actually consumed in
developing countries was much less than the
54 percent increase observed in internationally
traded and dollar-denominated food prices
(table O.1). Moreover, not all food consumed in
poor countries is traded and the share of non-
traded foods in total consumption varies across
regions. In Africa, for example, real food prices
rose by an average of 8.3 percent, compared
with 19.8 percent in the Middle East, which re-
lies much more heavily on imported foods.


Overall, the rise in food prices between 2005
and the beginning of 2008 is estimated to have
increased the share of the population of East
Asia, the Middle East, and South Asia living
in extreme poverty by 1 or more percentage
points. Impacts in Africa were less pronounced
because food prices rose by less on average and


O V E R V I E W


11


Table O.1 Food price hikes and consump-
tion shares vary by region


Food
Price share among


Region shock the poor


(percent)
Rural population
East Asia and Pacific 12.4 71.5
Europe and Central Asia 0.2 63.4
Latin America and the Caribbean 6.9 51.2
Middle East and North Africa 25.9 64.5
South Asia 5.0 65.3
Sub-Saharan Africa 9.6 68.0


Developing world 6.7 66.1


Urban Population
East Asia and Pacific 13.8 67.5
Europe and Central Asia 0.5 57.9
Latin America and the Caribbean 1.6 44.1
Middle East and North Africa 12.5 57.1
South Asia 4.8 64.4
Sub-Saharan Africa 4.9 53.0


Developing world 4.1 60.4


Source: World Bank.
Note: Price shocks differ between the rural and urban popu-
lations because of differing degrees of urbanization among
countries included in the aggregates.


10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 11




because a much larger share of the population
lives in rural areas. In general, rural dwellers
have been less seriously affected because, in ad-
dition to being consumers, many are producers
and benefit from higher revenues. The impact
on the urban poor was much higher, increasing
the incidence of poverty by more than 1.5 per-
centage points in East Asia, the Middle East,
South Asia, and Sub-Saharan Africa (table O.2).
Overall the number of extremely poor is esti-
mated to have increased by between 130 and
155 million, and the poverty deficit (the annual
cost of lifting the incomes of all of the poor to


the poverty line) increased by $38 billion, or 0.5
percent of developing-country GDP.


For the very poor, reducing consumption
from already very low levels, even for a short
period, can have important long-term conse-
quences. Already, higher food prices during
2008 may have increased the number of
children suffering permanent cognitive and
physical injury caused by malnutrition by
44 million. It is therefore critical that coun-
tries react to higher food prices by increasing
the assistance they make available to those
most at risk.


Most countries have reacted to the hike in
food and fuel prices by some combination of
increased government spending on existing
social safety net programs, be they subsidies,
conditional transfer systems, or food distribu-
tion schemes. Others have responded by seek-
ing to hold domestic prices down by reducing
taxes or instituting restrictions on exports.


Such programs have been relatively expen-
sive, increasing government expenditures by
as much as 2–4 percent of GDP. Moreover, in
many cases poor targeting means that much of
this spending does not benefit those most in
need. And, by interfering with market prices,
these programs often impede adjustment, re-
ducing producers’ incentives to increase out-
put and consumers’ incentives to conserve. As
such they likely exacerbated the extent of price
rises and extended their duration.


Going forward, policy makers need to
restructure their support so that it is better
targeted on the very poor. Doing so will help en-
sure that the next time food (or energy) prices
spike, assistance programs will be both more
affordable and more effective at delivering assis-
tance to those most in need. Of the options
available, targeted cash transfers tend to succeed
best because they have relatively low adminis-
trative requirements and minimize the diversion
of benefits toward less needy population groups.
Unfortunately, these programs may also exclude
the many poor who are either unable or unwill-
ing to meet the conditions attached to the pro-
gram, which are designed to dissuade all but the
most needy from participating. In-kind


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


12


Table O.2 Higher food prices have
increased both the incidence and severity
of poverty worldwide
January 2005–December 2007


Initial levels: Change in:


Poverty Income Poverty Income
Region headcount gap ratio headcount gap ratio


(percent) (percentage points)
Urban population
East Asia and Pacific 13.2 20.3 6.3 2.7
Europe and


Central Asia 2.5 8.7 0.0 0.2
Latin America


and the Caribbean 3.7 37.6 0.1 0.7
Middle East


and North Africa 2.7 17.8 2.4 5.7
South Asia 32.3 25.0 2.0 0.5
Sub-Saharan Africa 34.1 38.1 1.7 0.3


Developing world 15.3 27.1 2.9 0.5


Rural population
East Asia and Pacific 31.9 23.2 4.9 0.7
Europe and


Central Asia 8.2 6.6 0.0 0.0
Latin America


and the Caribbean 18.6 43.9 0.1 0.1
Middle East


and North Africa 15.4 22.9 0.7 0.9
South Asia 43.3 24.0 0.8 0.3
Sub-Saharan Africa 54.9 41.5 0.3 0.0


Developing world 37.1 28.2 2.1 0.1


Source: World Bank, using the Global Income Distribution
Dynamics model.
Note: The per capita poverty line equals 1.25 international
2005 dollars a day. The ratio of food in total consumption
among the poor is computed as described in De Hoyos and
Lessem (2008). East Asia excludes China, and the Middle
East comprises Jordan, Morocco, and the Republic of Yemen.
The income gap ratio expresses, as a percent of the poverty
line, how much the income of the average poor person is
lower than the poverty line.


10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 12




programs, such as school feeding and the distri-
bution of fortified weaning food for toddlers,
can be effective, especially in fiscally constrained
countries. Subsidies, even targeted ones, tend to
be much less efficient, with as little as one-fifth
of the money spent benefiting the poor. Public
works programs rarely provide sufficient cover-
age to meaningfully target poor families. What-
ever policies are adopted, it is critical that the
offsetting income support be clearly presented
as temporary and include phaseout strategies to
avoid creating an unnecessary longer-term fiscal
burden.


The role for international policy
Ultimately, given the scope of the costs in-
volved, neither individual governments nor in-
ternational agencies are in a position to offset
the costs of higher food and fuel prices en-
tirely. However, well-targeted programs are
much more affordable. For the poorest coun-
tries, these too may be beyond reach fiscally,
and in these cases, the international commu-
nity has a role.


Steps so far have concentrated on reallocat-
ing existing funds toward those most in need
and on strengthening both the financial and
infrastructural capacity of emergency food aid
agencies such as the World Food Programme
(WFP). Further steps that might be considered
include providing the WFP with a more stable
source of financing and affording it a line of
credit so that it is able to act quickly in in-
stances where food prices are unusually high.


Policy makers might also examine
prospects for improving the coordinated man-
agement of grain reserves so that they can be
more easily brought to the aid of those in
need. Steps might include the construction
of storage facilities in strategic parts of the
world and the creation of a management
system perhaps along the lines of that used
by the IEA for oil. Individual food-importing
and -exporting nations may wish to explore
the use of market-based future contracts as an


alternative to building stocks and restricting
exports. Such contracts can reduce both price
and quantity uncertainty by providing for
guaranteed delivery of fixed quantities of
grains at fixed prices. They can even be writ-
ten conditionally, providing an option to sell
or buy that can be exercised depending on
market conditions.


Trade reform will necessarily form part of
the solution as well. Steps are required to
sanction effectively countries that use export
restrictions as a mechanism to control domes-
tic prices. Not only do such restrictions
interfere with the domestic supply response,
they also tend to exacerbate the price hikes
and shortages in the rest of the global econ-
omy. Although a successful conclusion to the
World Trade Organization’s Doha Round of
multilateral trade negotiations might result in
higher prices in the short run, it would likely
prove beneficial to developing countries by
improving the competitiveness of their agri-
cultural sectors and reducing their reliance on
imported food.


References
De Hoyos, R., and R. Lessem. 2008. “Food Shares


in Consumption: New Evidence Using Engel
Curves for Developing Countries.” World Bank,
Washington, DC.


Grilli, Enzo R., and Maw Cheng Yang. 1988. “Primary
Commodity Prices, Manufactured Good Prices,
and the Terms of Trade of Developing Countries:
What the Long Run Shows.” World Bank Eco-
nomic Review 2: 1–47.


IEA (International Energy Agency). 2006. Energy
Technology Perspectives: Scenarios & Strategies
to 2050. Paris: OECD/IEA.


Kaufmann, D., A. Kraay, and M. Mastruzzi. 2007.
Governance Matters VI: Aggregate and Individ-
ual Governance Indicators for 1996–2006. World
Bank Policy Research Working Paper 4280,
Washington, DC.


World Bank. 2007. At Loggerheads: Agricultural
Expansion, Poverty Reduction, and Environment
in the Tropical Forests. Washington, DC: World
Bank.


O V E R V I E W


13


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10363_Pg1-14:10363_Pg1-14 11/29/08 6:56 AM Page 14




15


Prospects for the Global Economy
1


The stresses in the financial markets of theUnited States that first emerged in the
summer of 2007 transformed themselves into a
full-blown global financial crisis in the fall of
2008: credit markets froze; stock markets
crashed; and a sequence of insolvencies threat-
ened the entire international financial system.
Massive liquidity injections by central banks
and a variety of stopgap measures by govern-
ments proved inadequate to contain the crisis
at first.


The initially hesitant policy response has
become increasingly robust. The United States
government introduced a $700 billion rescue
package and has taken equity positions in nine
major banks and several large regional banks.
Various debt and deposit guarantees have also
been introduced. At the same time, European
governments have announced plans for equity
injections and purchases of bank assets worth
some $460 billion, along with up to almost
$2 trillion in guarantees of bank debt. At the
time of this writing, November 20, 2008, mar-
kets remain volatile despite the forcefulness of
these measures and signs that credit condi-
tions are improving somewhat in high-income
countries. Both private-sector and sovereign
interest rate spreads for developing countries
have spiked even higher, and a growing list of
countries have been forced to seek assistance
from the International Monetary Fund (IMF).


During the initial phases of this financial
crisis in 2007, the effects of the financial tur-
moil on developing countries were relatively


modest. However, as the crisis intensified in
2008 and especially since mid-September, risk
aversion (the absence of which had been the
hallmark of the preceding boom) has in-
creased, and capital flows to developing coun-
tries have seized up. As a result, the currencies
of a wide range of developing countries depre-
ciated sharply, and developing-market equity
prices have given up almost all of their gains
since the beginning of 2008. Initial public eq-
uity offerings have disappeared, and risk pre-
miums have increased to more than 700 basis
points on sovereign bonds and to more than
1,000 basis points on the debt of developing-
country firms. Very recent data on bank lend-
ing and foreign direct investment inflows are
not available, but indications are that these in-
flows have also declined, but less dramatically.


Virtually no country, developing or high-
income, has escaped the impact of the widening
crisis, although those countries with stronger
fundamentals going into the crisis have been
less affected. The deterioration in financing
conditions has been most severe in countries
with large current account deficits, and in
those that showed signs of overheating and
unsustainably rapid credit creation before the
financial crisis intensified. Of the 20 develop-
ing countries whose economies have reacted
most sharply to the deterioration in conditions
(as measured by exchange rate depreciation,
increase in spreads, and equity market de-
clines), 6 come from Europe and Central Asia,
and 8 from Latin America and the Caribbean.


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Much tighter credit conditions will see
investment and GDP growth slow sharply
In this climate, growth prospects for both
high-income and developing countries have de-
teriorated substantially, and the possibility of a
serious global recession cannot be ruled out.


Even if the waves of panic that have inun-
dated credit and equity markets across the
world are soon brought under control, the
crisis is likely to cause a sharp slowdown in
activity stemming from the deleveraging in
financial markets that has already occurred
and that is expected to continue. In the baseline
forecast presented in this chapter, much tighter
credit conditions, weaker capital inflows to
middle-income countries, and a sharp reduc-
tion in global import demand are expected to
be the main factors driving the slowdown in
developing countries. Import demand is pro-
jected to decline by 3.4 percent in high-income
countries during 2009, while net private debt
and equity flows to developing countries are
projected to decline from $1 trillion in 2007
to about $530 billion in 2009, or from 7.7 to
3 percent of developing-country GDP. As a re-
sult, investment growth in developing countries
is projected to slow dramatically, rising only
3.5 percent in middle-income countries, com-
pared with a 13.2 percent increase in 2007.


A pronounced recession is believed to have
begun in mid-2008 in Europe, Japan, and most
recently, the United States. This recession is pro-
jected to extend into 2009, yielding a decline in
high-income country GDP of 0.1 percent that
year (table 1.1). In developing countries,
growth is projected to slow to 4.5 percent in
2009, down from 7.9 and 6.3 percent in 2007
and 2008. Overall, global GDP is projected to
expand only 0.9 percent in 2009 (figure 1.1)—
below the rate recorded in 2001 and 1991 and
indeed, the weakest since records became
available beginning in 1970.


Because low-income countries have less ac-
cess to international capital markets, the slow-
down will affect them mainly through indirect
mechanisms, including reduced demand for
their exports, lower commodity prices, and
reduced remittance inflows. International trade


is projected to decelerate sharply, with global
export volumes falling by 2.1 percent in
2009—the first time they have declined since
1982 and eclipsing the 1.9 percent falloff that
occurred in 1975. Export opportunities for
developing countries will fade rapidly because
of the recession in high-income countries and
because export credits are drying up and ex-
port insurance has become more expensive.


Slower growth in high-income countries is
estimated to have reduced remittance flows
into developing countries from 2 to 1.8 per-
cent of recipient country GDP between 2007
and 2008. At the country level, the extent of
further slowdown will depend critically on ex-
change rate developments, with recent swings
in bilateral exchange rates dwarfing the ex-
pected changes in remittances denominated in
host-country currencies.


The global growth recession is projected to
cause both commodity prices and inflation to
ease further, with oil prices averaging about
$75 a barrel (bbl) in 2009, and food and metal
prices projected to decline by about 23 and
26 percent, respectively, compared with their
average levels in 2008. Nevertheless, com-
modity prices will remain well above the very
low levels of the 1990s.


Lower commodity prices should reduce the
burden on some segments of the poor (notably
urban dwellers), whose purchasing power has
declined because of high food and fuel prices
(see chapter 3). Lower prices should also help
dampen headline inflation. Indeed, the rapid
rise of food and energy prices over the course
of 2007 and the first half of 2008, coupled with
tight capacity in many countries (following
years of very fast growth fueled by ample liq-
uidity) caused headline and core inflation to
pick up throughout the world. Headline infla-
tion increased by 5 percentage points or more in
most developing countries, and more than half
of developing countries had an inflation rate in
excess of 10 percent by the middle of 2008.


This financial crisis and the expected abrupt
slowing of global growth comes at a moment
when developing countries considered as a
whole are more vulnerable than they have been


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


16


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P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


17


Table 1.1 The global outlook in summary
(percentage change from previous year, except for interest rates and oil prices)
Indicator 2006 2007 2008* 2009† 2010†


Global conditions
World trade volume 9.8 7.5 6.2 2.1 6.0
Consumer prices


G-7 countriesa,b 2.2 1.7 3.3 1.6 1.8
United States 3.3 2.6 4.5 2.5 2.8


Commodity prices (US$)
Non-oil commodities 29.1 17.0 22.4 23.2 4.3


Oil price (US$ per barrel)c 64.3 71.1 101.2 74.5 75.8
Oil price (percent change) 20.4 10.6 42.3 26.4 1.8


Manufactures unit export valued 1.6 5.5 9.0 2.1 1.3
Interest rates


$ LIBOR, 6-month (percent) 5.2 5.3 3.3 1.9 2.5
€ EURIBOR, 6-month (percent) 3.1 4.3 4.9 3.8 4.2


Real GDP growthe


World 4.0 3.7 2.5 0.9 3.0
Memo item: World (PPP weights)f 5.0 4.9 3.6 1.9 3.9
High-income countries 3.0 2.6 1.3 0.1 2.0


OECD countries 2.9 2.4 1.2 0.3 1.9
Euro Area 2.9 2.6 1.1 0.6 1.6
Japan 2.4 2.1 0.5 0.1 1.5
United States 2.8 2.0 1.4 0.5 2.0
Non-OECD countries 5.5 5.6 4.3 3.1 5.3


Developing countries 7.7 7.9 6.3 4.5 6.1
East Asia and the Pacific 10.1 10.5 8.5 6.7 7.8


China 11.6 11.9 9.4 7.5 8.5
Indonesia 5.5 6.3 6.0 4.4 6.0
Thailand 5.1 4.8 4.6 3.6 5.0


Europe and Central Asia 7.5 7.1 5.3 2.7 5.0
Poland 6.2 6.6 5.4 4.0 4.7
Russian Federation 7.4 8.1 6.0 3.0 5.0
Turkey 6.9 4.6 3.0 1.7 4.9


Latin America and the Caribbean 5.6 5.7 4.4 2.1 4.0
Argentina 8.5 8.7 6.6 1.5 4.0
Brazil 3.8 5.4 5.2 2.8 4.6
Mexico 4.9 3.2 2.0 1.1 3.1


Middle East and North Africa 5.3 5.8 5.8 3.9 5.2
Algeria 1.8 3.1 4.9 3.8 5.4
Egypt, Arab Rep. of 6.8 7.1 7.2 4.5 6.0
Iran, Islamic Rep. of 5.9 7.8 5.6 3.5 4.2


South Asia 9.0 8.4 6.3 5.4 7.2
Bangladesh 6.6 6.4 6.2 5.7 6.2
India 9.7 9.0 6.3 5.8 7.7
Pakistan 6.2 6.0 6.0 3.0 4.5


Sub-Saharan Africa 5.9 6.3 5.4 4.6 5.8
Kenya 6.1 7.1 3.3 3.7 5.9
Nigeria 5.2 6.5 6.3 5.8 6.2
South Africa 5.4 5.1 3.4 2.8 4.4


Memo items
Developing countries


excluding transition countries 7.8 7.9 6.3 4.6 6.2
excluding China and India 6.0 6.1 5.0 2.9 4.7


Source: World Bank.
Note: PPP purchasing power parity; * estimate; † forecast.
a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
b. In local currency, aggregated using 2000 GDP weights.
c. Simple average of Dubai, Brent, and West Texas Intermediate.
d. Unit value index of manufactured exports from major economies, expressed in U.S. dollars.
e. GDP in 2000 constant U.S. dollars, 2000 prices, and market exchange rates.
f. GDP measured at 2000 PPP weights.


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in the recent past. Higher commodity prices
have widened current account deficits of many
oil-importing countries to worrisome levels
(they exceed 10 percent of GDP in about one-
third of developing countries), and after having
increased substantially, the international re-
serves of oil-exporting developing countries
are now declining as a share of their imports.
Moreover, inflation is high, and fiscal positions
have deteriorated both for cyclical reasons and
because government spending has increased to
alleviate some of the burden of higher com-
modity prices.


Although the global recession is likely to be
protracted, some elements of an eventual re-
covery can already be discerned. These include
early movement toward stabilization in the
housing sector in the United States; continued
progress on debt workouts and a strengthen-
ing of balance sheets among both banks and
households; a gradual easing of credit condi-
tions as government rescue packages take hold
and investors begin to return to heavily dis-
counted equity markets; increases in real in-
comes (stemming from lower food and fuel
prices) among individuals with relatively high
marginal propensities to consume; and in-
creased space for fiscal and monetary policies
as inflationary pressures ease and government
outlays on food and fuel subsidies decline in
tandem.


Prudent and vigilant policies are key
as uncertainty continues to cloud the
outlook
Although this sober outlook represents a
likely outcome, the situation remains unsta-
ble, and a wide range of outcomes are possi-
ble, including a scenario where the rebound
of growth in 2010 is weaker, held back by
continuing banking sector restructuring, and
negative wealth effects resulting from lower
housing and stock market prices.


An even sharper recession is also possible.
If the freeze in credit markets does not thaw as
anticipated in the baseline, the consequences
for developing countries could be cata-
strophic. Financing conditions would deterio-
rate rapidly, and apparently sound domestic
financial sectors could find themselves unable
to borrow or unwilling to lend—in both inter-
national and domestic markets. Such a sce-
nario would be characterized by a long and
profound recession in high-income countries
and substantial disruption and turmoil, in-
cluding bank failures and currency crises, in a
wide range of developing countries. Sharply
negative growth in a number of developing
countries with all of the attendant repercus-
sions, including increased poverty and unem-
ployment, would be inevitable.


Although it is a receding concern, high infla-
tion in developing countries remains a problem,
especially if the impact from the current crisis
on developing-country investment demand is
less pronounced, and the stimulus provided by
various rescue and fiscal packages in high-
income and developing countries feeds a rapid
expansion in demand. Under such a scenario,
global growth would still slow in 2009, which
would tend to dampen inflationary pressures
initially, but growth could be expected to snap
back much more sharply in 2010. Countries
that now have large current account deficits
and high inflation could suffer from a renewed
overheating of their economies. Policies would
have to be very prudent in these circumstances,
because the currencies of these countries are
likely to remain sensitive to changing market
perceptions and increased risk aversion.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


18


22


0


2


4


6


8


1980 1984 1988 1992 1996 2000 2004 2008


Source: World Bank.


Real GDP, percentage change


Figure 1.1 GDP growth


Asian
crisis


Dot-com
crisis Forecast


Developing countries, excluding China and India
Developing countries


High-income countries


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 18




The challenge for policy makers is not only
to prevent an escalation of the crisis and to mit-
igate the downturn but also to ensure a good
starting position once the rebound sets in. For
developing countries, this means responding
rapidly and forcefully to signs of weakness in
domestic banking sectors, including resorting
to international assistance where necessary. It
also means pursuing a prudent countercyclical
policy, relying on automatic stabilizers, social
safety nets, and infrastructure investment that
addresses bottlenecks that have become bind-
ing constraints on long-term sustainable
growth in many countries.


In the current circumstances of heightened
risk aversion and investor skittishness, policy
makers need to be especially wary of taking
on excessive levels of debt or creating the con-
ditions for an inflationary bubble by reacting
too aggressively to the global slowdown.
Although it is important for policy makers to
react quickly to emerging problems, it is also
essential that steps and conditions attached to
assistance be well focused on overcoming
some of the fundamental sources of weak-
ness. Otherwise there is a risk that govern-
ments lose the support of markets and tax-
payers in their efforts to limit the extent of
near-term disruptions.


Financial markets


The deterioration in financial
conditions accelerated markedly
in September 2008


The protracted turmoil that has plaguedglobal financial and credit markets since
mid-2007 escalated in September 2008, with
the sudden collapse of major financial insti-
tutions, first in the United States and subse-
quently in Europe. The crisis has spread
rapidly to emerging markets and has raised
fears of systemic risk to the international
financial system. Growing concerns about
counterparty risk have disrupted credit mar-
kets, especially the interbank and commercial
paper markets.


Earlier in the year major banks were still
able to attract new equity investors in an effort
to rebuild their capital bases, which were
eroded by significant losses stemming from
large write-downs on mortgage-backed securi-
ties and other assets. However, investor confi-
dence was shaken by the March collapse of
Bear Sterns, the seventh largest securities firm
in the world in total assets. In September and
October, authorities in the United States and
Europe had to respond with extraordinary
steps, including large injections of liquidity; co-
ordinated reductions in policy interest rates;
the takeover of major financial institutions; en-
hancements in deposit guarantees; and plans to
purchase impaired financial assets (such as the
U.S. Troubled Asset Repurchase Program, or
TARP), to take equity positions in commercial
banks, and to intervene in the commercial
paper markets (box 1.1).


The turmoil has had a dramatic
impact on emerging market assets
Although financial institutions in developing
countries are believed to have limited direct
exposure to U.S. subprime assets and related
securities, the financial turmoil has affected
virtually all emerging-market economies as
high-income-country banks and investment
funds withdrew from emerging markets and
converted a broad range of risky assets into
more liquid holdings. The rapid increase in
risk aversion has also led to a forceful unwind-
ing of the carry trade. The sell-off in risky as-
sets carried a dramatic impact on equity prices,
bond spreads, and currencies in virtually all
emerging-market economies and has also con-
tributed to tighter domestic credit conditions in
larger countries, including India, the Russian
Federation, and Brazil, and smaller countries,
including Thailand and the Philippines. These
developments were reinforced as local in-
vestors also moved out of equity markets, and
more generally, out of investments denomi-
nated in local currencies.


Countries with large current account
deficits, and therefore most dependent on for-
eign capital, were hit hardest by the substantial


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


19


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 19




G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


20


Financial stress escalated in the United States andEurope over the course of 2008, beginning with
the takeover of Bear Stearns by JP Morgan in March,
and culminating in September when several major
institutions came under severe distress.


Week of September 7
The U.S. government seized control of Fannie


Mae and Freddie Mac, institutions that own or guar-
antee about one-half of all mortgage assets in the
United States.


Week of September 14
The U.S. investment bank Lehman Brothers filed


for bankruptcy and Merrill Lynch was taken over by
the Bank of America for $50 billion.


The U.S. government seized control of American
International Group Inc., providing an $85 billion
emergency loan and taking a 79.9 percent equity
stake in the firm.


Britain’s largest mortgage lender, HBOS, agreed to
be purchased by Lloyds TSB in an $18.9 billion deal.


The Russian government pledged to provide
$120 billion to support financial markets and banks
(the amount was increased by $50 billion on
October 7).


U.S. Treasury Secretary Henry Paulson introduced
the Troubled Asset Relief Program, a key element of
which enables the government to buy up to $700 bil-
lion of mortgage-backed securities. An amended
version was signed into law on October 4th.


Week of September 21
Goldman-Sachs and Morgan Stanley became


bank holding companies.
The U.K. government nationalized the mortgage


bank Bradford and Bingley (a loan portfolio of
$90 billion).


Week of September 28
Washington Mutual became the largest bank


failure in U.S. history, with assets valued at
$328 billion.


The Belgian, Dutch, and Luxembourg govern-
ments each took a 49.9 percent equity stake in the
operations of the banking and insurance company
Fortis within their respective borders, each injecting
$16.4 billion in capital. One week later, the Dutch
government took full control of the company’s
operations in the Netherlands. Fortis’ operations in


Box 1.1 Chronology of recent developments in the
financial crisis


the BENELUX countries were later sold to the
French commercial bank, BNP Paribas.


The German government, together with commer-
cial banks and federal regulators, provided $50 bil-
lion in credit guarantees to Hypo Real Estate.


Citigroup agreed to buy the banking operations
of Wachovia.


France, Belgium, and Luxembourg injected
$9.2 billion into the French-Belgian bank Dexia.


The Icelandic government took a 75 percent equity
stake in Glitnir, the country’s third-largest bank.


The Swedish central bank announced that it
would lend up to $700 million to the Swedish unit
of the Icelandic bank Kaupthing.


Ireland announced unlimited guarantees on retail,
commercial, and interbank bank deposits. Similar
measures were adopted in Austria, Denmark,
Germany, Greece, Iceland, Italy, and Portugal.
Sweden, the United Kingdom, and the United States
raised limits on deposit guarantees. On October 3,
European finance ministers agreed to raise the mini-
mum guarantee on bank deposits to €50,000 across
all EU member states.


Week of October 5
The Icelandic government loaned $683 million to


Kaupthing, and seized control of Landsbanki, and
sought a $5.5 billion loan from Russia.


The Spanish government established a $40 to
$68 billion emergency fund to purchase assets held
by Spanish banks.


The U.S. Federal Reserve intervened in the
commercial paper market for the first time since the
Great Depression.


The British government made available $87 bil-
lion in emergency loans to the banking system and
offered to purchase capital in eight of the largest
banks. The package includes guarantees of £250 mil-
lion for new debt and the same for liquidity
provisions.


The central banks of the United States, the Euro
Zone, Canada, Sweden, and Switzerland each cut
their benchmark rates by half a percentage point in
an unprecedented coordinated effort. Separately,
China’s central bank lowered its key one-year lend-
ing rate by 27 basis points, the second reduction in
three weeks.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 20




tightening of credit conditions in international
markets. One-third of developing countries are
running current account deficits in excess of
10 percent of GDP, many of which may be
forced to restrict domestic demand severely as
capital inflows dry up. During 2007, for ex-
ample, several countries were the recipients of
vigorous increases in private debt flows that
fueled credit growth to the domestic private
sector and intensified inflation pressures. A
year later private debt flows to the banking
sector declined dramatically in a number of
cases: by $13.2 billion in Kazakhstan, $6.6 bil-
lion in Russia, $3.7 billion in South Africa,


$3.1 billion in Turkey, and $2.1 billion in
Ukraine (comparing January through Septem-
ber 2008 with the same period in 2007).


All middle-income countries, even with
current account surplus positions, have come
to be substantially affected by the financial
crisis. A Revealed Vulnerability Index indi-
cates the extent to which financial conditions
for developing countries have deteriorated
since September 15, 2008 (upon the failure of
Lehman Brothers). The vulnerability index
averages the standardized depreciation of cur-
rencies, domestic equity market losses, and in-
creases in risk premiums, as well as the decline


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


21


The Belarusian authorities requested financial as-
sistance from the IMF under a program that could
be supported by a Stand-By Arrangement.


The Pakistani authorities requested discussions
with the IMF on an economic program supported by
financial assistance from the IMF.


Week of October 26
IMF staff agreed with the Hungarian and Ukrain-


ian authorities’ economic programs supporting loans
of $15.7 and $16.7 billion, respectively.


The European Union stood ready to provide a
loan of $8.1 billion to Hungary and the World Bank
agreed to provide $1.3 billion.


The IMF announced the Short-Term Liquidity
Facility designed to channel funds quickly to emerg-
ing markets that have a strong track record, but that
need rapid help during the current financial crisis to
get them through temporary liquidity problems.


Week of November 9
The Leaders of the Group of Twenty agreed to a


plan of action to restore global growth and achieve
needed reforms of the world’s financial systems.


IMF staff and Pakistani authorities reached agree-
ment on an economic program supported by a $7.6
billion loan. The Executive Board of the IMF was
expected to discuss the program shortly under the
IMF’s Emergency Financing Mechanism procedures.


Week of November 16
IMF staff and Serbian authorities agreed on an


economic program supported by a $0.5 billion loan.


The Icelandic government placed Glitnir into re-
ceivership, seized control of Kaupthing Bank, and
abandoned its attempt to peg the krona at 131 per
euro, established one day earlier, after it touched 340
against the euro.


California, the most populous U.S. state, asked
federal authorities for a $7 billion emergency loan as
it was unable to obtain financing in the wake of the
bankruptcy of Lehman Brothers.


The British government announced a $685 billion
plan to restore confidence in financial institutions,
which included insuring up to $438 billion in new
debt issued by banks, along with providing as much
as $88 billion in equity capital.


The National Bank of Ukraine seized control of
Prominvestbank, the country’s sixth-largest bank.


Week of October 12
European governments announced financing


packages totaling over $2.5 trillion. The packages in-
clude recapitalizing the banking sectors, credit guar-
antees on interbank lending, and direct loans.


The British government injected $60 billion in eq-
uity capital into the country’s three largest banks.


The United States announced that it would com-
mit $250 billion of the $700 billion rescue package
to recapitalize the banking sector.


Week of October 19
The IMF agreed with Iceland on an economic


recovery program supported by a two-year loan
of $2.1 billion.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 21




in gross capital flows to a country over the
preceding 12 months. The index shows that
virtually all middle-income countries are expe-
riencing financial stress.


Emerging-market equity prices—as cap-
tured by the Morgan-Stanley Composite
Index (MSCI)—tumbled by over 60 percent
(in dollar terms) from their peak of October
2007, bringing prices back to levels attained at
the beginning of 2005 (figure 1.2).1 The mas-
sive correction in equity prices was wide-
spread across emerging market economies,
with the largest declines found in a number of
European and Central Asian economies—
Ukraine (80 percent), Romania (75 percent),
Bulgaria (75 percent), and the Russian Feder-
ation (73 percent). Other large emerging mar-
ket economies, including Brazil, China, and
India, experienced corrections of over 60 per-
cent. Despite the declines of the past year, eq-
uity prices in emerging markets remain above
those in mature markets from a longer-term
perspective, albeit characterized by much
higher volatility.


The selloff in emerging market assets trig-
gered a marked depreciation of exchange rates
in a large number of countries, reversing much
of the appreciation of the past two years. For
example, the Brazilian real dropped by 40 per-
cent against the dollar (20 percent against the
euro) from early August to mid-November
2008, but the currency stands only 8 percent
below its January 2007 dollar value. The


South African rand depreciated by nearly 60
percent against the dollar (38 percent against
the euro) from late October 2007 to mid-
November 2008. Similarly, the Turkish lira
depreciated by over 40 percent against the
dollar (20 percent vis-à-vis the euro) from late
October 2007 to mid-November 2008, but
the currency has appreciated by 6 percent in
real effective terms between January 2007 and
October 2008.


The banking crisis that erupted in September
2008 is restricting credit to developing coun-
tries, and in particular to the least creditworthy
borrowers. Sovereign bond spreads widened to
a peak of 1,100 basis points in late October
2008 from 330 points in late August—well
above the record 150 basis points registered in
June 2007—before recovering to just over 700
basis points by mid-November. At that time,
sovereign bond spreads exceeded the “dis-
tressed debt” threshold of 1,000 basis points in
14 of 38 emerging market economies currently
part of JPMorgan’s EMBI Global Index.
Corporate bond spreads jumped by still more
than sovereign spreads (figure 1.3). Spreads on
risky non-investment grade (BB-rated) emerg-
ing market corporate bonds widened to 1,750
basis points in mid-November, up more than
1,450 points since mid-2007.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


22


50


100


150


200


250


Source: Morgan-Stanley, Standard & Poor’s.


MSCI equity price indexes (January 2005 5100)


Figure 1.2 Emerging market equities are hit
hard as turbulence evolves to crisis


Euro Area


United States Oct. 2007


Emerging markets


Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


0
Jan.
2007


May
2007


Sep.
2007


Jan.
2008


May
2008


Sep.
2008


200


400


600


Corporate
CEMBI composite


Sovereign
EMBIG composite


800


1000


1200


Source: JPMorgan-Chase.


Note: CEMBI 5 Corporate Emerging Markets Bond Index;
EMBIG 5 Emerging Markets Bond Index Global.


Spreads in basis points


Figure 1.3 Emerging-market bond spreads
widen, especially for corporates


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 22




The rise in spreads was only partially offset
by a 1.3 percentage point decline in the bench-
mark yield on 10-year U.S. Treasury notes be-
tween June 2007 and November 2008, so the
yield on dollar-denominated sovereign bonds
issued by emerging markets reached 10.5 per-
cent, the highest in four years.


Private capital flows expected to
continue decline
Even before the intensification of the financial
crisis, tighter credit conditions were curtailing
gross private debt and equity flows to devel-
oping countries (figure 1.4). Cross-border syn-
dicated bank loan commitments declined to
$315 billion over the 12-months ending
October 2008, down from a record $400 bil-
lion a year earlier (but still above levels
recorded over 2005–06). Bond issuance by de-
veloping countries decreased to $72 billion
over the year to October, down from a record
high of just over $170 billion at mid-2007.
Corporate bond issuance declined sharply,
with large falloffs in South Africa (by $15.6
billion), India ($12.8 billion), and Russia
($9.4 billion). Indeed, non-investment-grade
bonds by corporations located in emerging
markets accounted for about 40 percent of
total issuance from January to October 2008,
compared with 60 percent over 2005–06. And
equity issuance plummeted along with falling
equity prices to total $90 billion in the period,


down from a record high of $200 billion
achieved at the start of 2008.


Even assuming a restoration of market con-
fidence and a thawing of credit markets and
capital movements, overall credit conditions
for emerging markets will remain substan-
tially tighter than in the recent past. As a con-
sequence, net private debt and equity flows to
developing countries are anticipated to decline
from the record-high $1.03 trillion (7.6 per-
cent of developing-country GDP) set in 2007
to about $530 billion (3 percent of GDP) in
2009. Although net foreign direct investment
should be moderately more resistant to the
downturn (as in past episodes), tighter credit
may cause high-income firms to reduce their
foreign direct investment by much more than
they did during earlier financial crises, which
were centered in developing countries.


Tightening of credit sharply reduces
domestic growth prospects
Before the financial turmoil developed into a
crisis of global proportions, developing coun-
tries were affected mainly by slowing demand in
high-income countries through the export chan-
nel. Many developing countries had shown
strong resilience in the face of the gradually de-
teriorating external environment, because their
economies were supported by strong investment
growth and shielded by large amounts of inter-
national reserves. This situation has changed
dramatically since September 2008.


Unlike gradual adjustments in markets for
goods and services, adjustments in financial
markets come fast and suddenly, and they
often tend to “overshoot.” More importantly,
the escalation of the crisis directly affects the
engine for domestic growth in many develop-
ing economies, because obtaining finance for
capital spending has become abruptly more
difficult. Moreover, the crisis is placing strong
pressure on foreign exchange reserves and, at
the same time, can reveal dangerous currency
mismatches in private sector balance sheets.


During the global boom of the past five
years, local banks and private companies
whose local currencies were appreciating


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


23


0


100


Jan.
2004


Jan.
2005


200


300


400 Bank loan
commitments


Source: Dealogic Analytics.


US$ billions


Figure 1.4 Private debt and equity flows
decline by a third in 2008


Bond
issuance


Equity
issuance


Jan.
2006


Jan.
2007


Jan.
2008


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 23




found it attractive to borrow abroad in
dollars. With the sudden turnaround in cur-
rency movements, the currency mismatch on
private sector balance sheets has likely led to
substantial losses across firms and banks and
even for households. To the extent that this
development results in loan defaults, it may
strain domestic banking systems and place
pressure on banks to find alternative sources
of funding at a time when global financing
conditions have deteriorated markedly. Stress
induced by currency movements thus carries
the potential to further degrade prospects for
investment spending in developing countries.


Outlook for high-income
OECD countries


The intensification of the financial crisis inthe United States, and its widening to
major European countries in the autumn of
2008, is expected to exact a significant toll on
economic activity across the high-income
countries belonging to the Organisation for
Economic Co-operation and Development
(OECD). Even if confidence in global credit
markets is restored quickly, reductions in the
finance available for firms and consumers,
coupled with a slowdown in developing-
country import demand, have set the stage for
a recession in the United States, Europe, and
Japan beginning in the second half of 2008 and
lasting into 2009.


A movement to joint recession across key
OECD countries
Through the first quarter of 2008, the slow-
down among the OECD countries was fairly
moderate (although industrial production
stagnated in the quarter): exports benefited
from strong import demand from developing
countries and from oil exporters, while falling
imports served to boost the contribution of
net trade to GDP growth. But GDP fell to
0.3 percent growth (at an annual rate) in the
second quarter for the key advanced
economies, down from 2.4 percent in 2007;
and as GDP growth moved to decline across


the United States, Europe, and Japan during
the third quarter, OECD growth dropped to
0.6 percent.


Industrial production slipped to negative
ground across all major OECD economies in
both the second and third quarters of the year,
as fading overseas demand combined with a
lack of domestic orders tied to sluggish condi-
tions in housing and autos in a number of
countries (table 1.2, first and second panels).
Growth of export volumes dropped from 14.6
percent in 2007 to 2.5 percent during the third
quarter (saar), as intra-OECD trade (especially
within Europe) softened at the same time as
developing-country demand slowed.


During the second quarter, conditions in
Europe and Japan deteriorated sharply.
Japan’s GDP declined at a steep 3.7 percent
seasonally adjusted annualized rate (saar), and
Euro Area GDP fell 0.7 percent (figure 1.5 and
table 1.2, first panel). A falloff in household
spending tied to the effects of much higher in-
flation, a decline in investment, and a dra-
matic shift in the growth contribution of trade
all contributed to the turnaround. In Europe,
increased sluggishness in export markets and
the long bout of euro appreciation pressured
exports and imports into negative territory in
the second quarter, with contributions to over-
all growth slipping to nil from 1.4 points in the
final quarter of 2007.


In the United States, conversely, GDP
picked up 2.8 percent (saar) in the second
quarter, as fiscal stimulus and looser monetary
policy boosted consumption spending. More-
over, the pace of decline in residential invest-
ment slackened, while contributions from
trade—still benefiting from the weak dollar—
increased to a large 1.6 percentage points of
growth (figure 1.6). U.S. domestic demand has
been depressed since the final quarter of 2006,
as a rise in domestic savings helped to unwind
the global imbalances that were of such
concern a couple of years ago. As financial
dislocations heightened in the third quarter,
including unprecedented declines in equity mar-
kets in Europe, Japan, and the United States,
consumer spending came under increasing


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


24


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 24




P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


25


Figure 1.5 Change in GDP in the United
States, Europe, and Japan
GDP growth (percentage change)


24


22


0


2


4


6


Source: World Bank, national statistical agencies.


JapanGermanyEuro AreaUnited States


Q4
,


20
07


Q1
,


20
08 Q


2,
20


08
Q3


,
20


08
Table 1.2 High-income OECD countries: growth and related indicators


Seasonally adjusted
Growth year-over-year annualized growth Growth year-over-year


Indicator, country 2006 2007 Q108 Q208 Q308 H108 Q308


GDP growth (percent)
High-income OECD 2.9 2.4 1.5 0.3 0.6 1.9 0.5


United States 2.8 2.0 0.9 2.8 0.5 2.3 0.7
Japan 2.4 2.1 2.5 3.7 0.4 1.0 0.0
Euro Area 3.0 2.6 2.6 0.7 0.8 1.7 0.3


Germany 3.2 2.6 5.7 1.7 2.1 2.2 0.8
France 2.4 2.1 1.6 1.1 0.6 1.6 0.6


United Kingdom 2.8 3.0 1.1 0.0 2.0 1.9 0.3


Industrial production
High-income OECD 2.9 2.4 0.1 3.2 3.8 1.4 2.2


United States 2.2 1.7 0.4 3.2 5.9 1.0 4.5
Japan 4.1 2.9 1.7 3.5 4.3 1.8 1.9
Euro Area 3.4 2.8 1.3 4.5 2.6 1.2 1.8


Germany 5.9 6.1 4.9 3.2 4.7 4.2 2.3
France 0.9 1.2 0.1 6.1 2.6 0.7 1.9
United Kingdom 0.7 0.4 1.7 2.9 5.8 0.2 3.0


Consumer pricesa


High-income OECD 2.3 2.0 3.1 3.2 4.0 3.2 4.0
United States 3.2 2.9 4.3 4.0 4.9 4.2 4.9
Japan 0.3 0.1 0.7 1.2 2.1 1.0 2.1
Euro Area 1.9 2.3 3.3 3.5 3.9 3.4 3.9


Germany 1.7 2.3 2.8 3.1 2.9 3.0 2.9
France 1.7 1.5 2.8 3.2 3.0 3.0 3.0


United Kingdom 2.3 2.3 2.2 2.4 5.0 2.3 5.0


Export volumes
High-income OECD 13.9 14.6 9.2 2.8 2.5 6.7 4.8


United States 10.5 6.9 5.3 14.7 21.9 9.8 11.2
Japan 8.1 5.9 4.0 2.1 12.9 7.1 1.6
Germany 13.0 6.2 11.0 0.4 5.9 6.4 3.9
France 9.9 3.7 32.6 14.6 0.1 5.1 4.2
United Kingdom 11.7 10.4 0.7 1.3 4.2 0.8 0.2


Source: National statistical agencies through Haver Analytics and Thomson/Datastream.
Note: CPI inflation for high-income OECD countries is GDP weighted.
a. Year-over-year growth rates.


0


2


4


6


Figure 1.6 The contribution of U.S. domestic
demand to GDP growth


Source: U.S. Department of Commerce; World Bank calculations.


Percentage points (4-quarter moving average)


Q1
2000


Q1
2001


Q1
2002


Q1
2003


Q1
2004


Q1
2005


Q1
2006


Q1
2007


Q1
2008


Contribution of
domestic demand


U.S. GDP


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 25




pressure (figure 1.7).2 And with export per-
formance for OECD economies fading on the
back of sputtering global demand, the Euro
Area and Japan fell into technical recession in
the quarter, while growth in the United States
reverted to decline.


Financial crisis places outlook under
exceptional uncertainty
Given the dramatic developments over Sep-
tember to November 2008, the depth of the
coming recession is difficult to gauge. Should
credit markets remain frozen and asset prices
continue to fall, then the decline in output
over the next year could be extreme. However,
the extraordinary measures now being taken
by fiscal and monetary authorities are ex-
pected to eventually restore confidence so that
banks will no longer hoard cash, and busi-
nesses can obtain the finance essential for nor-
mal operations. Nevertheless, the outlook for
OECD countries remains grim. A common
element is a falloff in domestic demand—
increasingly deep in business capital spending—
no longer offset by support from net trade
because of a coincident marked slowdown in
growth among the developing countries.


With U.S. private consumption dropping an
unprecedented 3.1 percent in the quarter, the


decline in GDP would have been much more
severe save for the contribution of net trade.
Notwithstanding that GDP is projected to de-
cline more sharply in the fourth quarter of
2008, growth for the year is expected to regis-
ter 1.4 percent, because of the strong contribu-
tions of trade in the first half of the year. An
abrupt decline in investment and a 1 percent
falloff in consumer spending are expected to
cause GDP to fall in both the first and second
quarters of 2009, with a shallow recovery be-
ginning in the second half of the year. GDP is
projected to decline by 0.5 percent for all of
2009 but to recover to a still below-par 2.0 per-
cent in 2010 (figure 1.8).


Financial conditions in the Euro Area are
now also perilous. After having fallen 0.7 per-
cent in the second quarter (saar), GDP
dropped 0.8 percent during the third quarter
and is expected to register modest declines in
coming quarters before picking up steam to-
ward the end of 2009. Growth is expected to
register a weak 1.1 percent increase for 2008
as a whole and a 0.6 percent decline in 2009,
before strengthening in 2010 to a still below-
trend advance of 1.6 percent. The depth of re-
cession in Europe should be comparable to
that in the United States, in part because cor-
porate finance in Europe is more reliant on the
banking sector but also because lower com-
modity prices will dampen import demand in


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


26


Figure 1.7 U.S. household wealth falls
sharply in the last quarters


22,000


21,500


21,000


2500


0


500


1,000


1,500


2,000


Source: Federal Reserve.


US$ billions


Q2
,


20
07


Q3
,


20
07


Q4
,


20
07


Q1
,


20
08


Q2
,


20
08


Total
assets


Household
real estate


Financial
assets


Equities,
mutual funds


21


0


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


1


2


3


4


Source: National statistical agencies, World Bank.


Real GDP growth (percentage change)


Figure 1.8 GDP to decline across the
OECD


United States


Euro Area


Japan


ForecastDot-com
recession


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 26




the Middle East and North Africa, a region
that has been an important origin of export
demand for Europe. The rapid decline in out-
put, plus the drop in commodity prices should
alleviate inflationary pressures in Europe. But
the recent depreciation of the euro measured
against the dollar may continue, as investors’
continue to perceive U.S. government securities
as safe-haven assets.


Aside from sharp equity market declines,
Japan’s financial markets have been less af-
fected (through mid-November 2008) by
fallout from the global financial and banking
crisis. Nevertheless, the macroeconomic land-
scape is surprisingly similar to that in the
United States and Europe. Household spend-
ing has retrenched, higher inflation has com-
pressed purchasing power, and consumer sen-
timent has plummeted to 17-year lows. The
Tankan survey of business investment inten-
tions has been marked down steeply, in line
with a downward shift in expectations for
Japan’s export prospects. Slumping import de-
mand in emerging Asia has been amplified by
a tightening of policy interest rates in countries
such as India, Indonesia, the Philippines, and
Thailand to stem inflation pressures. During
the third quarter, Japan’s GDP dropped by
0.4 percent (saar) and for the remainder of
2008, creeping spillover from the credit crunch
and falling exports will cause Japan’s GDP to
recede further, coming to register 0.5 percent
growth for the year. Recession in Japan is ex-
pected to be less pronounced than elsewhere,
with output declining by 0.1 percent in 2009
before picking up to 1.6 percent in 2010 as
global investment demand revives and stimu-
lates Japanese exports.


Outlook for the developing
countries
(A deeper discussion of developments in each
of the six developing regions may be found in
the Regional Appendix in this book.)


Even before international credit channelsfroze, there were increasing signs of slow-
ing economic activity in developing countries.


Slowing growth in the high-income economies,
falling equity markets, and reduced interna-
tional capital flows cut into investment in de-
veloping countries, while a sharp acceleration
in inflation linked to the surge in commodity
prices constrained consumer spending.


Industrial production (outside of China)
had been robust but began to slow in mid-
2008. In the rest of East Asia, the downward
shift in production growth has been sharp,
dropping from 20 percent in January (saar) to
a decline of 5 percent by May 2008, before re-
covery to nil by September (figure 1.9).


More dramatic has been the steep recent
falloff in China’s industrial production growth,
from 20 percent in July to a decline of 0.2 per-
cent in September (saar). Softening export
growth, together with tightening microman-
agement of inventories—given uncertain sales
prospects—have underpinned this develop-
ment. This, in turn, has carried aggregate pro-
duction growth in East Asia to zero as of the
third quarter.


Output growth also faded in India and else-
where in South Asia, while production in Hun-
gary, Poland, Turkey, and the Baltic states began
to decline more recently. Output dynamics have
also faltered in Latin America, as production in
Chile, Colombia, and Mexico have dropped to
negative ground, while that in Brazil has slowed


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


27


210


25


Jan.
2006


Jun.
2006


Nov.
2006


Apr.
2007


Sep.
2007


Feb.
2008


Jul.
2008


0


5


10


15


20


25


30


Source: World Bank data.


Industrial production (percentage change, saar)


Figure 1.9 East Asian countries show steep
falloff in output growth


East Asia, excluding China


ChinaEast Asia & Pacific


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 27




sharply (figure 1.10 and table 1.3, second
panel). Imports across developing regions are
also showing signs of easing, reflecting a soften-
ing of domestic demand. And export volumes
from emerging markets displayed fading mo-
mentum over the first three quarters of 2008,
notably in Latin America, as import demand in
the OECD countries declined sharply. Overall
GDP growth for the developing countries
slowed from the 7.9 percent advance recorded
in 2007 to 5.3 percent (annualized) during the
second quarter of 2008 (see table 1.3 and asso-
ciated notes).


Financial turmoil likely to curb
investment
Fixed investment has been a powerful driving
force for growth across developing countries
over the last decade, particularly in East Asia
and the Pacific and in Europe and Central
Asia, increasing its contribution to overall
growth to almost 4 percentage points in recent
years, and well outstripping contributions
from trade (figure 1.11). But the intensification
of the credit crisis in the United States has se-
verely constrained finance to developing coun-
tries, with ominous implications for growth


prospects. The effects of the global financial
crisis on developing countries will differ by re-
gion and by the ability of individual countries
to offset adverse effects on domestic banking
sectors and the broader financial market.


Emerging-market corporate borrowers al-
ready are seeing a sizable widening of spreads
and are increasingly being shut out of interna-
tional bond markets (see discussion above). A
pullback in syndicated bank lending is emerg-
ing (as commercial banks and other financial
institutions in the high-income countries shore
up balance sheets by limiting new lending or
by calling in existing lines of credit), and ini-
tial public equity offerings from key emerging
markets have dried up. Even before the freez-
ing of credit flows that has accompanied the
banking crisis, overall capital inflows to devel-
oping economies were down 35 percent over
the first nine months of 2008 from the same
period a year earlier.


The slowdown is likely to be more
pronounced in 2009
Looking forward, recent adverse trends are
anticipated to intensify, driven by an especially
sharp decline in investment growth in devel-
oping countries, weaker exports as import de-
mand from high-income economies declines,
and lingering and in some cases still-escalating


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


28


210


0


25


5


10


15


20
Industrial production (percentage change, saar)


Figure 1.10 Output growth in Latin America,
South Asia, and Europe and Central Asia is
fading


Source: World Bank data.


Jan.
2006


Jun.
2006


Nov.
2006


Apr.
2007


Sep.
2007


Feb.
2008


Jul.
2008


South Asia


Latin America
& Caribbean Europe &Central Asia


21


0


1992 1994 1996 1998 2000 2002 2004 2006 2008a


1


2


3


4
Contribution to real GDP growth (percentage points)


Figure 1.11 Investment was the driving force
for growth in developing countries


Source: World Bank data.


a. Projected.


Investment


Net exports


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 28




inflation. Developing-country GDP growth is
projected to decline to 4.5 percent in 2009,
more than 3 percentage points below the av-
erage of the past five years (figure 1.12). No
region or country is likely to escape this
growth recession. Recovery in 2010 to a 6.1
percent advance is predicated upon a relatively
quick improvement in financial and growth
conditions among the high-income countries, a
prospect currently subject to a high degree of
uncertainty.


Growth outcomes for 2009 are anticipated
to vary significantly across developing coun-
tries and regions, depending on their reliance
on external flows and bank lending to finance
investment, trade links to deeply affected
high-income countries, direct and indirect ex-
posures to the subprime mortgage crisis, and
the degree of participation of foreign banks in
the domestic financial sector. Moreover, policy
responses to the crisis will play a large role in
shaping the near-term economic outlook.


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


29


Table 1.3 Developing regions: growth and related indicators
Growth Seasonally adjusted Growth


year-over-year annualized growth year-over-year


Indicator 2006 2007 Q108 Q208 Q308 H108 Latest


GDP growth (percent)
Developing countries 7.7 7.9 7.5 5.3 — 6.9 —


East Asia and the Pacific 10.1 10.5 9.4 9.2 — 9.0 —
South Asia 9.0 8.4 11.3 2.9 — 8.3 —
Europe and Central Asia 7.5 7.1 8.8 1.2 — 5.9 —
Latin America and the Caribbean 5.6 5.7 4.4 5.4 — 5.3 —
Middle East and North Africa 5.3 5.8 4.0 3.8 — 4.0 —
Sub-Saharan Africa 5.9 6.3 4.9 5.2 — 4.5 —


Industrial production
Developing countries 8.8 9.7 10.6 9.6 2.4 9.2 5.0


East Asia and the Pacific 13.0 15.0 18.3 17.1 0.2 14.7 10.2
South Asia 10.6 9.1 9.5 1.1 4.1 6.1 1.0
Europe and Central Asia 7.6 6.9 5.9 3.3 9.8 5.1 0.3
Latin America and the Caribbean 4.3 4.3 0.2 0.4 3.6 3.4 2.2
Middle East and North Africa 0.8 0.5 8.6 3.5 0.2 3.6 3.5
Sub-Saharan Africa 3.9 5.8 2.1 15.6 9.3 6.5 4.7


Consumer pricesa


Developing countries 6.2 6.1 8.6 10.4 9.9 9.5 9.9
East Asia and the Pacific 5.1 5.3 7.7 9.5 8.2 8.6 8.2
South Asia 7.6 7.6 10.1 11.0 22.0 10.6 22.0
Europe and Central Asia 5.6 8.0 11.0 11.3 11.0 11.2 11.0
Latin America and the Caribbean 5.6 6.5 8.8 9.7 7.5 9.3 7.5
Middle East and North Africa 5.1 7.2 11.2 10.8 12.7 11.0 12.7
Sub-Saharan Africa 6.2 6.0 8.2 10.4 11.3 9.3 11.3


Export volumesa


Developing countries 13.9 14.6 14.0 13.8 — 14.0 —
East Asia and the Pacific 19.2 18.7 16.2 17.0 17.1 16.2 19.2
South Asia 4.8 9.0 13.8 9.4 12.8 13.8 10.5
Europe & Central Asia 11.8 11.8 14.3 10.3 — 14.3 —
Latin America and the Caribbean 6.9 4.5 0.7 2.5 11.4 0.7 5.4


Source: National Statistical Agencies through Haver Analytics.
Note: Growth rates at annual or annualized rates, unless otherwise indicated. Consumer prices for regions are medians. Quarterly
2008 growth for developing regions is based on data available for key economies. No data on export volumes for South Asia and
Sub-Saharan Africa are available. East Asia and Pacific: China, Indonesia, Malaysia, the Philippines, and Thailand. South Asia:
India. Europe and Central Asia: Czech Republic, Hungary, Poland, Russian Federation, and Turkey. Latin America and the
Caribbean: Argentina, Brazil, Chile, Colombia, and Mexico. Middle East and North Africa: Arab Republic of Egypt. Sub-
Saharan Africa: Nigeria, and South Africa.
a. Quarterly data, year-over-year growth.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 29




Inflation has been rising but is now
set to decline
The projected global growth recession and
much lower commodity prices should help
ease the surge in inflation observed over 2007
and 2008. Headline consumer price inflation
among the OECD countries increased from a
modest 2 percent in 2007 to a 4 percent year-
over-year pace in the third quarter of 2008,
led by increases in the United States (4.9 per-
cent), the Euro Area (3.9 percent), and the
United Kingdom (5 percent). Although the
peak in commodity prices appears to have
passed, the momentum of headline inflation
during August picked up to 8.5 percent in the
United States before easing in September,
while falling to 2.3 percent in Japan and to
3.6 percent in Europe (figure 1.13).


Consumer price inflation accelerated much
more quickly in developing countries than in
the advanced economies (figure 1.14, and
table 1.3, third panel). In the majority of de-
veloping economies, most of the increase in
headline inflation was attributable to the direct
effects of higher commodity prices; increases
in core inflation (which excludes food and
energy) were limited. Indeed, inflation in
developing countries has remained relatively
low over the past five years of rapid growth,


despite substantial increases in oil and metals
prices since 2003 (box 1.2). However, the
sharp rise in food and fuel prices in the first
half of 2008 pushed median inflation in the
developing world to 12 percent by July 2008,
and more than 30 countries were facing
double-digit inflation rates.


In a welcome development, median infla-
tion has since retreated to below 10 percent in
September, as falling commodity prices have
improved CPI developments across a wide
range of developing countries.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


30


0


3


6


9


12
Median inflation rates (%)


Figure 1.14 Inflation in emerging markets
surged on higher food and energy prices


Source: World Bank data.


Jan.
2000


Jan.
2001


Jan.
2002


Jan.
2003


Jan.
2004


Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


High-income OECD countries


Developing countries


0


1


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


2


3


4


5


6


7


8
Real GDP (percentage change)


Figure 1.12 Developing-country GDP growth
is expected to fall below 5 percent in 2009


Source: World Bank.


Forecast


23


0


3


6


9


Percentage change (saar)


Figure 1.13 Headline inflation is easing
across industrial countries


Source: World Bank data.


Note: HICP 5 Harmonized index of consumer prices.


a. Year-over-year.


Jan.
2006


Jan.
2007


Jan.
2008


Japan


United States
Euro Areaa (HICP)


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 30




P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


31


Strong growth in developing countries during the1960s coincided with a low-inflation environ-
ment, while high inflation during the subsequent two
decades coincided with low average growth (box fig-
ure 1.2a). The recent sharp pickup in GDP growth
occurred in an environment of low and stable infla-
tion. Although the causality is always difficult to un-
tangle, the potential adverse impact of high inflation
on the ability to interpret price signals, on disciplined
fiscal management, and on savings and investment
are well understood.


These negative effects underscore the importance
of preventing an acceleration of inflation beyond the
direct impact of increased commodity prices.


The relatively low inflation of the recent past can
be clearly illustrated at an aggregate level with a
model that explains median inflation in the developing
world as stemming from commodity price increases
in local currencies (measured as a median) and
persistence (inflation tends to depend on past
inflation as a result of indexation and as inflationary
expectations are adjusted). In the model, CPIt
denotes consumer price inflation in developing
countries, Pt denotes annual commodity prices, both
in (median) local currencies for the 1962–2008
period. Numbers in parentheses denote t-ratios, and
denotes the first-difference operator:


Box 1.2 Commodity prices and inflation in
developing countries


log(CPIt)0.010.09 log(CPIt1)0.79 log(Pt),
(1.39) (5.09) (11.60)


adjusted R2 0.78.


Box figure 1.2b shows a dynamic simulation of
the equation since the 1960s.


Inflationary pressures during the 1970s are well
explained by a combination of commodity price in-
creases and persistence. During the 1990s, however,
many developing countries experienced high inflation
unrelated to commodity prices and therefore not ex-
plained by the estimated equation. These increases in
inflation were caused more by loose policy reactions
to debt crises, especially in Latin America, and the
transition toward market economies in Europe. In
the recent period, inflation has actually remained
lower than the model would predict, largely as a re-
sult of institutional reforms, which made monetary
policy more independent in many countries and in-
flation targeting more prevalent.


The literature provides a range of explanations
for the relatively low inflation of recent years.
Dominant in the debate is the role of inflation expec-
tations, which have been brought down sharply by
institutional reforms. Increased competition in global
markets, making it more difficult to pass through
increases in the higher costs of production, is another
explanation. Moreover, the additional low-cost


0
1965 1970 1975 1980 1985 1990 1995 20052000 2010


4


8


12


16


Percentage change
(5-yr moving average)


Percentage change
(5-yr moving average)


Box figure 1.2a Inverse long-term correlation
between inflation and growth


Source: World Bank.


Developing-country real
GDP growth (right axis)


Developing-country
median inflation (left axis)


2


0


4


6


8


0.00


Box figure 1.2b How do international
commodity prices explain inflation in
developing countries?


1961 1966 1971 1976 1981 1986 1991 20011996 2006


0.05


0.10


0.15


0.20


Source: World Bank.


Dynamic
simulation


Actual consumption index


Log scale


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 31




Many countries that experienced the
sharpest run-up in inflation have been sub-
jected to a dangerous combination of escalating
food and energy prices and generally tight con-
ditions in domestic markets, caused by a rapid
increase in credit creation. Of the 24 countries
where inflation picked up by more than 5 per-
centage points within the past year, 10 are in
Europe and Central Asia, where inflation was
spurred by very strong capital inflows or
booming commodity revenues. Other countries
subject to strong domestic inflationary pres-
sures include Bolivia, Chile, the Philippines,
República Bolivariana de Venezuela, and
Vietnam. Some of the biggest jumps in head-
line inflation were seen in Sub-Saharan African
countries, but that is largely because food
represents more than 50 percent of consump-
tion in many African countries.


The ramp-up of commodity prices over
2006–08 and the associated acceleration of
inflation have posed difficult policy challenges.
The continued practice of official subsidization


of fuels and basic foodstuffs across many
countries in the Middle East and North Africa,
and East and South Asia is contributing to
wider fiscal deficits, narrowing the room pol-
icy makers have for maneuver in other areas,
including targeted income support, investment
in the Millennium Development Goals, and
countercyclical fiscal policy. Many monetary
authorities have faced a trade-off between
supporting growth and dampening inflation
and inflation expectations. Brazil, Indonesia,
Mexico, the Philippines, South Africa, and
Thailand have raised policy rates by 25 basis
points or more. The recent fall in commodity
prices and the global slowdown are likely to
ease this difficulty over time, and indeed, a
shift toward monetary accommodation is now
under way to mitigate a portion of the growth-
dampening effects of the financial crisis.


Regional outlooks
GDP in East Asia and the Pacific increased by
8.5 percent in 2008, down from 10.5 percent in


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


32


clines in commodity prices, headline inflation will
ease gradually, even if core inflation moves up mod-
erately. But the probability of higher inflation is cer-
tainly not negligible.


supply from developing countries, notably China,
in global markets carried deflationary effects. And
the share of commodities in world production and
trade has declined over time, as a result of which the
impact of commodity price increases is now substan-
tially less than during the 1970s (box figure 1.2c).


On the other hand, many of the factors that have
kept inflation low over the last five years may have
lost a degree of efficacy. Indeed, with the recent rise
in commodity prices, the share of commodities in the
global economy, and with that, their effects on the
general price level, is increasing rapidly. Many fast-
growing developing countries have reached capacity
constraints in infrastructure, energy, and other inputs
to production, and the increase of low-cost goods in
global markets is waning. With broader inflation
rates rising, it becomes easier to pass through cost
increases, and, importantly, low inflation expecta-
tions might be revised upward quite quickly. These
are serious challenges to be faced to prevent a
reemergence of a high-inflation environment. In the
baseline forecast, we assume that as a result of the
sharp global growth slowdown and the recent de-


0
1963 1968 1973 1978 1983 1988 1993 1998 2003


10


5


15


20


25


30
Nominal shares (%)


Source: World Bank.


Box figure 1.2c Commodities are a declining
share in global merchandise trade


Oil


Ores and metals


Agriculture


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 32




2007. (Excluding China, growth in the region
fell to 5.3 percent, from 6.2 percent in 2007.)
Of importance to the slowing pace of growth,
China’s GDP growth in the third quarter eased
to 9 percent, from 10.6 percent in the first
quarter, on a slump in investment and exports.
Rising oil and food prices boosted median in-
flation in the region to 9 percent in 2008, com-
pared with 5 percent over the preceding
2 years. The deterioration in the outlook for
Japan and the United States reduced export
growth, which for East Asian countries outside
of China fell from 10.5 percent in 2006 to
4 percent in 2008 (figure 1.15). In turn, manu-
facturing output fell from 5 percent growth in
2007 to a decline of the same magnitude in
2008. And gross capital flows fell by a third, to
$64 billion over the year to September 2008.


Prospects for 2009 and 2010 have dimmed
with the deterioration in the external environ-
ment. The global banking crisis has had little
direct effect on the region, but several countries
are more vulnerable to spillovers in the form of
higher corporate spreads, reduced capital
flows, and plummeting domestic equity mar-
kets. Private sector investment in particular
stands at risk. Although China is well cush-
ioned against coming shocks, several countries
remain exposed to a steep downturn in world


trade and more difficult financing conditions.
While the decline in oil and food prices will
support external positions and provide some
relief on the inflation front, reduced investment
spending is expected to contribute to a substan-
tial slowdown in regional growth to 6.7 percent
in 2009. A gradual recovery in key foreign mar-
kets will offer fresh impetus for exports and
production and will help return growth in the
region to a 7.8 percent pace by 2010.


In Europe and Central Asia, output is likely
to increase by 5.3 percent in 2008, down from
7.1 percent in 2007, though growth held up re-
markably well during the first half of the year.
First-half GDP growth in Russia (7.8 percent),
Poland (6 percent), Turkey (5.8 percent), and
Romania (8.8 percent) were grounded in strong
domestic demand, along with higher oil prices
and fiscal revenues for the region’s hydrocar-
bon exporters. But in 2009 deteriorating exter-
nal positions and new risks from the global
banking crisis are likely to depress prospects for
vulnerable countries, and the downside risks
are substantial. Sovereign spreads jumped in
October 2008, notably for the Russian Federa-
tion and Turkey, and especially for Ukraine and
Kazakhstan (figure 1.16).


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


33


0


300


150


450


600


750


900
Spreads in basis points


Figure 1.16 Sovereign bond spreads widen
across Europe and Central Asia


Source: JPMorgan-Chase.


Jul.
2007


Oct.
2007


Jan.
2008


Apr.
2008


Oct.
2008


Jul.
2008


Bulgaria
Poland
Turkey


Hungary
Russian Federation


26


23


0


3


6


9


12
Percentage change


Figure 1.15 Key developments in 2008 for
East Asia and the Pacific (excluding China)


Source: World Bank.


20
06 20


07 20
08


Export
growth


Industrial
production


Median
inflation


Median
policy rate
(interest


rate)


Terms
of trade


GDP
growth


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 33




While most countries have maintained for-
ward momentum, a divergence in growth per-
formance has emerged: Latvia is in recession,
the Romanian economy is overheating, and
the Kyrgyz Republic, Tajikistan, and
Moldova, which are receiving World Bank
support, are facing the impact of rising food
prices. The situation in Russia shifted dramat-
ically from concerns about domestic overheat-
ing to fears of financial crisis, as equity prices
gyrated with the turmoil in global markets,
and oil prices fell.


Most countries have experienced strong
growth in domestic demand, but net trade has
remained a drag on growth. At the same time,
rapid credit expansion and wage escalation
has made the region more vulnerable to deteri-
oration in external financing conditions. The
medium-term outlook points to a sharp decline
in regional growth to 2.7 percent in 2009, dri-
ven by a falloff in investment tied to difficult
financing conditions and a marked weakening
in export market demand. Growth is projected
to firm to 5.0 percent by 2010, as credit markets
stabilize, inflation pressures ease, and growth
in external markets resumes, paving the way
for a revival in spending and exports.


Latin America and the Caribbean countries
have enjoyed four years of robust growth,
while current account surpluses, accumulation
of reserves, and improved policies have served
to restrain core inflation rates, improve the
quality of banking systems, and build up sub-
stantial buffers against financial contagion.
However, in 2008 headline inflation jumped
in response to higher oil and food prices, and
policy makers in countries such as Brazil and
Chile raised interest rates. Gross capital in-
flows to the region compressed by 45 percent
between January and September 2008, com-
pared with the same period in 2007. The deteri-
oration in external demand and in international
financial markets, combined with the recent
falloff in commodity prices, reduced GDP
growth to 4.4 percent in 2008 from 5.7 percent
in 2007.


The global slowdown and a shortfall in cap-
ital flows present substantial risks to sustained


growth, pressuring private sector investment in
particular. As commodity prices continue to
weaken, some major exporters, Argentina of
note, will likely see current account surplus po-
sitions shift to deficit. For other countries, in-
cluding Brazil and Mexico, the depth of reces-
sion in the United States and Europe will turn
exports to negative growth, while contraction
in imports should lead to a return of surplus
position (figure 1.17).


GDP growth in the region is expected to
drop to 2.1 percent in 2009 before recouping
to 4 percent by 2010. Country-specific events
could also pose a challenge: conditions in sev-
eral Andean countries have tended toward less
stability; República Bolivariana de Venezuela
has seen another wave of nationalizations, and
its growth is expected to fall from 8.4 per-
cent in 2007 to 3.2 percent by 2010; and
Argentina’s GDP is expected to slow from
8.7 percent in 2007 to 4 percent by 2010, with
a 1.5 percent growth trough in 2009.


The developing countries of the Middle
East and North Africa region offer a good ex-
ample of the diversity of effects stemming from
the ramp-up in global fuel and food prices—at
both extremes of the spectrum. In oil-export-
ing economies, a rise in oil and natural gas
revenues to $200 billion supported 5.8 per-
cent growth in 2008, down from 6.4 percent


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


34


24


22


23


21


0


Brazil Argentina Mexico


1


2


3


4
Current account balance as a share of GDP (%)


Figure 1.17 In Latin America and the
Caribbean, current accounts of largest
economies diverge


Source: World Bank.


20
06


20
07


20
08


20
09


20
10


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 34




in 2007. Slower domestic demand growth in
the Islamic Republic of Iran (where GDP
growth declined from 7.8 percent to 5.6 per-
cent) was a key factor in this development.
Outside Iran, growth among oil exporters
stepped up to 5.9 percent.


In the more-diversified economies that are
highly dependent on oil and food imports, ex-
ports slowed in 2008 as growth turned slug-
gish among key trading partners in Europe
and the United States. But strong recovery in
Morocco following drought in 2007 and con-
tinued solid performance in Tunisia and Jordan
boosted growth to 5.7 percent from 3.8 per-
cent. For the region as a whole, these develop-
ments yielded a flat profile of activity at 5.8 in
2008 (figure 1.18).


The region’s oil exporters will face the chal-
lenge of diminished revenues in 2009. The
global oil price is anticipated to fall from its
July 2008 peak ($145/bbl) to below $80 in
2009. Growth in oil-exporting countries is
projected to slow to 3.9 percent in 2009. Al-
though their economies are unlikely to be se-
verely affected by developments in financial
markets, several countries stand more exposed
to spillover effects from these developments,
including Lebanon, Jordan, and the Arab


Republic of Egypt. Moreover, oil-exporting
members of the Gulf Cooperation Council are
vulnerable to losses on international invest-
ment positions, potentially prompting a hiatus
in the recent buildup of foreign direct invest-
ment within the region. For the region’s oil-
importing economies, lower energy prices will
reduce the import bill and provide some
breathing space on the inflation front follow-
ing the surge in prices in the first half of 2008.
Growth for the region should recover to a
5.2 percent pace by 2010 as external demand
recovers, and declines in hydrocarbon prices
give way to a period of greater stability.


GDP growth in South Asia eased to an esti-
mated 6.3 percent in 2008, from 8.4 percent in
2007 and from a 25-year high of 9 percent
during 2006. High food and fuel prices,
tighter international credit conditions, and
weaker foreign demand have led to worsening
external accounts and contributed to a slow-
down in investment growth. Deterioration in
trade balances, however, has been offset in
large part by large remittance inflows, partic-
ularly for Bangladesh, Nepal, and Sri Lanka,
where remittances represent 8 percent of
GDP or more. Policy makers responded to
high commodity prices and rising inflation
pressures by partially adjusting domestic fuel
prices, cutting development spending, and
(initially) tightening monetary policy.


The global financial crisis is placing further
downward pressure on growth. Lower capital
inflows (down 40 percent, over January-
September 2008 compared with the same
period in 2007) and harder credit terms will
reduce private investment, while reduced remit-
tance inflows will add to pressures on growth.
Food and fuel price subsidies have pushed
fiscal outlays higher, reversing recent progress
in fiscal consolidation. And increasing deficits
are narrowing the scope to provide support
for other urgent public programs, including
the region’s overburdened infrastructure. The
slowdown in growth is most apparent in India
and Pakistan, where industrial production fell
sharply, and the momentum of production for
South Asia has recently declined from a peak


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


35


2


0


4


6


8


30


20


50


90


100


70


80


60


40


110
GDP growth (%)


Figure 1.18 Oil revenues, recovery from
drought underpin growth in the Middle East
and North Africa in 2008


Source: World Bank data.


2000 2001 2002 2003 2004 2005 2006 2007 2008


Oil prices (right axis)


Oil exporters GDP (left axis)
Diversified economies GDP (left axis)


World Bank average oil price ($/bbl)


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 35




of 12 percent in April 2008 to a decline of
2 percent in August (saar) (figure 1.19).


South Asia’s GDP is expected to drop to
5.4 percent in 2009 but to recoup to 7.2 per-
cent by 2010. Firming growth will be sup-
ported by improving external demand and
lower commodity prices.


Growth in Sub-Saharan Africa, outside of
South Africa, increased to a remarkable 7 per-
cent in 2007, the highest in some 35 years, as
outcomes for both oil-importing and oil-
exporting countries were robust. Growth
among oil exporters increased to 8.2 percent
in 2007, exceeding 5.5 percent gains for a
fifth year running; growth in oil-importing
economies breached a 25-year record, gaining
5.4 percent. GDP advances have become more
broad-based and less volatile in recent years,
especially among oil importers. And a notable
and encouraging feature of Africa’s recent per-
formance is the sustained contribution of in-
vestment to overall GDP growth.


In 2008, activity outside of South Africa re-
mained strong at 6.6 percent as GDP gains
among oil-producing countries eased moder-
ately to 7.8 percent, joining the larger group of
oil-importing countries where GDP gains
slowed to 4.2 percent in the year. Investment
continues to provide an underpinning for GDP
growth, while net exports are contributing to


growth despite a sharp slowdown in global
trade (figure 1.20).


The region’s growth is expected to decline to
4.6 percent in 2009, before firming to 5.8 per-
cent by 2010 as a result of recovery in exter-
nal demand. Excluding South Africa, growth
is anticipated to ease to 5.7 percent in 2009
and to accelerate to 6.6 percent in 2010. But
this scenario is subject to significant downside
risks. Should the global slowdown prove much
deeper than anticipated, fostering a sharp fall
in world trade growth, the contribution of net
exports to African GDP growth will diminish.
And many countries in the region have be-
come more vulnerable to terms of trade
shocks, as high fuel and food prices have led
to a deterioration in external positions over
the past years. Higher food and fuel prices
have also widened the poverty gap, raising the
risk of possible social unrest.


World trade


World trade volumes are expected to con-tract in 2009 for the first time since
1982 (figure 1.21). This decline is driven first
and foremost by a sharp drop in demand, as
the global financial crisis imposes a rare simul-
taneous recession in high-income countries and
a sharp slowdown across the developing


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


36


40
1976 1981 1986 1991 1996 2001 2006


50


60


70


80


90
Primary commodities as a share of total exports (%)


Source: UN Conference on Trade and Development, Comtrade.


Sub-Saharan Africa


Sub-Saharan African oil-importing countries


Figure 1.20 In Sub-Saharan Africa, primary
commodity exports increased as prices
surged


25


0


5


10


15


20
Industrial production (percentage change, saar)


Figure 1.19 South Asian production slips in
the last months


Source: World Bank.


Jan.
2006


Jan.
2007


Jan.
2008


South Asia
Developing
countries


High-income OECD countries


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 36




world. The global credit crunch is likely to af-
fect private investment especially, which is the
most cyclical and most internationally traded
component of GDP. At the same time, the
credit crunch is restricting export finance. Al-
ready there is anecdotal evidence that commer-
cial bank trade credits are drying up and that
export receipts are becoming more difficult to
insure. Similarly, exporting firms may cut back
on shipments if their access to credit lines is
limited. Finally, the crisis has been associated
with sharp, unpredictable swings in exchange
rates, which also will hamper trade.


Signs of an economic slowdown have been
visible for some time (growth in U.S. import
demand was already falling in 2005), but they
have been building at a much more gradual
pace than occurred, for example, during the
sharp correction in 2001, when import
growth dropped from plus 15 percent to
minus 5 percent within a year (figure 1.22).
The current gradual decline in demand growth
means that some exporting countries have had
time to shift to higher growth markets in de-
veloping countries. For example, while the
share of the United States in India’s exports
fell from 17.1 percent in 2004 to 15.3 percent
in 2007, China’s share in India’s imports rose
from 5.5 percent to 8.4 percent.


In addition, several countries (many in
Latin America) that experienced a slowing of
exports because of low U.S. demand growth
benefited from higher commodity prices.
Moreover, the impact on the volume of world
trade was mitigated by the strong intra-
regional growth of trade in East Asia, largely
driven by China’s continuing integration into
global markets. China’s import and export
growth continued to exceed 20 percent over
the past two years; while outside of China, ex-
port growth remained robust (figure 1.23).


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


37


0


1981 1984 1987 1990 1993 1996 1999 2002 2005 2008


6


23


3


9


12


Growth of global trade volumes (percentage change)


Source: World Bank data.


Figure 1.21 World trade is expected to
decline in 2009 for the first time since 1982


0


Jan.
1999


Jul.
2000


Jan.
2002


Jul.
2003


Jan.
2005


Jul.
2006


Jan.
2008


25


5


10


15


10


0


20


30


40


Import volumes
(percentage change)


Import volumes
(percentage change)


Source: World Bank data.


Figure 1.22 Decline in high-income import
growth affects developing-country exports


U.S. imports
(left axis)


Latin America &
Caribbean exports
(left axis)


China exports
(right axis)


210


25


0


5


10


15


20


25


30


35
Export volumes of developing countriesa (percentage change)


Figure 1.23 Developing-country exports
have been strong, even outside China


Source: World Bank data.


a. Excluding China.


Jan.
1992


Jan.
1996


Jan.
2000


Jan.
2004


Jan.
2008


Annual (12-month moving average)


Momentum (annualized 3 month over 3 month)


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 37




These mitigating and compensating factors
are unlikely to be active in 2009. The slow-
down in high-income import demand has ac-
celerated, few growth centers are left to which
exports can be redirected, and commodity
prices are falling. Thus developing countries
are set to experience a sharp, but likely tem-
porary, fall in their export revenues. Those
countries with insufficient reserves to sustain
import growth will need to rely on some com-
bination of exchange rate depreciation and
slower growth to restrain imports.


Remittance flows to developing countries,
which reached an estimated $283 billion in
2008 (Ratha, Mohapatra, and Xu 2008),
began easing in the second half of the year and
are projected to slow sharply in 2009. Mi-
grant earnings in host-country currency terms
are anticipated to be compressed by the reces-
sion in the industrial economies, lower rev-
enues in high-income oil-exporting countries,
and slower growth in many developing coun-
tries that are destinations for migrants.


While the baseline projection is for remit-
tance flows to developing countries to decline
as a share of recipient-country GDP from 1.8
to 1.6 percent in 2009, the extent of the de-
cline at the country level will depend critically
on exchange rate developments. Recent
swings in bilateral exchange rates have out-
weighed the expected change in remittances
denominated in host-country currencies. Fu-
ture exchange rate movements will also play
an important role.


Global current account balances are
expected to show substantial shifts
The global recession and attendant decline in
world trade and in commodity prices will have
a dramatic impact on current account balances.
Surplus positions in Japan and the Euro Area
should increase to $240 billion and $180 bil-
lion, respectively, during 2009 as commodity
prices fall and trade volumes compress. Despite
the improvement in the U.S. terms of trade, its
current account shortfall is expected to deterio-
rate from $770 billion in 2008 (5.4 percent of
GDP) to $830 billion or 5.8 percent of GDP in


2009. The sharp downturn in world trade hits
the United States especially hard: export vol-
umes are expected to drop 2.6 percent in 2009,
while imports contract 1.1 percent. Overall, the
high-income OECD countries’ current account
deficit is projected to narrow by $185 billion to
$375 billion in the year.


The lower industrial-country deficit has its
counterpart in lower surpluses in high-income
oil exporters and in developing countries. The
current account surplus in developing countries
is expected to fall from a peak $500 billion, or
3.7 percent of GDP, in 2007 to $333 billion, or
2 percent of GDP in 2009 (figure 1.24). While
China’s (and thus East Asia’s) surplus is antici-
pated to increase, in other regions, surpluses are
expected to narrow, or deficits to widen.


Some appreciation of the impact of the
global recession on current account balances
can be gained by looking at countries grouped
by their primary commodity trade (here we
exclude China, because the country’s massive
current surplus—nearly $400 billion in
2008—masks underlying developments across
smaller countries). The expected 26 percent
fall in the price of oil and 23 percent fall in
non-oil commodity prices (see the Commodity


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


38


2200
201020082006200420022000


2100


0


100


200


300


400


500


600
Current account balance (US$ billions)


Source: World Bank data.


Figure 1.24 Developing-country current
account surpluses to wane after 2008


All developing
countries


East Asia & Pacific
Middle East & North Africa


South Asia
Europe & Central Asia


Latin America & Caribbean


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 38




Markets section below) will shift the terms of
trade in favor of oil- and food-importing
countries, following a string of at least five
years of substantial losses. For developing-
country oil exporters, the fall in global de-
mand will reduce both oil prices and export
volumes (which are expected to shift from
5.1 percent growth in 2008 to 0.3 percent in
2009), and their current account surplus will
fall from a peak of 6.4 percent of GDP in 2008
to 1.4 percent in 2009 (figure 1.25). By con-
trast, the current account deficit of developing-
country importers of both oil and food almost
halves, from a peak of 8.1 percent of GDP in
2008 to 4.3 percent by 2009, because of lower
commodity prices and a sharp slowdown of
imports from 8.1 percent growth in 2008 to
1.5 percent in 2009. The impact of these global
developments should begin to dissipate in
2010 as oil prices stabilize, the prices of nonen-
ergy commodities decline by only 4.3 percent,
and world trade begins to recover.


The financial crisis has induced major fluc-
tuations in exchange rates during the autumn
of 2008. Almost every currency in the world
has depreciated against the dollar and the yen,
reflecting a “flight to quality” into U.S. Trea-
sury securities, the unwinding of yen-based
carry trades, and the deleveraging of banks,


firms, and investors. No developing-country
currency has appreciated against the dollar by
more than 0.5 percent during this period. On
average, currencies of developing countries
have fallen by 15 percent against the dollar, but
high-income-country currencies (save Japan’s),
have also depreciated (figure 1.26). In general
the competitiveness of the United States, Japan,
China (whose currency has held steady versus
the dollar), and those countries whose curren-
cies have been pegged to the dollar will have
been reduced; competitiveness for countries
whose currencies have depreciated will be im-
proved in these markets. As a result, the strong
impetus that net exports have provided for
U.S. growth is likely to be attenuated; at the
same time, net exports are likely to support the
growth recovery of many developing countries.


Commodity markets


Commodity prices—which have been trend-ing higher since 2003—continued the ro-
bust rise that began in 2007 into the first half
of 2008. As of mid-November, prices have
since fallen sharply, giving up most of their
gains of the first half of the year. The abrupt
decline reflects a classic response of commodi-
ties to slowing global growth at the end of a
boom (for more on this subject, see chapter 2),
a decline that has been amplified and acceler-
ated by the financial crisis. In the summer of


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


39


Figure 1.25 Current account balances for
commodity-exporting and -importing
developing-country groups (excluding
China)


210


28


22


24


26


0


2


4


6


8


Source: World Bank data.


Oil and food
importers


20
07


20
08


20
09


20
10


Oil exporters


Current account balance as share of GDP


Oil importers /
food exporters


Oil importers


0
2
4
6
8


10
12
14


Source: World Bank.


% depreciation since Sept.15 –Oct. 30


High-
income


countries


East
Asia &
Pacific


Europe
&


Central
Asia


Latin
America


&
Caribbean


Middle
East &
North
Africa


South
Asia


Sub-
Saharan


Africa


Figure 1.26 Almost all currencies have
depreciated against the dollar


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 39




2008, energy prices were 80 percent higher in
dollar terms than a year earlier, while nonen-
ergy prices were 35 percent higher (figure 1.27
and table 1.4).


Almost all the advance in nonenergy com-
modity prices during 2008 came from grains
(up 60 percent), fats and oils (up 34 percent),
and fertilizers (up 140 percent). Metals prices,
which increased rapidly between 2003 and
2008, picked up just 8 percent over the first six
months of 2008. Almost all commodity prices
peaked in early or mid-2008, and most have de-
clined sharply since then. Crude oil prices
dropped from $143/bbl in early July to less than
$50/bbl in mid-November. The price drop
stemmed from weaker realized demand across


OECD member countries, appreciation of the
dollar, and concerns about demand prospects in
the wake of financial turmoil (figure 1.28). The
sharp decline in crude oil prices has also been a
significant contributor to declines in other com-
modities, because thesemarkets are increasingly
linked through production costs and through
the development of biofuels (see chapter 2).


Falloff in demand in high-income
countries drives decline in oil prices
Oil demand in the OECD countries has been
declining for three years, with most of the re-
duction in the United States, which was af-
fected by slowing economic activity and the
consumption-dampening effects of higher oil
and gasoline prices. U.S. oil demand fell 5.6 per-
cent over the first 10months of 2008 (year-over-
year). Gasoline consumption dropped 3 per-
cent as consumers reduced the number of miles
driven and began switching to more energy-
efficient vehicles. Oil demand also slowed in
Europe. Overall, OECD demand is expected to
fall by more than 2.2 percent during 2008 and
by less than 2 percent in 2009. Demand in de-
veloping countries and emerging markets has
continued to grow by about 4 percent, with de-
mand strongest in Asia and theMiddle East, the
latter fueled until recently by strong economic
growth and in some countries fuel subsidies and
thus low consumer prices (box 1.3).


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


40


100
Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


125


150
175


200
225


250
275


300
325


100


150


200


250


300


350


400


450


500


Source: World Bank data.


Figure 1.27 Commodity prices surged before
retreating in the second half of 2008
Commodity price indexes
(2000 5 100, current US$)


Commodity price indexes
(2000 5 100, current US$)


Non-energy prices
(left axis)


Energy prices
(right axis)


Source: Datastream and World Bank.


World Bank average crude oil price ($/bbl)


Figure 1.28 Crude oil prices correct sharply
after unprecedented run-up


25


50


100


75


125


150


Jan.
2004


Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


Table 1.4 Forecast of commodity prices
Percent change 2000–05 2006 2007 2008 2009f 2010f


Energy 13.5 17.3 10.8 45.1 25.0 0.9
Oil 13.6 20.4 10.6 42.3 26.4 1.8
Natural gas 10.4 33.9 1.0 57.2 10.8 4.2
Coal 12.7 3.1 33.9 97.8 23.1 10.0


Nonenergy 8.3 29.1 17.0 22.4 23.2 4.3
Agriculture 6.0 12.7 20.0 28.4 20.9 1.3


Foods 6.0 10.0 25.6 35.2 23.4 0.3
Grains 4.8 18.4 26.1 50.9 27.7 2.6


Raw materials 5.0 22.7 9.0 13.0 14.9 2.7
Metals and
minerals 12.3 56.9 12.0 5.0 25.5 5.5


Copper 15.2 82.7 5.9 0.6 32.2 4.2


Source: World Bank data.
f. Forecast.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 40




P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


41


Deterioration in external balances has become asignificant problem for many developing coun-
tries. Overall, in 2007, current account deficits ex-
ceeded 10 percent of GDP in about one-third of de-
veloping countries, up from about one-quarter in
2006. Twelve countries ran deficits in excess of 20
percent of GDP in 2007. In part, these deficits reflect
the impact of higher oil prices on oil-importing coun-
tries: oil balances account for more than half of the
current account deficit in one of every two develop-
ing countries. Excluding the massive rise in China’s
surplus, the current account deficit of oil-importing
countries has increased significantly during the rise
in prices, from close to zero in 2002–03 to about
$130 billion in 2007, an amount equal to 2.2 per-
cent of GDP (box figure 1.3a). In contrast, the cur-
rent account surplus of oil-exporting countries im-
proved from 2 percent of GDP to more than 7
percent in 2005–06, though it declined to below 5
percent in 2007.


The rise in oil prices has contributed to, but does
not fully explain, this disparity in current account
balances. The rise in oil-importing countries’ deficits
has been less than the increase in their net oil bal-
ance, while the increase in oil-exporting countries’
surplus has been well below the improvement in
their oil balance (box figure 1.3b). As should be
expected, many countries have made compensating


Box 1.3 Impact of commodity prices on external
balances and capital flows


adjustments in trade and domestic absorption to ac-
commodate the rise in oil prices. And there is little
correlation between the size of countries’ net oil bal-
ance and the size of current account balances. Sev-
eral oil-importing countries continue to run sizable
current account surpluses (exceeding 10 percent of
GDP in four countries), whereas several oil-exporting
countries are running sizable current account deficits
(notably Kazakhstan and Sudan). Some countries
(Botswana, Nepal, Paraguay, Swaziland, and Thai-
land) managed to run current account surpluses even
though their deficits on the oil component of the
trade balance exceeded 5 percent of GDP.


How have countries been able to finance their
large external imbalances?
The financing of increased current account deficits
has not come principally from higher portfolio flows
or reserve drawdowns, but from foreign direct in-
vestment and aid. Much of the surge in private debt
and equity flows to developing countries over the
past few years has gone to countries with sizable
current account surpluses. For example, private debt
flows to the 11 countries with current account
surpluses in 2005–07 accounted for half of the total
to all developing countries (in 2007, Russia ran a
current account surplus equal to 6 percent of its
GDP and yet received $125 billion in private debt


2200


2100


0


20012000 2002 2003 2004 2005 2006 2007


100


200


300


600


500


400


US$ billions


Box figure 1.3a Oil balances in developing
countries, 2000–07


Oil exporters


China


Other oil importers


Source: World Bank.


25


0


20012000 2002 2003 2004 2005 2006 2007


10


15


5


GDP (%)


Box figure 1.3b Oil balances as a share of
GDP in developing countries, 2000–07


Oil exporters


China


Other oil importers


Source: World Bank.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 41




OPEC producers—reluctant to raise output
significantly during the run-up in prices dur-
ing the first half of 2008—increased produc-
tion at midyear, mainly through Saudi Arabia,
which unilaterally agreed in June to lift output
by 0.5 million barrels a day (mb/d). Iraq’s out-
put breeched 2.5 mb/d for the first time since
2001 as attacks on infrastructure subsided
somewhat. But increases elsewhere in the Gulf
were partly offset by declines in Nigeria,
where civil strife continued to cause large
supply disruptions.


As discussed in chapter 2, the non-OPEC
supply response has been disappointing. Pro-
duction has been plagued by several factors
during the current decade, notably rising costs
and taxes, and the ongoing depletion of aging
fields. Despite these constraints, non-OPEC
supplies are beginning to increase in a number
of regions and are projected to rise in the
second half of 2008 and over 2009–10.


As a result of weakening demand and ex-
pected supply increases, oil prices are antici-
pated to average $75/bbl in nominal terms
during 2008–10, implying a cumulative real
decline of more than 30 percent.


Prices for many metals are falling
on the back of weaker demand
Several metals prices have plummeted in recent
months because of slowing global growth and
improving supply prospects. Nickel prices have
fallen more than three-quarters from their 2007
peak, partly because of difficulties in the auto-
mobile and construction sectors. Prices have
fallen below the marginal costs of high-cost
producers, and some plants are being closed
and new projects delayed or reconsidered. Zinc
prices have fallen almost as much as nickel in
percentage terms. Lead prices have fallen more
than 60 percent on improving supply prospects.
Prices for these metals are expected to decline
further as new capacity comes online.


Copper is among the few metals whose
price remained elevated during the first half of
2008, despite weak demand; numerous supply
disruptions tied to strikes in Latin America
and delays bringing on new capacity kept cop-
per prices high. However, prices plunged in
the second half of the year in the wake of the
financial crisis and the weakening global eco-
nomic environment. China’s import demand
has been weak in 2008, and the slowdown in


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


42


foreign direct investment covered over half of the
current account deficit, and in 4 countries net official
development assistance (ODA) disbursements ex-
ceeded 10 percent of GDP (box table).


flows). And to date few countries have had to draw
down their ample foreign reserve holdings. Instead,
of the 13 countries with the largest current account
deficits (and where data are available), in 8 countries


Developing countries with large external imbalances, 2007
(percent)
Country Current account Oil balance Non-oil commodity balance Commodity balance FDI inflows Net ODA disbursements


Burundi 37.6 11.6 0.4 12.0 0.0 46.0
Seychelles 32.7 36.5 0.7 35.8 18.8 1.8
Togo 21.9 8.5 4.6 4.0 3.5 3.6
Nicaragua 21.5 13.1 6.5 6.6 0.1 13.8
Latvia 20.8 3.2 1.2 2.0 7.3 0.0
Georgia 20.0 5.5 1.8 7.3 16.9 4.7
Fiji 18.8 11.7 2.9 8.8 11.9 1.8
Malawi 18.6 4.3 11.6 7.3 — 21.3


Source: World Bank.
Note: — not available. For Burundi, Fiji, Malawi, Seychelles, and Togo, data are for 2006.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 42




global housing construction more broadly
contributed to diminishing demand. Prices
nonetheless remain well above production
costs and are expected to continue to decline
significantly through 2010 as new capacity
comes online.


Aluminum—the one major metal whose
price has not surged during the current cycle
because of the growth of capacity in China—
became more expensive recently because of
still-strong global demand and increasing
costs of electricity, a major input to the pro-
duction of aluminum. The outlook for alu-
minum prices depends critically on the pace of
investment in new capacity (especially in
China and the Middle East), as well as on the
level of energy costs and deregulation of
power markets. Even if new capacity is con-
centrated in areas with stranded, low-cost en-
ergy sources, such as the Middle East, there is
limited downside potential for prices, because
aluminum has been fluctuating near the upper
portion of the cost curve.


Taken together, the index of metals and
minerals prices is projected to fall 25 percent
in 2009 and an additional 5 percent in 2010
compared to 2008.


Prices of agricultural commodities are
falling sharply from peaks
Prices for food traded internationally increased
almost 60 percent during the first half of 2008
in dollar terms, with basic staples such as grains
and oilseeds showing the largest increases.
Wheat prices more than doubled, from $200 a
ton to $440 between March 2007 and March
2008, while rice prices almost tripled in the four
months ending April 2008 (figure 1.29). Soy-
bean and palm oil prices increased 44 percent
from 2007 to 2008. Prices have since declined
sharply. Wheat prices, for example, fell to less
than $240 a ton in November. Since their peak
in April 2008, grain prices have declined by
more than 30 percent. The spike in rice prices in
April and May 2008, on concerns regarding the
adequacy of global food supplies and export
bans, appears to have subsided, with prices
falling from nearly $1,000 a ton to $550 a ton


in November. Export bans that had been in
place were either eliminated by many countries
or partly circumvented through bilateral
agreements. For example, Egypt, which had
accumulated 7 million tons of rice during the
period of its export ban, is expected to curb the
intervention soon. Similarly, India has allowed
shipments of non-basmati rice to four African
nations.


Oilseed prices also have fallen sharply. Palm
oil prices averaged less than $480 a ton in
November, down from $1,250 a ton in March
2008. Similar declines took place in most edi-
ble oils (soybean oil dropped from $1,475 a
ton to $835, and coconut oil from $1,470 a
ton to $705 over the period). The weakening
of edible oil prices reflects not only slowing
economic growth but also improved supplies,
and perhaps mounting pressure in the Euro-
pean Union (EU) to scale back biofuel man-
dates—most of the EU’s biofuel production is
biodiesel, whose feedstock is rapeseed oil, a
close substitute for palm and soybean oils.


Rubber prices began easing in July and
August 2008, an unsurprising development be-
cause they track crude oil prices closely (syn-
thetic rubber is made from petroleum). Signs
of weakening prices have also been evident in
beverages, with cocoa averaging a little over
$2 a kilogram in November, down from $3.00
in June 2008. Other agricultural commodities,
especially raw materials and some foods such


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


43


50
Jan.
2005


100
150
200
250


350
300


450
400


1,000
900
800
700
600
500
400
300
200


Commodity prices
(current US$)


Commodity prices
(current US$)


Figure 1.29 Grains prices show sharp
declines from recent peaks


Source: World Bank data.


Jan.
2006


Jan.
2007


Jan.
2008


Wheat (left axis)


Rice (right axis)


Maize (left axis)


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 43




as bananas and sugar, have experienced
smaller declines, because their price increases
were not as sharp and they are less closely
linked to energy prices.


Fertilizer prices experienced the largest in-
crease among all commodity groups in 2008,
with the index up 116 percent between January
and August 2008; prices were driven up by the
combination of strong demand growth (in re-
sponse to high crop prices), limited surplus
production capacity, higher production costs
related to high energy prices, and an export
tax imposed by China to protect domestic
supplies. Phosphate prices (DAP), for exam-
ple, increased by almost 110 percent between
January and August 2008 while urea prices
doubled in just four months (December 2007
to April 2008). The decline in crude oil and
grain prices, along with weak demand, how-
ever, is now being reflected in fertilizer prices.
Urea, for example, declined to $250/ton (a
two-year low) while DAP averaged below
$650/ton as of November 20.


Current crop prospects are favorable.
Grain production is projected to increase
about 4 percent in the current crop year, and
oilseed production is anticipated to rise by
twice as much. Although this production in-
crease will allow some rebuilding of stocks,
continued growth of demand for biofuels
should keep pressure on inventories. Maize
used for ethanol in the United States is ex-
pected to increase to 33 percent of the crop in
2008, accounting for nearly all of the increase
in global maize consumption and causing
global maize stocks to fall. In contrast, large
increases in wheat and oilseed production
should allow some rebuilding of stocks.
Stocks will remain low by historic standards,
however, and prices will remain vulnerable to
supply disruptions or demand surges.


Overall, grain prices are projected to de-
cline about 28 percent in 2009 and to recoup
3 percent in 2010. Fats and oil prices are an-
ticipated to fall by 27 percent in 2009 and an-
other 5 percent in 2010. And beverages are
projected to decline 18 percent and 4 percent,
respectively. Despite these developments, food


prices are expected to remain much higher
than during the 1990s and more than 60 per-
cent higher than their levels in 2003.


In the baseline, the very tight credit condi-
tions observed in November are projected to
dissipate during the first quarter of 2009—
which together with a strong crop this season
should ensure that prices do not rise sharply in
the medium term. However, if farmers in high-
and middle-income countries are unable to get
financing for seed and fertilizer purchases for
plantings for next season, plantings may be
lower than expected, which could cause agri-
cultural prices to rebound during the 2009/10
crop year. Farmers in key agricultural producing
and exporting countries, including Australia,
Argentina, Brazil, the United States, and the
European Union, rely on short-term financing
for inputs (e.g., fertilizer) and longer-term
financing for the purchase of machinery. The
short-term financing is typically guaranteed by
placing land as collateral and to a lesser extent
by hedging in futures markets for a minimum
price guarantee (the latter mostly in the United
States). The credit crunch combined with de-
clining commodity prices has made banks
reluctant to lend. The situation may worsen if
land prices begin to decline—there are already
signs that land prices are falling in some EU
countries—or if credit conditions do not begin
to thaw. At the same time, farmers appear to
have lost faith in hedging instruments.


Commodity price declines carry significant
implications for the terms of trade
The decline of commodity prices anticipated
for 2009 will drive sharp changes in develop-
ing countries’ terms of trade. Some 30 coun-
tries are expected to gain more than 1.5 per-
cent of GDP from the decline in oil prices
(figure 1.30). Of these, Cyprus, Guyana,
Jamaica, Jordan, the Kyrgyz Republic,
Moldova, Nicaragua, the Seychelles, and
Tajikistan stand to gain more than 2.5 percent
of GDP. And the fall in food prices will help to
ease both external and fiscal positions (as the
cost of food subsidies declines) for many of
the world’s poorest countries, including Benin,


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


44


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 44




Eritrea, Ghana, Guinea, Haiti, Madagascar,
Niger, Senegal, and Togo.


At the same time, oil-exporting countries
will experience large terms of trade losses, with
Angola, Azerbaijan, the Republic of Congo,
Equatorial Guinea, Gabon, the Islamic Repub-
lic of Iran, Kuwait, Libya, Nigeria, and Saudi
Arabia incurring first-round income losses in
excess of 10 percent of GDP. Weaker metals
prices are anticipated to reduce incomes by
more than 2 percent of GDP in Chile, Mauri-
tania, Mongolia, Papua New Guinea, Suri-
name, and Zimbabwe. Countries that rely
heavily on grains exports are likely to be hit
hard. Exporters like Argentina (maize, soy-
beans, wheat), Bolivia (soybeans), The Gambia
(groundnuts), Guinea-Bissau (groundnuts),
Guyana (rice), and Paraguay (soybeans) will
experience losses ranging from 1.6 percent to
9 percent of GDP, though for some the impact
will be softened by falling oil prices.


Taking into account the effects of commod-
ity price declines on both import and export
prices, more than half of the countries in a
sample of 162 economies are expected to see
an increase in the terms of trade, of which 24
will experience gains in excess of 1.5 percent
of GDP. About a quarter of the countries, in-
cluding most oil producers, are seen to incur


first-round income losses in excess of 1.5 per-
cent of GDP (figure 1.31).


Key risks and uncertainties


The freezing of credit markets, collapse ofstock markets, large shifts in exchange
rates and commodities prices, and unprece-
dented policy reactions have combined to cre-
ate an extremely uncertain environment for
market participants and forecasters alike. Sev-
eral possible outcomes for the global economy
remain plausible at this juncture—even assum-
ing that a catastrophic meltdown of markets is
avoided. Global GDP growth could reasonably
be expected to be as strong as 1.4 percent in
2009 and as weak as 0.4 percent, compared
with the baseline projection of 0.9 percent
growth presented in this chapter.


The confidence interval around projections
for 2010 is even wider. Instead of the typical
cyclical rebound envisaged in the baseline,
output could remain subdued as consolidation
in the banking sector acts as a persistent drag
on growth, and credit growth remains almost
stagnant for several years (see Hebling 2005;
IMF 2008). Alternatively, the crisis may have
less pronounced direct effects on the real econ-
omy, in which case the aggressive monetary
loosening and large-scale fiscal stimulus that
the crisis has provoked could lead to a sharper
rebound in 2010. Such a scenario runs the risk


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


45


Source: World Bank.


Terms of trade shock (as share of GDP)


Figure 1.31 First-round income impact of
lower commodity prices will be positive in
more than half of developing countries


–25


–20


–15


–10


–5


0


5


28
23 22 21 0 1


26


24


22


0


2


4


6


Source: World Bank.


Grains price shock (as share of GDP)


Vulnerable countries


Argentina


Kazakhstan
Venezuela,
R.B. de


Seychalles
Jordan


Figure 1.30 Most vulnerable countries will
benefit from the decline in grains and
oil prices
Oil price shock (as share of GDP)


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 45




of reaccelerating inflation, which would likely
need to be followed by a tightening of both
monetary and fiscal policies.


In such an environment, policy makers in
both developing and high-income countries
must be prepared to weather a worst-case sce-
nario of even lower growth, including the pos-
sibility of a decline in world GDP for the first
time in the postwar period, as well as a finan-
cial meltdown that could lead to a sudden stop
of credit flows to all but the most creditwor-
thy borrowers. Whatever the eventual out-
come, the environment over the next two
years will be radically different from that
which was expected only a few months ago,
and policies will need to adapt.


Understandably (and correctly) under cur-
rent circumstances, with the world economy
confronted with systemic financial risks,
short-term attention is focused on dealing
with the immediate crisis, minimizing risks,
and reacting to rapidly evolving develop-
ments. Major risks concern the possibility of
balance of payments and currency crises in in-
dividual countries—a real risk at this stage for
at least some developing countries. A collapse
of the domestic banking system in select de-
veloping countries is also a tenable possibility.
In the case of Russia, where the economy is
flush with petrodollars, the authorities look to
be in a position to rescue domestic financial
institutions. Other countries are less well
positioned and may have to draw upon inter-
national assistance, a development that should
be undertaken quickly if necessary. The longer
the global stress lasts, the more currencies may
come under pressure. The increase in corpo-
rate spreads still exceeds the increase in sover-
eign spreads by a large margin. In all cases
preventing a financial crisis in one country
from infecting a broader group of countries
would be difficult. Therefore, instead of ex-
ploring the details of a potential crisis, it is
paramount to avoid a crisis altogether
through coordinated international action.


From a longer-term perspective, concerns
are of a very different nature. The question is:
How will developing countries emerge from


the current downturn, and will they retain the
underlying strength, confidence, and strong
macroeconomic fundamentals that under-
pinned the record growth of the past five
years? The danger for all countries is that too
aggressive an effort to combat what looks to
be an inevitable slowdown may prove too
costly and undermine the strong fundamentals
that had earlier underpinned growth. Coun-
tries need to react quickly and forcefully to
signs of weakness in their financial sectors, in-
cluding by liquidity injections and recapitaliz-
ing banks where necessary.


Care must also be taken, however, to avoid
the possible entrenchment of inflationary
pressures by ensuring that more general ef-
forts to provide support to banking systems
are highly targeted and efficient, and that any
necessary liquidity injections are reabsorbed
once growth revives. The long-term costs of
such policies could be substantial even if they
help to lighten the coming recession. Policy
makers must ensure that the steps taken are
clear and coherent. So far, the worst has been
avoided by huge government interventions. If
the market comes to view such interventions
as ineffective, because they are poorly under-
stood or seen as not addressing the most criti-
cal problems, then the policies likely will be
ineffective. In this case, global economic diffi-
culties could become very serious indeed.


Long-term prospects and
poverty forecast


Despite the current financial turmoil andsharp slowdown in growth anticipated for
2009, longer-term prospects for developing
countries have changed only modestly com-
pared with last year’s forecast. In part prospects
are little changed because a slowdown had al-
ready been anticipated, albeit to a much lesser
degree. The primary reason, however, lies in the
long-term supply potential of developing coun-
tries, which should allow output to recoup the
lost production induced by the coming growth
recession during the first five years of the next
decade.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


46


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 46




Per capita GDP in developing countries
over the period 2010–15 is expected to expand
at a relatively rapid annual pace of 4.6 per-
cent, much faster than the 2.1 percent pace of
the 1990s and the 0.6 percent average of the
1980s, replicating the average performance of
this decade. Improvements in macroeconomic
policies (lower inflation, relaxation of trade
restrictions, more flexible exchange rate
regimes, and lower fiscal deficits) have com-
bined with structural reforms (privatization
and regulatory initiatives) to reduce uncertainty
and generally improve incentives for invest-
ment. Projected future growth rates are higher
than in the 1990s (and much more so than in
the 1980s) in every developing region except
East Asia and the Pacific, where growth is ex-
pected to decline somewhat because of an aging
population.


Rapid growth should enable developing
countries, as a group, to achieve the Millennium
Development Goal of halving poverty by 2015.
The poverty forecast for 2015 is 15.5 percent,
well below the target of 20.9 percent—half of
the revised 1990 level as explained in more
detail below. The East Asia and Pacific region
has clearly surpassed its individual target, and
South Asia is on target. The main concern re-
mains Sub-Saharan Africa. Although the inci-
dence of poverty in the region has been de-
clining over the past decade, at about 37.1
percent in 2015, the share of people living in
extreme poverty will remain well above the
region’s target of 29 percent (table 1.5).


This year’s poverty forecast is consistent
with the World Bank’s revised poverty esti-
mates for developing countries. The new
poverty estimates largely result from a revision
of purchasing power parities (PPP) by using a
new International Comparison Project survey
of prices paid by households. The 2005 survey
improved on the 1993 data and methods used
to prepare previous estimates. The new price
data reveal that the cost of living is higher in
low- and middle-income countries than had
been suggested by past surveys. Other factors
influencing the changes to the poverty esti-
mates include revisions to national accounts


and the incorporation of new and more recent
household surveys (see box 1.4 and Chen and
Ravallion 2008 for more detail).


The new poverty estimates provide a signif-
icantly different picture of global poverty—
back to 1990 and for the most recent year, 2005
(figure 1.32). Global poverty in 1990, the bench-
mark year for the Millennium Development
Goals, is now estimated to have been 41.7 per-
cent of the developing-country population


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


47


Table 1.5 Poverty in developing countries
by region, selected years


Region or country 1990 2005 2015


Number of people living on less than $1.25/day (millions)
East Asia and the Pacific 873.3 316.2 137.6


China 683.2 207.7 84.3
Europe and Central Asia 9.1 17.3 9.8
Latin America and the Caribbean 49.6 45.1 30.6
Middle East and North Africa 9.7 11.0 8.8
South Asia 579.2 595.6 403.9


India 435.5 455.8 313.2
Sub-Saharan Africa 297.5 388.4 356.4
Total 1,818.5 1,373.5 947.2


Number of people living on less than $2.00/day (millions)
East Asia and the Pacific 1,273.7 728.7 438.0


China 960.8 473.7 260.9
Europe and Central Asia 31.9 41.9 26.7
Latin America and the Caribbean 86.3 91.3 72.4
Middle East and North Africa 44.4 51.5 33.3
South Asia 926.0 1,091.5 959.5


India 701.6 827.7 714.5
Sub-Saharan Africa 393.6 556.7 585.0
Total 2,755.9 2,561.5 2,115.0


Percentage of the population living on less than $1.25/day
East Asia and the Pacific 54.7 16.8 6.8


China 60.2 15.9 6.1
Europe and Central Asia 2.0 3.7 2.2
Latin America and the Caribbean 11.3 8.2 5.0
Middle East and North Africa 4.3 3.6 2.5
South Asia 51.7 40.3 23.8


India 51.3 41.6 25.4
Sub-Saharan Africa 57.6 50.9 37.1
Total 41.7 25.2 15.5


Percentage of the population living on less than $2.00/day
East Asia and the Pacific 79.8 38.7 21.6


China 84.6 36.3 18.9
Europe and Central Asia 6.9 8.9 6.0
Latin America and the Caribbean 19.7 16.6 11.8
Middle East and North Africa 19.7 16.9 9.3
South Asia 82.7 73.9 56.6


India 82.6 75.6 57.9
Sub-Saharan Africa 76.2 73.0 60.8
Total 63.2 47.0 34.6


Source: World Bank.




(compared with the previous estimate of
28.7 percent using the old prices and guide-
lines). This implies that the target for the
poverty MDG is 20.9 percent, rather than the
previous 14.4 percent. The revisions had a sig-
nificant affect on all regions, except Latin
America and the Caribbean, which saw only
minor adjustments. The case of China is


illustrative. The headcount index for 1990
jumped from 33 percent to 60.2 percent. This
dramatic change was attributable mainly to
the poor price comparison basis for the ear-
lier estimate rather than to any underlying
change in China itself.


The combination of a new estimate of mean
consumption and a new poverty line also


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


48


Surveys of prices are obviously critical in determin-ing the cost of the common basket of goods and
services in each country that is used to define
poverty. The price surveys determine the purchasing
power parity (PPP) exchange rate used in translating
domestic prices into international dollars. Compared
with the measure provided by market exchange
rates, these PPP exchange rates provide a more accu-
rate measure of the affordability of nontraded goods
in the poverty basket (because prices of nontraded
goods vary enormously across countries at different
levels of development). Previously, the PPP exchange
rates were based on a 1993 survey of prices that cov-
ered relatively few countries and used a weak survey
methodology. In 2005, the World Bank, in partner-
ship with other international organizations and na-
tional statistical offices, concluded a new price sur-
vey that covers 146 countries—of which 101 are
developing—and between 600 and 800 products
(World Bank 2008). The survey includes China for
the first time and updates the earlier survey of India,
which dated from 1985. The new price survey has
had two impacts on measured poverty.


First, it has revealed that prices paid by the poor
in developing countries are higher than thought previ-
ously, thereby reducing estimates of mean per capita
consumption (or income) based on a common unit,
that is, international dollars. In China, for example,
average per capita consumption in 2005 was esti-
mated to be about $2,400 at the old PPP exchange
rate but only about $1,400 at the new PPP exchange
rate. These newer price levels imply quite naturally
that households can afford fewer goods and that
many more are living on less than a $1 a day.


Second, in light of the new price survey, the defin-
ition of the “international” poverty line has been


Box 1.4 The impact of the new price survey on
poverty estimates


reevaluated. The international poverty line is meant
to capture a notion of extreme poverty. As such, it is
calculated as the average poverty line of the poorest
countries. Using the new PPP estimates, the new
poverty line for extreme poverty is now measured at
$1.25 (in 2005 international dollars, and represents
the average of the poverty lines of the fifteen poorest
countries for which there is data). This new poverty
line is about 14 percent lower than the old interna-
tional poverty line, which in 2005 dollars is $1.45.
This reflects the higher PPPs for the poorest coun-
tries implied by the 2005 survey data. To capture a
broader notion of poverty, the World Bank’s poverty
forecast has also presented statistics relevant to the
so-called $2/day poverty line that was double the
$1/day poverty line and reflected the average of the
national poverty lines of the middle-income coun-
tries. The new $2/day poverty line, measured in 2005
prices, represents the median of all of the national
poverty lines in the available surveys.


The increased estimates of prices in many coun-
tries and a lowering of the international poverty line
have changed the picture of poverty globally—over
time and in 2005. As reported in Chen and Raval-
lion (2008), these two effects partially offset each
other. The revisions in the PPPs alone, with no
change in the poverty line, would have raised the
poverty estimate in 2005 from the previous 17 per-
cent to 32 percent. The reduction in the poverty line
to $1.25 a day lowers this estimate to 25 percent.
The net effect is to raise the poverty estimate for
2005 by 8 percentage points. The upward revision in
the poverty level does not imply that the rate of
poverty reduction, say between 1990 and 2005, has
not been as rapid as previously reported.


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 48




implies a change in the starting value of the
growth-to-poverty elasticity. Even if the
shape of the income distribution is broadly
the same as in earlier income surveys (as is the
case for many countries), the fact that the
poverty line intersects the distribution at a dif-
ferent spot means that the impact of a given
increase in per capita incomes has changed.
Nevertheless, the rate of improvement in the
headcount poverty rate between 1990 and
2005 has not changed that much using the
new estimates.3 This year’s forecast reports an
annual decline in global poverty between
1990 and 2005 of some 3.3 percent, which is
very close to the earlier estimated annual de-
cline of 3.2 percent. However, the higher
poverty level means that 25.2 percent of the
developing world’s population was living on
less than $1.25 a day in 2005, compared with
last year’s estimate of 18.1 percent for 2004.
As before, much of decline in global poverty
between 1990 and 2005 results from in-
creased incomes in China, where the level of
extreme poverty fell from over 60 percent in
1990 to less than 16 percent in 2005.


It should be noted that the impact on the
poverty forecast of the recent rise in food and
energy prices is not fully reflected in these pro-
jections, which largely reflect neutral changes
in per capita incomes.4 As discussed in chap-
ter 3, the increase in food prices between
January 2007 and January 2008 is likely to
have increased global poverty by between
130 million and 155 million people, or by
1.3–1.5 percentage points. With prices now
declining but not expected to return to their
earlier levels, at least some of this deteriora-
tion is likely to be permanent.


Notes
1. Prices are as of November 20, 2008.
2. Total assets of U.S. households began to decline


in the fourth quarter of 2007, as real estate values
dropped by $185 billion and financial assets fell by
$200 billion. By the second quarter of 2009, the
cumulative decline in household assets amounted to
$2.4 trillion, the equivalent of 16 percent of GDP.


3. It is difficult to make an exact comparison be-
cause last year’s forecast was benchmarked to 2004,
not 2005 as is this year’s forecast. As well, there have
been (slight) revisions to historical national income and
product accounts.


4. Because of the inherent delays in processing
household surveys, the current forecast reflects surveys
that were taken in 2005—before the rapid increase in
commodity prices in 2007 and the first half of 2008.


References
Chen, Shaohua, and Martin Ravallion. 2008. “The De-


veloping World Is Poorer Than We Thought, But
No Less Successful in the Fight against Poverty.”
World Bank Policy Research Working Paper, No.
4703, August. World Bank, Washington, DC.


Helbling, Thomas, andMarco Terrones. 2003. “Real and
Financial Effects of Bursting Asset Price Bubbles.”
In IMF World Economic Outlook, April 2003.


IMF. 2008. “Financial Stress and Economic Downturns.”
in IMF World Economic Outlook, October 2008.


Ratha, Dilip, Sanket Mohapatra, and Zhimei Xu. 2008.
“Outlook for Remittance Flows 2008–2010.”
Migration and Development Brief 8. World Bank,
Washington, DC.


World Bank. 2008. Global Purchasing Power Parities
and Real Expenditures: 2005 International Com-
parison Program. Washington, DC: World Bank.


P R O S P E C T S F O R T H E G L O B A L E C O N O M Y


49


0


Ea
st


As
ia


& P
ac


ific Ch
ina


So
uth


As
ia


Ind
ia


Eu
ro


pe
& C


en
tra


l A
sia


Mi
dd


le
Ea


st
& N


or
th


Afr
ica


Su
b-S


ah
ar


an
Afr


ica


La
tin


Am
er


ica
& C


ar
ibb


ea
n


Wo
rld


tot
als


Source: World Bank data and staff calculations.


Note: The comparison reflects both revisions necessitated by the
change in purchasing power parities and the new international
poverty line, which was $1.45 per day in 2005 dollars under the
old methodology and has been revised down to $1.25 per day in
2005 dollars with the new methodology.


70


60
New


Old


50


40


30


20


10


Headcount poverty index in 1990


Figure 1.32 Revised poverty estimates
following from new price survey


10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 49




10363_Pg15_50:10363_Pg15_50 11/29/08 7:05 AM Page 50




51


The Commodity Boom:
Longer-Term Prospects


2


The enduring importance of commodities tothe world economy and their volatility has
been driven home with the rise, and recent
decline, of prices for energy, metals, and food.
Before they began to fall in the second half
of 2008, the real prices of energy and metals
more than doubled over the past five years,
while the real price of internationally traded
food commodities increased 75 percent (see
chapter 1 for more detail on the most recent
developments in commodity markets).


This chapter reviews the main characteris-
tics of this most recent boom in commodity
markets and examines the structure and behav-
ior of both their demand and supply, with a
view to better understanding prospects over the
medium to long term. The discussion does not
include forests or fisheries, given their com-
plexity and the greater importance of issues
related to the public commons than for oil,
metals, minerals, and agricultural products.


Several important insights emerge from this
chapter that are likely to drive developments
over the next several decades.


The magnitude and duration of the com-
modity price boom are unprecedented.


• The upswing of the current boom lasted
five years. Average commodity prices
doubled in U.S. dollar terms (in part
boosted by dollar depreciation), making
this boom longer and stronger than any
boom in the 20th century.


• Like earlier booms, this one ended when
a slowdown in global growth eased de-
mand pressures. The unusual strength
and duration of this boom reflect the
unusual resilience, until now, of global
growth, particularly in developing
countries.


For oils and metals, an extended period of
low or falling prices created the conditions for
the boom and help explain the weak supply
response.


• Low prices throughout much of the
1980s and 1990s reflected periods of
relatively weak growth and abundant
spare capacity. Idle capacity arose, both
because energy demand declined in the
wake of high oil prices in the 1970s and
early 1980s and because demand for oil
and metals in the former Soviet Union
(FSU) fell sharply when altered eco-
nomic incentives caused these countries
to radically increase the efficiency with
which commodities are used.


• During the 1990s, much of the rising
demand for oils and metals was met by
the relatively easy rehabilitation of this
already-existing capacity. This helped to
keep global commodity prices low and
deterred investment in new supply
capacity, thus depressing activity in the
sectors supplying inputs to commodity
exploration and exploitation.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 51




• As a result, a mismatch developed be-
tween the trend growth of demand and
the trend growth of supply capacity.
This mismatch became apparent in the
early to mid-2000s, when spare capacity
was exhausted and demand began to
outstrip supply, pushing up oil and
metals prices.


• Metals prices also were boosted by strong
demand growth, linked to unusually high
and rising metal intensities in China.
Going forward, the intensity of metals de-
mand in China should decline as invest-
ment rates fall and market mechanisms
provoke an increase in efficiency similar
to that observed in the FSU.


The supply response in oil and metals is ex-
pected to remain sluggish over the next few
years, but new discoveries and technological
progress are likely to boost supply over the
long run.


• Ongoing shortages in the sectors that
provide exploration and exploitation
services, and the long lags between ini-
tial investments and the coming on-
stream of new production, suggest that
supply conditions may remain relatively
tight in the oil and metals sectors and
that prices, although declining, are un-
likely fall to their 1990s levels.


• Despite rising production levels, known
reserves of most metals and oil have re-
mained fairly constant because of new
discoveries and improvements in extrac-
tion technology.


• Although oil prices are likely to fall
below existing levels during the current
downturn, they are expected to rise
during the recovery and stabilize at
around $75 a barrel in real terms because
new supplies—for example, from off-
shore oil fields and Canadian tar sands—
have higher production costs, and a ma-
jority of known reserves are located in
regions that are politically unstable or
not open to outside investors.


• Given continued technological progress
and appropriate policies, high oil prices
will prompt and use development of al-
ternative energy sources (including re-
newables) and greater efforts at conser-
vation, raising energy supplies and
significantly reducing the demand for oil.


• For metals, slower growth in commodity-
intensive developing countries (as popula-
tion growth slows and income levels catch
up with the West), the easing of China’s
investment surge, a rise in the share of
total output held by the less-commodity-
intensive service sector, and substitution
away from expensive materials should
slow demand over the long term, facilitat-
ing a decline in prices.


The extension of the boom to agricultural
markets mainly reflects the rising demand for
biofuels and high energy prices.


• Higher energy and fertilizer prices raised
production costs in agriculture, and the
combination of high oil prices and
biofuel subsidies and mandates boosted
demand for some food crops. Poor har-
vests in Australia also contributed to a
decline in grain stocks.


• Demand growth for food and feed in de-
veloping countries (such as China and
India) has not accelerated and was not a
major contributor to the rise in food
prices.


• Real-side speculation (the decision to hold
on to physical stocks in anticipation of
further price increases) and financial in-
vestments along with policy reactions
such as the imposition of export bans, also
contributed to the rapid increase in grain
and oilseed prices during 2007 and 2008.


The prospects for growth in the supply of
agricultural commodities at the global level are
good, while demand growth is likely to slow.


• Historically, agricultural productivity has
increased more quickly than population,


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


52


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 52




allowing food production to keep pace
with growing demand, even as the share
of the population working in agriculture
declined. Over the next 20 years, assum-
ing sufficient investment is forthcoming
in developing and high-income countries,
the spread of more-intensive production
techniques coupled with improved vari-
eties that are emerging from recent ad-
vances in biotechnology, should allow
global productivity gains on par with his-
torical trends despite some productivity
losses caused by climate change.


• Considerable potential remains for
bringing new (albeit somewhat less pro-
ductive) land under cultivation in Latin
America, Africa, and the FSU countries.


• The demand for agricultural commodi-
ties will slow as population growth
slows and as incomes in developing
countries continue to rise (at higher in-
comes, the incremental rise in demand
for agricultural commodities sparked by
further increases in income is relatively
small).


• Robust supply growth and slowing de-
mand are expected to reduce agricul-
tural prices in the long run. Increased
demand for biofuels, however, will ex-
tend the period of high prices unless
policies change or energy prices fall
more rapidly than expected.


• A more-rapid-than-expected warming of
the planet could reduce agricultural pro-
ductivity sharply, leading to rising food
prices.


While global supply prospects are good, un-
less policy responds forcefully, food produc-
tion in many developing countries may fall
short of output gains
Yield gains associated with the green revolu-
tion are waning in many countries. Productiv-
ity levels in much of Africa and Europe and
Central Asia are also declining; they are only
one half those of best-practice developing
countries, even after having controlled for dif-
ferences in climate and soil.


Unless large-scale agricultural investment
and knowledge creation and dissemination are
stepped up, food production in many of these
countries will not keep pace with demand. As
a result, these countries will become increas-
ingly dependent on imported food.


Simulations suggest that if productivity
growth in developing countries disappoints,
global food prices will be higher, and many
developing countries—especially those with
rapidly growing populations—will be forced
to import more-expensive food from high-
income countries, where productivity growth
shows fewer signs of waning.


The remainder of this chapter explores each
of these themes in more detail. The next sec-
tion compares the main characteristics of the
current commodity price cycle with earlier
ones. Then an examination of the long-term
demand and supply sides of commodity mar-
kets follows. The chapter then brings the fore-
casts for supply and demand in commodity
markets together to form a base-case scenario
for prices, along with some alternative scenar-
ios. While a wide range of future outcomes for
supply, demand, and prices are possible, the
simulations support a highest-probability out-
come where today’s high prices should induce
sufficient additional supply to keep commodity
prices well below their recent highs over the
medium to long term—although they are not
expected to descend as low as they were in the
1990s. A final section concludes.


Characteristics of the current
commodity price boom


Booms and busts are relatively commonoccurrences in commodity markets (box 2.1
and figure 2.1). Like its predecessors, this
episode of high prices has occurred during a
period of strong global growth and heightened
geopolitical uncertainty, and it generated sig-
nificant inflationary pressures (see chapter 1).1


However, this commodity boom was differ-
ent in important ways as well. It was among
the most marked of the past century in its


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53


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 53




G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


54


It is in the nature of commodities for their prices toshow pronounced cyclical behavior. Indeed, some
of the most influential early insights about the role
of expectations in pricing behavior derived from ob-
servations of how the interaction between prices and
quantities in agricultural markets tended to generate
price cycles (Kaldor 1934).


Prices in commodity markets tend to exhibit cyclical
behavior because supply decisions (how much to plant,
how many mine shafts to dig) must be made by market
participants well before the final sale price of the com-
modity is known. Because producers in the market are
uncertain about future demand and the production
decisions of other producers, the tendency in the aggre-
gate is for the independent production decisions to
overcompensate for short-term imbalances between
demand and supply and therefore for commodity prices
to be volatile. The longer the lag between the produc-
tion or investment decision of producers and the actual
increase in output, the longer the cycle in prices.


Individual commodities differ in the extent to
which they exhibit cyclical behavior and in the mech-
anisms underlying the cycles. The output of industrial
commodities tends to be most volatile, mainly be-
cause their demand tends to fluctuate with the busi-
ness cycle and (in the case of crude oil) to be subject
to policy-related supply shocks (box figure 2.1a).


While prices of all commodities are sensitive to
spare capacity, the duration of booms and busts in
the metals, minerals, and the oil sectors tends to be
longer than in agricultural markets because of the
longer lags between investing in new capacity and
the eventual increase in supply.


Their revenues also tend to be more volatile than
revenues in agricultural commodities because
changes in production mainly reflect demand shocks.
As a result, both prices and quantities move in
tandem, rising during periods of high demand and
declining in periods of low demand. In contrast,
demand for agricultural products tends to be more
stable, and volatility tends to stem from supply
shocks. As a result, price movements tend to reduce
revenue volatility among agricultural commodities
because prices tend to move in the opposite direction
of supply shocks—rising when supply is low and
falling when supply is ample. Thus, for example,
copper, lead, and zinc have much higher price and
revenue volatility than maize, soybeans, and wheat,
but the differences in output volatility are much less
marked (box figure 2.1b).


Box 2.1 Commodity price cycles


The current boom in agricultural prices is differ-
ent in this regard, because it reflects a demand shock
rather than a supply shock, meaning that prices have
risen even as overall production (including that des-
tined for biofuels) has increased.


Phosphate


Source: World Bank.


3 5 7 9
Percent


11 13 15


Tin
Iron Ore


Petroleum
Aluminum


Coffee
Cocoa


Soybeans
Cotton


Lead
Maize


Palm oil
Wheat


Copper
Rice
Tea


Logs
Zinc


Rubber
Sugar


Bananas


Box figure 2.1a Volatility of production
around trend, 1960–2007


Global revenue volatility (%)


Contribution of:


Source: World Bank.


Volatility decomposition of select commodities (global),
1986–2006


Box figure 2.1b Volatility decomposition of
global revenue for selected commodities,
1986–2006


220


0


20


40


60


Co
ffe


e


Co
pp


er


Le
ad Zin


c Oil Tin
Co


co
a


Co
tto


n
Ric


e
Te


a
Co


rn


So
yb


ea
ns


Wh
ea


t


Global price volatility (%)
Global output volatility (%)
Residual (%)


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 54




T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


55


80


130


180


230


280


330


380


1900 1910


Source: Grilli and Yang (1988) for 1900 to 1947; World Bank for 1948 to 2008.


1920 1930 1940 1950 1960 1970 1980 1990 2000


Real non-energy commodity prices, index (1977–79 5100)


1917 (just prior to WW I)


1951 (postwar rebuilding)


2008 (forecast)


1974 (first oil crisis)


Figure 2.1 The recent commodity boom was the largest and longest of any boom since 1900


magnitude, duration, and the number of com-
modity groups whose prices have increased.


The size of the price increases are
unprecedented
The magnitude of commodity price increases
during the current boom is without precedent.


The real U.S. dollar price of commodities has
increased by some 109 percent since 2003, or
130 percent since the earlier cyclical low in
1999. By contrast, the increase in earlier major
booms never exceeded 60 percent (table 2.1).


The unusual amplitude of the price in-
creases during this boom partly reflects the


Table 2.1 Principal characteristics of major commodity booms
Common features 1915–17 1950–57 1973–74 2003–08


Rapid global real growth — 4.8 4.0 3.5
(average annual percent)


Major conflict and geopolitical World War I Korean War Yom Kippur War, Iraq conflict
uncertainty Vietnam War


Inflation Widespread Limited Widespread Limited second
round effects


Period of significant World War I Postwar rebuilding Not a period of Rapid buildup of
infrastructure investment in Europe and Japan significant infrastructure in China


investment


Centered in which major Metals, Metals, agriculture Oil, agriculture Oil, metals,
commodity groups agriculture agriculture


Initial rise observed in prices of Metals, Metals Oil Oil
agriculture


Preceded by extended period No World War II destroyed Low prices and a Extended period
of low prices or investment much capacity supply shock of low prices


Percent increase in prices 34 47 59 131
(previous trough to peak)


Years of rising prices prior to peak 4 3 2 5


Years of declining prices prior to trough 4 11 19 —


Source: World Bank.
— Not available.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 55




fact that the U.S. dollar has been depreciating
during the same period and most primary
commodity prices are quoted in dollars. The
real commodity prices in developing countries
(local currency prices deflated by local infla-
tion), have increased by much less than their
dollar counterparts. The real dollar price of
internationally traded metals and minerals
rose by 158 percent between 2000 and 2007,
but by only 78 percent in developing coun-
tries. Similarly, the real dollar price of interna-
tionally traded food commodities increased 64
percent compared with a much lower 14 per-
cent in developing countries (figure 2.2).2


The boom covers a wide range of
commodities and has lasted much longer
than previous ones
This boom also differs from earlier ones in
the breadth of commodities that have seen
their prices rise sharply. The initial accelera-
tion in prices was first visible in the oil mar-
ket and was quickly followed by develop-
ments in the metals and minerals market. The


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


56


0


55


110


165


220
Percent change, 2000–07


Figure 2.2 The real local currency price of
commodities rose much less than the real
dollar price


Energy


Source: World Bank.


Note: Real US$ price has been deflated by the unit value of
manufactures (MUV); real price in developing countries represents
a trade-weighted average of local currency price increases deflated
by local consumer prices increases.


Metals Food


Nominal price increase (US$)
Real US$ price increase (MUV deflated)
Real price increase in developing countries


real price of agricultural products was
broadly stable, especially in developing coun-
tries, and began to rise sharply only in early
2007 (figure 2.3).


This is very different from the 1950s boom,
when post–World War II rebuilding (and fears
of shortages) increased metals prices and poor
harvests raised agricultural prices, but the
price of oil remained flat. In the 1970s boom,
agricultural and oil prices increased, but met-
als prices rose initially and then collapsed with
the decline in aggregate demand.


The current price boom is unusually long.
The U.S. dollar price of internationally traded
commodities has been rising for more than
five years, much longer than the price booms
of the 1950s and 1970s. Only the 1917 boom
saw a sustained increase in commodity prices
over a similarly long period (four years).


Typically a commodity price boom is fol-
lowed by a bust as demand reacts to high
prices by contracting and supply reacts by ex-
panding. For example, the 1970s and 1980s
busts were associated with a sharp slowdown
in world output, which eased demand pres-
sures at the same time as supply was rebound-
ing. Until most recently, the current boom has
been marked by a weak supply response (see
below) and sustained global growth.


50
Jan.
2000


Jan.
2001


Jan.
2002


Jan.
2003


Jan.
2004


Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


100


150


200


250


300


Real local currency commodity price indexes, CPI-deflated
(Jan. 2000 5 100)


Figure 2.3 Oil and metal prices led this
boom, with food prices rising only much
later


Source: World Bank.


Energy


Food


Metals and minerals


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 56




The roots of the boom in
commodity prices


This commodity price boom has been sup-ported by strong growth in global demand,
primarily from developing countries. With the
possible exception of a few metals, however,
the strong GDP growth of the past five years
does not by itself account for the magnitude or
duration of the current boom (box 2.2). Global
GDP was actually growing faster in the lead-up
to the 1970s boom, with Japan—taking the
role China plays today—emerging as a new
economic power with growth in excess of
10 percent (figure 2.4). However, the strength
and duration of this boom owes much to the
resilience of developing-country growth, which
continued at high levels for much longer than
during previous episodes of high commodity
prices. On the one hand, this reflected the sur-
prising facility with which both industrial and
developing countries absorbed the initial very
large hikes in commodity prices—itself a reflec-
tion of the very buoyant external conditions,
including notably historically low interest rates,
weak inflation, and ample liquidity (see World
Bank 2007a, 2008).


Other important factors were also at work.
The supply response in extractive industries
has been muted because of the low prices of


the late 1980s and 1990s, which reduced in-
centives to develop new deposits and to invest
in the physical and human capital required to
expand supply. In agriculture, higher oil and
fertilizer prices, along with increased demand
from biofuels and a reduction in grain stocks,
have been more important than fast growth
per se.


An extended period of low prices
depressed investment in new capacity
The influence of low prices was perhaps most
marked in the oil sector, where following the
oil shocks of the 1970s and 1980s, conserva-
tion efforts and substitution toward other
sources of energy depressed demand for oil and
oil prices. Indeed, it took 15 years for world oil
demand to regain its 1979 level. Meanwhile, the
expansion of oil production, particularly in the
North Sea, Mexico, and Alaska eliminated
the market power that the Organization of
Petroleum-Exporting Countries (OPEC) had
exploited to keep prices high even in the face of
rapidly declining demand. By mid-1986, nom-
inal prices had fallen to less than $10 a barrel
and OPEC’s spare production capacity was
equal to 8.7 mb/d—more than 13 percent of
world demand at that time.3


Global spare capacity was further aug-
mented during the 1990s, when demand for oil
in the FSU declined precipitously and more or
less permanently. As the prices of primary com-
modities were allowed to reflect world prices
and many of the energy- (and metals-) inten-
sive industries that had characterized the Soviet
era closed or retooled, demand for energy (and
metals) in these countries declined rapidly.
Overall, oil demand declined by 40 percent be-
tween 1987 (its peak) and 1999—or by 5 mil-
lion barrels a day—the equivalent of 7 percent
of world demand in 2000.


Initially, oil production in the FSU fell by
about as much, so there was an enormous
buildup of dormant capacity. Including
OPEC’s surplus capacity of about 5 mb/d,
total dormant capacity from these countries
equaled around 10 mb/d in 1995 (figure 2.5).4


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


57


Annual percent change in global GDP


1970s
boom


Source: World Bank.


Figure 2.4 Global growth lasted longer and
was stronger during the recent commodity
boom than in earlier ones


2000s
boom


0
1967 1972 1977 1982 1987 1992 1997 2002 2007


1


2


3


4


5


6


7


8


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 57




opment of existing wells declined by more
than 50 percent, from $72 billion in 1980 to
$30 billion in 1999 (figure 2.6).5 As a result,
demand for the inputs required for oil explo-
ration and extraction was weak, and capacity
in these supporting industries declined, as did
the number of new engineers trained to find
and extract oil.6


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


58


The growth surge of developing countries between2003 and 2007 contributed to strong demand
for commodities. Had output expanded more slowly,
in line with the long-term growth potential of devel-
oping countries—estimated to be about 6.4 per-
cent—oil demand would have been lower by only
about 1 million barrels a day, or just under 1.2 per-
cent of world consumption; demand for metals
would have been about 1.5 percent lower and
demand for grains about 1.9 percent lower.


Overall, demand for most commodities at the
global level rose less quickly than world GDP, and
for most commodities, the contribution of
developing countries to the increase in commodity
demand was in line with their GDP growth (box
figure). Incremental developing-country demand
for some commodities was much stronger than in
high-income countries, both because developing-
country GDP was growing at a faster rate and
because relatively commodity-intensive manufactur-
ing activities were being transferred from high-
income to developing countries in this time period—
a factor that by itself should have had no impact on
global commodity demand.


Indeed, despite the acceleration in world GDP,
consumption for most commodities did not rise
rapidly. Coal and certain metals represent notable
exceptions, and here the demand of China has played
a particular role. Between 2003 and 2007, China’s
consumption of aluminum increased by 7.1 million
tons, or 26 percent of world demand. Coal consump-
tion increased by 458 million (oil equivalent) tons, or
18 percent of global demand. However, China’s pro-
duction of these commodities increased by almost as
much—7.0 million tons in the case of aluminum and


Box 2.2 Developing-country growth and global
commodity demand in the recent past


421 tons in the case of coal—so its demand surge con-
tributed relatively little to overall market tightness. In-
deed, by mid-2008, the price of aluminum rose by
only 74 percent compared with its average value in
the 1990s (versus 200 percent for metals and minerals
in general), and coal rose by 392 percent, about the
same as natural gas, but much less than oil.


Importantly, despite rapid gains in developing-
country GDP and income growth, grain demand did
not accelerate appreciably for developing countries
considered as a whole or for China alone. In fact,
Chinese consumption of wheat and rice declined,
and China’s contribution to incremental global corn
demand was roughly in line with its increase in GDP.


Box figure 2.2 China was the key global
metals contributor to global demand growth
Percent increase in global commodity demand, 2003–07


25
0
5


Source: World Bank.


10
15
20
25
30
35
40


Alu
m


inu
m


Co
al


Co
pp


er


Re
al


GD
P


Co
rn


Cr
ud


e
oil


Wh
ea


t
Ric


e


Contributions to total from:
Ethanol
production


OECD Rest of
the world


China


The buildup of excess capacity meant that
the real price of oil during the 1990s remained
low, at $16 a barrel, equivalent to half the
price experienced during 1985. It also meant
that there was little incentive to invest in new,
higher-cost oil fields. Overall spending by
major American multinational oil companies
on exploration for new wells and the devel-


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59


As the transition continued, oil-producing
firms in the region were able to rehabilitate
existing capacity relatively easily and to reorient
expanding output to Western markets, where
demand continued to rise. Between 1995 and
2005, world oil demand increased by nearly
14 mb/d, with 8 mb/d of that total being met
by the dormant capacity in the countries of the
FSU and OPEC.7 As a result, underlying ca-
pacity grew less than half as fast as demand
throughout the period.


With spare and dormant capacity
absorbed, prices surged in 2004
By 2004, the dormant capacity that had been
created by the decline in demand in the FSU
had been reabsorbed. When demand growth
(which had been subdued following the burst-
ing of the Internet bubble) regained strength,
supply was unable to keep pace, in turn re-
sulting in a surge in prices.8


Metal demand also declined sharply as nu-
merous heavy industries in the FSU went out
of business. Global demand for metals and
minerals eased sharply beginning in 1990
and only returned to trend rates in 1997 (fig-
ure 2.7). As was the case in the oil sector, the
pickup in metals prices beginning in 2003 did
not reflect unusually strong demand—except
for aluminum—whose price, as it happens,
has been relatively stable. Rather, it reflected
low stock levels and depressed capacity.


Indeed, the strong correlation between the
prices of metals and minerals on the one hand
and oil on the other during 2003–06 is
unusual. Historically, the correlation between
the prices of these commodities tends to be
much less pronounced than between oil and
agricultural goods (table 2.2) because high oil
prices tend to cut into industrial production
and demand for metals, while food demand is
relatively inelastic.0


19
81


19
83


19
85


19
87


19
89


19
93


19
95


19
97


19
99


19
91


20
03


20
05


20
01


20


40


60


80


100


0


10


20


30


40


50


60


70
US$ 2006, billions


Crude oil prices (right axis)


Source: Energy Information Agency; World Bank.


Figure 2.6 Real spending by major American
multinational oil companies declined by 60
percent in the 1980s


Real price per bbl, US$ 2000


Exploration (left axis) Development (left axis)


0
1980


Source: World Bank, British Petroleum, International Energy
Agency, Petroleum Economics Ltd.


1985 1990 1995 2000 2005


5


10


15


20


Bbl per day, millions


OPEC
spare
capacity


Former Soviet Union
dormant capacity


Total spare capacity


Figure 2.5 Dormant capacity helped keep oil
prices low in the 1990s


24


22


0


2


4


6


8


10


1985


Source: World Bank, International Monetary Fund.


1990 1995 2000 2005


3-year, moving average of the % change in metal demand


Figure 2.7 Global metal demand also fell
during the transition


Aluminium


Copper


Nickel


Zinc


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 59




Increasing prices sparked a boom in
investment in the oil, metals, and minerals
markets
Global private investment in exploration for
nonferrous metals rose from $2 billion in
2002 to $7 billion in 2006 and to an estimated
$9 billion in 2007. Overall investment in the
sector more than doubled between 2001 and
2005 in a number of mineral-rich countries in-
cluding Canada, Mexico, the Russian Federa-
tion, South Africa, and the United States
(UNCTAD 2007). At the same time, invest-
ment in the oil sector increased dramatically,
75 percent in the case of the American multi-
national companies (see figure 2.6).


After years of low investment, the ability
of service sectors to deliver inputs to the
commodity-producing firms had atrophied.
As a result, the surge in demand for invest-
ment goods over the last several years has ex-
ceeded capacity by a wide margin and costs
have skyrocketed.


In the oil sector, operating costs have
more than doubled, and the cost of inputs to
exploration and extraction have increased
substantially. For example, the day-rate price
of semisubmersible rigs in the Gulf of
Mexico (0–3,000 ft. water depth) increased
from $36,000 in 2000 to $325,000 in March
2008, a ninefold increase. Similar increases
have been observed in other items, such as


water jack-up rigs, whose day rates have in-
creased fivefold in West Africa.


Such factors have put upward pressure on
the costs of developing new mines and oil
fields. Operating costs for marginal producers
rose by 25 percent for copper and 28 percent
for aluminum between 2002 and 2005 (IMF
2006), and in the case of at least one nickel
project, they rose by 170 percent.9 Higher
costs are reported to have increased the cost of
extracting a barrel of crude from Canada’s oil
sands to $75, while deepwater offshore pro-
jects may cost more than $50 a barrel.


Although higher prices are inducing sub-
stantial increases in capacity in the input in-
dustry, that capacity will not be in place for
several years. As a result, some delivery times
have more than doubled. For example, in the
mining sector it currently takes 45 months to
deliver a grinding mill, compared with a more
normal 20 months; for rope shovels the
delivery time has gone from 9 months to 24.
Large haul trucks, normally available within
4 months, now take 2 years.10 Other services
may take even longer to come into balance;
the training of technical personnel such as
engineers typically takes many years.


As a consequence, it may take some time
before the surge in investment now under way
leads to a surge in the delivery of inputs, and
even more time before delivery of inputs


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


60


Table 2.2 Comovement among major commodity prices, 1960–2007
Commodity Maize Wheat Rice Coffee Cotton Copper Aluminum Iron ore Gold


Wheat 0.91
Rice 0.82 0.81
Coffee 0.70 0.45 0.63
Cotton 0.83 0.80 0.82 0.82
Copper 0.75 0.55 0.71 0.35 0.75
Aluminum 0.70 0.46 0.63 0.37 0.76 0.41
Iron ore 0.72 0.49 0.63 0.36 0.76 0.0 0.34
Gold 0.69 0.0 0.65 0.54 0.80 0.0 0.44 0.0
Crude oil 0.72 0.55 0.65 0.58 0.81 0.0 0.48 0.0 0.83


Source: World Bank.
Note: The numbers are the adjusted R2s of a regression of each price on all other prices (individually), a time trend, and the
MUV, both directions. The residual was tested for stationarity (5% level of significance). If cointegration was confirmed in one
direction, the table reports the respective adjusted R2. If cointegration was found in both directions, the higher adjusted R2 is
reported. If no cointegration was found, implying that any correlation would, in fact, be a spurious correlation, the result was not
reported, and the respective cell shows 0.0 (e.g., gold with wheat or copper).


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 60




translates into actual increases in oil, metal,
and mineral production. All of this suggests
that notwithstanding recent declines, supply
will continue to be relatively scarce for several
more years and that prices will remain higher
than in the 1990s for some time.


The boom in agricultural prices reflects
both high costs stemming from oil prices
and increased demand from biofuels
The rise in the price of agricultural commodi-
ties occurred much later than it did for either
oil or metals and minerals. Dollar prices were
rising as early as 2003, but these increases
mainly reflected exchange rate movements.
Relative to consumer prices in developing
countries, internationally traded food prices
were broadly stable until 2007, when the
prices of internationally traded food commodi-
ties (such as maize, wheat, and soybeans) rose
very rapidly (figure 2.8).


The timing of the rise in agricultural prices
points strongly to the impact of energy markets
(box 2.3) First, agriculture production is fairly
energy intensive. The increase in oil prices
raised the price of fuels to power machinery
and irrigation systems; it also raised the price


of fertilizer and other chemicals that are energy
intensive to produce. The impact across differ-
ent countries is difficult to quantify owing to a
lack of data. In the United States, fuel, fertil-
izer, and chemicals accounted for 34 percent of
maize production costs and 27 percent of
wheat production costs in 2007 (USDA 2008).
Energy, fertilizer, and chemicals would typi-
cally make up a smaller share of production
costs in developing countries, because produc-
tion is less intensive. Nevertheless such costs
can be significant where intensive techniques
are used. Thus, fertilizer is estimated to have
accounted for 18 percent of variable costs for
irrigated wheat in the Indian Punjab in 2002
and for 34 percent of soybean costs in the
Mato Grosso, Brazil (World Bank 2007b).


Second, high oil prices sparked an increase
in biofuel production in the United States and
Europe that boosted demand for certain
grains and oilseeds thus contributing to their
rapid price rise in the course of 2007 and early
2008 (Mitchell 2008). Overall, two-thirds of
the increase in world maize production since
2004 has gone to meet increased biofuel de-
mand in the United States, thereby reducing
the quantity available for food and feed uses.
Estimates of the impact of increased demand
for biofuels on the rise in nominal maize
prices range from 70 percent (Lipsky 2008),
to 60 percent (Collins 2008), to 47 percent
(Rosegrant and others 2008).


The increased demand for crops used for
biofuels contributed to price increases for
other food by reducing the land allocated to
other crops. For example, in the United States
high prices increased land devoted to maize
production by 22 percent in 2007, with most
of the increase at the expense of soybeans, the
production of which declined by 16 percent.
Area planted to rapeseed and sunflowers—
used for biodiesel production—increased in
Europe and elsewhere at the expense of wheat.
Moreover, rising prices for maize, wheat, and
soybeans redirected consumer demand toward
other food products, aggravating price pres-
sures on other grains. For example, rice prices
rose from $376 a ton in January 2008 to $907


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


61


50
Jan.
2000


Jan.
2001


Jan.
2002


Jan.
2003


Jan.
2004


Jan.
2005


Jan.
2006


Jan.
2007


Jan.
2008


100


150


200


250


300


Domestic real


Nominal US$


Food price indexes


Figure 2.8 Real food prices were broadly
stable in developing countries until mid-2007


US$ nominal and domestic CPI-deflated price indexes
(Jan. 2000 5 100)


Source: World Bank.


Note: Individual country data deflated by local consumer price
index and aggregated by country shares in global imports.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 61




a ton in April, partly in response to the grow-
ing concern about the adequacy of global food
supplies and the 120 percent increase in wheat
prices during the previous six months.


While biofuels have contributed to higher
food crop prices, they also represent an op-
portunity for profitable production in devel-
oping countries (OECD 2007; GTZ 2006).
Additional ethanol production need not imply
reducing food crops production. Brazil, for
example, is a low-cost producer of ethanol
from sugarcane and has an estimated 180 mil-
lion hectares of pasture that could be used to
produce additional sugarcane for ethanol—
without reducing the food sugar crop. Many
Sub-Saharan African countries, including
Angola, Mozambique, and Tanzania, also


have the potential to produce ethanol prof-
itably from sugarcane on land that is not used
for food crop production. Finally, nonfood
crops such as jatropha can be used to produce
biodiesel in many developing countries.11


In addition to the impact of oil markets,
food prices were boosted by a series of poor
wheat harvests, notably in Australia.12 Before
the run-up of prices in 2007, wheat stocks had
fallen to the second lowest level of the past
40 years (figure 2.9).


Reported global stocks of corn and rice de-
clined before 2007, mainly due to a reduction of
very large government stocks in China. Because
these stocks have been greatly underestimated
for the past 30 years (figure 2.10), current stock
levels are not that different than what the world


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


62


Crude oil prices affect the prices of other commodi-ties in a number of ways. On the supply side,
crude oil enters the aggregate production function of
most primary commodities through the use of various
energy-intensive inputs and, often, transportation over
long distances, an energy-demanding process. Some
commodities, such as aluminum, have to go through
an energy-intensive primary processing stage.


On the demand side, some commodities compete
directly with synthetic products, which are produced
from crude oil (cotton with man-made fibers, natural
rubber with synthetic rubber). The demand for other
commodities (maize, sugar, rapeseed, and other oils)
has increased to produce biofuels. And the price of
energy commodities such as gas and coal are affected
because of their substitutability with crude oil.


Increases in crude oil prices also increase the
disposable income of oil-exporting countries. Because
these countries are heavy consumers of some com-
modities (e.g. tea and gold), and demand for these
products is sensitive to incomes, high oil prices
sharply increased regional demand for these products.
Finally, crude oil price spikes are often associated with


Box 2.3 The historical link between crude oil and
other commodity prices


inflationary pressures. As a result, the demand (and
hence the price) of precious metals often rise with oil
prices, because investors and households view these
metals as more secure ways for storing wealth.


Crude oil price increases reduce the disposable
incomes of consumers, which, in turn, may slow
industrial production. In principle, lower disposable
income should have a negative impact on the con-
sumption of food commodities. However, because
the income elasticity for most food commodities is
small, this effect is limited, and the positive impact
of crude oil price increases on the prices of food
commodities—through increased production and
transportation costs—tends to overshadow the
negative impact of reduced global consumption.


In contrast, the negative effect of high energy
prices on industrial production reduces the demand
for metals, thereby putting downward pressure on
their prices. This tends to offset the positive effect
from higher production and transportation costs.
As a result the correlation between metals and oil
prices is much lower than between oil and food
prices (see table 2.2).


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 62




forces that otherwise would have helped to
attenuate the rise in prices and shorten the du-
ration of the boom. As discussed in chapter 3,
although the various subsidies and price con-
trols that were in place or were introduced
muted the poverty impact of higher prices,
they have also reduced producers’ incentives
to increase output and consumers’ incentives
to substitute less-costly items in their food
baskets. And export bans limited supplies
available on international markets. For exam-
ple, India’s ban on rice exports in April 2008
was followed by other rice exporters, which
prompted some countries, notably the Philip-
pines, to increase rice imports to build up
strategic reserves, thus further boosting inter-
national prices.


The activities of financial investors may
have contributed to price rises as well. Tradi-
tionally, hedgers and speculators have been
the dominant players in futures exchanges,
but over the past few years, investment funds
have become important players as well. Such
funds may have indirectly influenced commod-
ity prices. Since 2003 index fund investors,
who allocate funds across a basket of com-
modity futures, have invested almost $250 bil-
lion in U.S. commodity markets, about half of
it in energy commodities (Masters 2008).
While such purchases create no real demand
for commodities, they may have influenced
prices because these funds are large compared
with their physical market counterparts and
because they have expanded rapidly. Their in-
fluence on prices is especially likely, if the rapid
expansion of these markets contributed to ex-
pectations of rising prices, thereby exacerbat-
ing swings, as argued by Soros (2008).


The empirical evidence on whether such
funds have contributed to the recent price
surge is mixed. In the nonferrous metals mar-
ket (where a similar buildup of financial posi-
tions has occurred), Gilbert (2008) found no
direct evidence of the impact of investor activ-
ity on the prices of metals but some evidence
of extrapolative price behavior that resulted in
price movements not fully justified by market
fundamentals. He also found strong evidence


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


63


0


5


1960 1965


10


15


20


25


30


35


40
Stock levels as a % of annual production


Figure 2.9 Most of the decline in global grain
stocks reflects lower stocks in China


Source: World Bank.


Global stocks
(with new
China data)


Global stocks
(excluding China)


Global stocks
(using older data
for China)


1970 1975 1980 1985 1990 1995 2000 2005


0
1960


Source: World Bank.


1966 1972 1978 1984 1990 1996 2002 2008


5


10
15


20
25


30
35
40
45


Period of strong
increase in
biofuel production


Figure 2.10 Outside of China, only wheat
stocks are unusually low


CornRice


Wheat


Stock levels as a % of annual production


thought them to be during the early 1990s. It is
thus unclear whether market participants took
the decline in global stocks as a signal of com-
ing scarcity or simply a return to stock levels
that were consistent with relatively low prices a
decade ago.


Government policy and investment fund
activity may have exacerbated the increase
in commodity prices
The extent of food price rises during this
boom was probably exacerbated by the ac-
tions of governments, which impeded market


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 63




that futures positions of index providers over
the past two years have affected soybean (but
not maize) prices. Similarly, Plastina (2008)
concluded that between January 2006 and
February 2008, investment fund activity
might have pushed cotton prices 14 percent
higher than they would have been otherwise.
On the other hand, two IMF (2006, 2008)
studies failed to find evidence that specula-
tors have had a systematic influence on com-
modity prices. A similar conclusion was
reached by a series of studies undertaken by
the Commodities Futures Trading Commis-
sion, the agency that regulates U.S. futures ex-
changes (Büyükşahin, Haigh, and Robe 2008;
ITF 2008).


Although evidence that financial invest-
ments have contributed to the rapid run-up in
commodity prices is limited, it seems likely
that real-side speculation (the decision to hold
stocks in anticipation of further price increases
or to order more than needed now for the
same reasons) likely contributed to the rapid
increase in prices during 2007 and 2008.13


Long-term demand prospects


The longevity of the current boom and thewide range of commodities that have been
affected have prompted many observers to
wonder if the global economy is moving into a
new era characterized by relative shortage and
permanently higher (and even permanently ris-
ing) commodity prices. This section looks at
demand and supply conditions in commodity
markets over the medium to long term and
concludes that slower population and GDP
growth, changes in the structure of GDP, and
technological improvements in production
and use of commodities make this scenario
unlikely.


Demand for (and supply of) commodities
over the past 35 years has been rising steadily.
The quantity of energy consumed has increased
by an average of 2.2 percent a year during
1970–2005, that of metals and minerals by
3.1 percent, and that of food by around 2.2 per-
cent. However, demand for these commodities


has grown less quickly than GDP, albeit more
quickly than population (figure 2.11).


Expressed another way, the commodity in-
tensity of GDP has been declining. For oil and
food, this process has been going on continu-
ously since the 1970s. For metals, the same
trend was observed until the mid-1990s when
it began to reverse (figure 2.12)


More generally, growth in the demand for
commodities is influenced by a wide range of
factors including several fundamental economic
drivers.


Incomes and population. As per capita
incomes rise, demand for commodities also
tends to increase, but the sensitivity of
demand to an increase in income differs across
commodities and changes as income levels
rise. For example, at low-income levels,
demand for grains rises relatively quickly as
income increases, but as per capita incomes
reach about $3,000 dollars, the pace at which
grains demand rises declines, ultimately falling
to close to zero. Thus, a 10 percent increase in


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


64


Palm oil


0 1 2 3 4
Percent


5 6 7 8 9


Soybeans
Aluminum


GDP
Rubber
Cocoa


Tea
Logs


Copper
Maize


Bananas
Wheat


Rice
Sugar
Cotton


Population
Zinc


Petroleum
Coffee


Iron ore
Phosphate rock


Tin
Lead


Average annual growth rate, 1975–2006


Figure 2.11 Demand for most commodities
has grown less rapidly than GDP but more
rapidly than population


Source: World Bank.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 64




incomes is associated with a 6 percent increase
in grains demand in low-income countries but
almost no increase in high-income countries
(table 2.3). As a result, beyond a certain
income level, grains demand is mainly dictated
by population growth. The sensitivity of
demand for metals to incomes is much higher
but tends not to change as income levels rise.
Energy is the reverse of grains, with the
demand for energy rising more rapidly than
incomes in high-income countries.


The composition of GDP. Commodity de-
mand depends on more than just GDP. The
composition of demand also plays an impor-
tant role. Over time, the commodity intensity
of GDP has declined partly because demand
has evolved toward goods and services that


are much less intensive in their use of com-
modities. This trend is illustrated in table 2.4,
which shows the value per kilogram of a vari-
ety of different products. Newer products,
such as computers and mobile telephones,
have a growing share in world GDP and con-
tain very little in the way of commodities
(proxied here by their weight).


The same effect can be seen at the sectoral
level. Industrial activity tends to be more com-
modity intensive than agricultural activity,
which in turn is more commodity intensive
than services. Thus, part of the declining
commodity intensity of demand over the past
35 years reflects the rise of the service sector,
which accounted for 50 percent of world GDP
in 1971 and 69 percent in 2005—a trend that
is shared by both high-income and developing
countries.


Technological change. Increased efficiency
in the use of commodities in production and
consumption has also contributed signifi-
cantly to the dematerialization of economic
activity. Examples include improvements in
gas mileage in automobiles and the substitu-
tion of artificial for natural fibers in clothing.


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


65


Figure 2.12 The quantity of most commodities
used per unit of GDP was declining until
recently


0.70


19
71


19
74


19
77


19
80


19
83


19
86


19
89


19
92


19
95


19
98


20
01


20
04


0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Commodity intensity of demand, index (1971 5 1.00)


Source: World Bank.


Energy Metals
Metals (excluding China) Food


Table 2.3 Impact of a 10 percent increase
in incomes on commodity demand
(Percent)
Income group Grains Energy Metals


Low 6.0 4.5 10.1
Lower middle 3.3 7.2 10.1
Upper middle 1.4 9.2 10.1
High 0.0 1.1 10.1


Source: World Bank.


Table 2.4 Modern goods make less
intensive use of commodities
(US$)
Good Value per kilogram


Iron ore 0.04
Steam coal 0.07
Wheat 0.27
Crude oil 0.47
Standard steel 0.56
Newsprint 0.89
Supertanker 4.00
Motor car 33.00
Dishwasher 56.00
TV set 133.00
Submarine 222.00
Large passenger aircraft 1,334.00
Laptop computer 2,224.00
Mobile telephone 4,448.00
Jet fighter 13,344.00
Windows 2000 Software, CD Rom 44,480.00
Telecom satellite 88,960.00
Banking services


Source: Radetzki 2008a.


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Long-term projections suggest that the
main factors driving commodity demand
will slow
To a significant degree, future demand for
commodities will reflect the combined impact
of, GDP growth, changes in the composition
of demand, and technological progress
(table 2.5).


• Population growth over the next two
decades is expected to slow significantly
from 1.2 percent during the 2000s to
about 0.8 percent in the period
2015–30, which should help moderate
commodity demand compared with past
demand.


• Per capita income growth is also pro-
jected to slow somewhat for the world as
a whole, mainly because incomes in the
largest developing countries are expected


to rise less quickly than they did during
the 1990s. Nevertheless, developing-
country per capita incomes are projected
to triple, rising from $1,550 to $4,650
between 2004 and 2030. This means
that, although global demand for grains
and some metals is likely to decelerate,
energy demand is likely to strengthen.


• The composition of GDP is not expected
to continue to move toward services but
to stabilize more or less at current levels.
This suggests that commodity intensities
may decline less rapidly than they have
in the past.


• Prospects for technological progress are
the least certain element likely to deter-
mine future commodity demand. Should
policy succeed in continuing past gains,
then this too should tend to moderate
commodity demand.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


66


Table 2.5 Fundamental economic factors drive future commodity demand
Average annual growth rate


Period Per capita income Population GDP Share of services in GDP Share of services in GDP


(percent) (percent)


1990s
World 1.2 1.5 2.7 0.99 64.6
High income 1.8 0.7 2.5 0.89 67.8
Low and middle income 2.0 1.6 3.6 1.73 49.8
Low income 2.3 2.2 4.5 0.96 44.3
Middle income 2.2 1.2 3.5 1.84 50.8


2000s
World 1.8 1.2 3.1 0.47 68.5
High income 1.7 0.7 2.5 0.51 71.8
Low and middle income 4.2 1.3 5.6 0.24 53.8
Low income 4.1 1.9 6.1 1.50 49.4
Middle income 4.6 0.9 5.5 0.04 54.5


2015–30
World 1.7 0.8 2.5 0.41 50.3
High income 1.2 0.1 1.3 0.02 59.0
Low and middle income 3.9 0.9 4.9 0.07 35.6
Low income 3.8 1.5 5.4 0.02 44.0
Middle income 4.1 0.7 4.8 0.08 35.0


Change (2015–30 vs. 2000s)
World 0.2 0.4 0.6 0.88 18.3
High-income 0.5 0.7 1.2 0.49 12.8
Low and middle income 0.3 0.4 0.7 0.31 18.2
Low income 0.3 0.4 0.7 1.52 5.4
Middle income 0.5 0.2 0.7 0.12 19.5


Source: World Bank LINKAGES model.


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A number of technologies currently available
as prototypes or in early stages of commercial-
ization could help more than double fuel effi-
ciency over the next several decades. In 2005,
about 8 liters of fuel were needed to drive 100
kilometers; by 2050, fewer than 3 liters may be
needed (IEA 2008a). Even more optimistic sce-
narios project that by 2050, 90 percent of the
vehicles in the high-income world and 75 per-
cent in the developing world will be powered by
alternative fuels, such as plug-in hybrids (hybrid
cars with large batteries that can be plugged
into the main electrical network), electric, and
hydrogen-powered cars. Such a shift would
reduce considerably private transportation’s
dependence on liquid fuels. Indeed, prototype
and soon-to-be-released electric and hydrogen-
powered cars already exist (box 2.4).


Strong growth in developing countries is
expected to dominate future energy
demand
Assuming that energy efficiency continues to
improve at about the same rate as in the past,
total demand for energy is projected to rise by
55 percent between now and 2030, with 80
percent of that emanating from fast-growing
developing countries (table 2.6). Overall,
weaker population growth and technological
change are likely to outweigh the impact of
rising developing-country incomes and their
increased weight in overall demand. Hence the
rate of growth of energy demand is expected
to ease over time, declining from an average of
1.8 percent during the past 15 years to about
1.3 percent in the period 2015–30.


In the baseline scenario, climatic and envi-
ronmental concerns are expected to contribute
to a modest shift away from petroleum prod-
ucts toward less carbon-intensive fuel sources,
such as natural gas, and renewable fuels, such
as wind, solar, and geothermal. Oil’s share in
overall energy consumption is expected to
decline, with demand rising more slowly.
Demand growth is projected to fall from
1.7 percent a year in 2005–15 to 1.1 per-
cent in 2015–30, reaching between 112 and
118 million barrels a day by 2030.


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67


The remainder of this section discusses in
more detail how these factors and technologi-
cal change are expected to play out in individ-
ual commodity markets.


Demand prospects for energy
Rising incomes and technology are expected
to play crucial roles in determining future en-
ergy demand. Assuming no improvement in
energy efficiency, given expected increases in
incomes and population, demand for energy
would rise by more than 120 percent between
now and 2030, with growth in developing
countries responsible for three-fourths of that
increase. Assuming the composition of energy
demand and supply did not change, that would
imply that demand for oil would more than
double, from 82 mb/d in 2007 to 174 mb/d
in 2030.


Efficiency gains and conservation efforts
reduced energy demand by 50 percent
over the past 35 years
Of course, these assumptions are somewhat
simplistic, viewed against the light of recent
history. Energy efficiency over the past 50
years has in fact improved sharply. Since
1960, the efficiency of jet transport has more
than tripled (Lee and others 2001) while fuel
efficiency in cars has also increased signifi-
cantly. Overall, between 1970 and 2004, tech-
nological change lowered energy demand 56
percent from what it would have been other-
wise (IEA 2007). Much of the improvement
resulted from substitution and conservation
prompted by higher prices. Ongoing techno-
logical change and increased efficiency in
China (Lin and others 2006) and the FSU
countries (see earlier discussion) also played
important roles.14


Looking forward, similar improvements in
energy efficiency are possible if supported by
an appropriate policy mix. Of particular im-
portance will be efficiency in the transport sec-
tor, which is expected to account for some
75 percent of the increase in future oil use,
largely because of rising incomes and car own-
ership in developing countries (IEA 2007).


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 67




Another important feature of the composi-
tion of energy demand is the importance of
coal, which currently accounts for more than
a quarter of global energy consumption. Coal
is primarily used by developing countries
(62 percent), with China accounting for more
than 40 percent of global consumption. The
baseline simulations indicate a slight increase
in coal’s share, from 25.3 percent in 2005 to
27.8 percent in 2015. However, the projection
is subject to two risks: on the upside, if new
clean coal technologies (including carbon se-
questration) come on board, coal’s share in
global energy consumption is likely to be
much higher. However, if such technologies


do not materialize, coal use is likely to be sub-
jected to significant environmental regulation
that could significantly reduce its economic
attractiveness.


The future path and mix of energy
demand will depend on policy
Simulations suggest that a more aggressive
stance toward reducing carbon emissions
could generate a further moderation in energy
demand and in fossil-fuel use. For example, a
$21 tax per ton of carbon dioxide could be ex-
pected to reduce demand for energy by 33 per-
cent (see the simulations at the end of the
chapter). Because of its high carbon content,


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


68


Hydrogen and electricity are emerging fuels fortransportation; fully ethanol-powered and flex-
fuel cars are already well-established commercial
successes in Brazil and increasingly in the United
States and Europe. Existing hybrid cars offer a
50 percent improvement in fuel efficiency for city
driving, while plug-in hybrid cars have the potential
of reducing reliance on gasoline even more.
Hydrogen-fuel-cell and all-electric cars could reduce
that dependence to zero, but considerable progress
needs to be made in increasing the efficiency of
battery technology and in the production and
conversion of hydrogen into electricity before these
vehicles will be competitive.


Currently, most major car manufacturers have
prototype versions of all such cars. General Motors
has announced its intention to sell commercially as
soon as 2010 an extended-range electric vehicle (the
“Volt”), which is a battery-powered electric car that
uses a small flex-fuel engine to extend its range for
highway driving. The Volt is expected to be able to
run up to 40 miles a day (more than the average
daily driving distance of 75 percent of Americans) on
batteries alone and 250 miles using its flex-fuel gen-
erator. The car is expected to have an EPA rating of
100 miles a gallon (Connor 2008), and its operating
costs could be 0.02 cents a mile or one-sixth the cost
of a vehicle powered with gasoline at $3.80 a gallon
(Padget 2008).


Box 2.4 Alternative fuels for transportation
Meanwhile, Honda is already leasing a limited


number of hydrogen-fuel-cell-powered cars to the
general public in southern California. While costs of
operation are similar to gas-powered cars, the cars
themselves are extremely expensive and the leases
being offered imply a substantial subsidy. The cost of
fuel-cell stack systems (the mechanism that converts
hydrogen into power and that uses platinum) will
have to decline tenfold before these vehicles become
economically viable.


For both plug-in hybrids and electric cars, the
major stumbling block is the size, weight, and cost of
the battery required to power them. With current
technology, the battery needed to power an electric
car 500 kilometers weighs five times as much as the
equivalent amount of gasoline and would cost
$50,000. Over the next several decades, technologi-
cal progress achieved through the commercialization
of hybrid cars is expected to raise battery efficiency
and reduce costs, so that plug-in hybrids will be
widely available by 2020.


Prospects for all-electric cars are less clear, mainly
because of the time that it takes to recharge batter-
ies, a factor that makes them much less attractive
than gas-powered vehicles. Here hydrogen-fuel-cell-
powered cars could have an advantage if the costs
associated with the fuel stack can be resolved.


Source: IEA 2008a.


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69


demand for coal would decline most sharply
under such a scenario, with natural gas and
other low-carbon energies increasing their
share in total demand.


An even more aggressive set of policies,
including a significant policy initiative to in-
crease energy efficiency and reduce carbon
emissions to below their 2005 levels, could see
energy demand fall even further (table 2.7).


Demand prospects for metals
and minerals
Demand for metals and minerals is also
closely related to GDP and the mix of GDP—
with manufacturing and investment activities


associated with relatively high commodity
intensities. Like oil, the evolution of metals
intensities reflects technological change, the
growing importance of services in the eco-
nomies of high-income countries, and other
structural changes in demand.


After falling for years, metals intensities in
developing countries are rising, especially
in China
The reversal of the trend decline in metals in-
tensities that began in the mid-1990s (see fig-
ure 2.10) reflects very different trends in high-
income countries, most developing countries,
and China (figure 2.13). The trend decline ob-
served for all three groups between 1970 and
1990 has continued among high-income coun-
tries, apace with the continued transfer of
commodity-intensive manufacturing activities
to developing countries. In developing coun-
tries excluding China, the same process has
driven a slight rise in metal intensities begin-
ning in 1992, after their fall attributable to the
efficiency improvements associated with the
end of the FSU.


China stands out as the country where in-
tensities have increased the most. After declin-
ing for years, they began to rise gradually to-
ward the beginning of the 1990s and then
sharply accelerated around 1998, reflecting a
rapid increase in manufacturing activity and a


Table 2.6 Energy demand is projected to
slow in the baseline scenario
Contributions to annual average global growth in energy
demand (percentage points)


1990–2005 2005–15 2015–30


World 1.4 1.1 0.6
High-income countries 0.7 0.4 0.3
Developing countries 2.2 3.4 2.0


Middle-income countries 0.1 2.4 1.5
Low-income countries 4.1 3.9 2.2


Shares in total energy demand (percent of total)


1970 1990 2005 2015 2030


Coal 26.0 25.3 25.3 27.8 28.2
Oil 44.0 36.7 35.0 32.9 31.5
Gas 16.0 19.1 20.6 21.2 22.3
Nuclear 1.0 6.0 6.3 5.6 4.8
Hydro 2.0 2.1 2.2 2.3 2.3
Biomass, waste 11.0 10.3 10.1 9.3 9.1
Other renewables — 0.4 0.5 1.0 1.7


Source: World Bank ENVISAGE model (forecast);
IEA (historical data).
— Not available.


Table 2.7 Energy demand could decline
further under more aggressive climate
change policies
Energy source Baseline Stable emissions Aggressive


(percent change in energy consumption)


Coal 198 15 22
Oil 57 10 29
Gas 96 68 25
Biomass, waste 48 144 214


Source: IEA 2008a.


Quantity of metals used per unit of GDP, index (1971 5 1.00)


Source: World Bank.


1.6


1.2


1.4


1.0


0.6


0.8


0.2


0.4


1970 1975 1980 1985 1990 1995 2000 2005


Rest of the world


OECD


China


Figure 2.13 Metal intensities have declined
steadily in high-income countries but have
reversed in China since 1993


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 69




sharp uptick in investment. The increase in the
Chinese investment ratio came partly from the
need to create capacity to meet the manufac-
turing boom, but the increase also reflects sig-
nificant investment in support of infrastruc-
ture in response to increased urbanization
(box 2.5).


Except for a few export- and manufactur-
ing-intensive Asian economies, other develop-
ing countries, including those at much higher
levels of income than China, have not seen
metal intensities rise in this way. Metal inten-
sities in Brazil, India, and South Africa, for ex-
ample, remained flat or continued to decline
during the same period.15 As a consequence,
the strong acceleration in metal demand ob-
served in China is not expected to be repeated
in other developing countries.


Not only have Chinese metal intensities
been rising, they are also as much as 7.5 times
as high as in high-income countries and 4
times as high as in other developing countries
(figure 2.14). While some of the same factors
(high investment rate, large manufacturing
sector) that explain the increase in Chinese in-
tensities likely explain these differences, the


fact that the former Soviet Union also had
similarly high intensities before its economic
transition suggests that perhaps nonmarket
factors continue to influence allocation of
these resources in a way not seen elsewhere.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


70


China’s accession to the World TradeOrganization and the boom in manufacturing
activity that accession generated certainly played a
role in increasing metals demand. However, the long-
term investments in new capacity and infrastructure
that began at the same time as WTO accession were
likely just as important. Overall investment in China
increased from 36 percent of GDP in the early 1990s
to around 45 percent currently, a result both of in-
creased manufacturing and rapid urbanization (over
the same period, the share of the population living in
cities increased from 30 to 40 percent). Similarly,
part of the increase in China’s energy demand was
associated with an acceleration in steel and cement
production (Lin and others 2006). These structural


Box 2.5 Understanding the rise in Chinese metal
intensities


changes entailed substantial investments in infrastruc-
ture and were associated with a rapid increase in au-
tomobile production—all heavy consumers of metals.


As of 2007, more than 50 percent of Chinese
steel and 44 percent of copper demand was used in
construction and infrastructure. While China’s
specialization in manufacturing is likely to persist,
investment rates are projected to decline over time
(the average life span of infrastructure investments
exceeds 50 years) so China’s metal intensity is ex-
pected to stabilize and then decline, as did the metal
intensities of other Asian countries, such as Japan
and the Republic of Korea, that followed a manufac-
turing- and export-intensive development path
(Mitchell, Tan, and Timmer 2007).


0


2


4


6


8


10


Nickel


Metal intensity indexes, 2000–06 averages (high-income
countries 5 1)


Figure 2.14 Metal intensities in China are
much higher than elsewhere


Source: World Bank.


High-income countries
Developing countries (excluding China)
China


Copper Aluminum Zinc Tin Lead


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Slowing global growth and a decline
in Chinese metals intensity should see
demand growth for metals slow over the
next 25 years
Over the next quarter of a century, metal in-
tensities in developing countries are likely to
stabilize and begin declining once again. Sev-
eral factors should contribute to the reasser-
tion of the earlier downward trend.


A slowing in the pace at which global man-
ufacturing capacity is transferred to the devel-
oping world is projected to result in a leveling
off and eventual decline in manufactures’ share
in Chinese GDP, from about 40 percent in
2005 to around 33 percent in 2030. This slow-
ing in turn should be reflected in a decline in
metals intensities. Less-rapid growth in manu-
facturing and the gradual completion of invest-
ment projects are expected to cause the share
of investment in GDP to decline considerably,
which should also serve to lower Chinese metal
intensities. Finally, the rising influence of mar-
ket forces in determining allocation decisions
in China should also cause a drop in the quan-
tity of metal used per unit of output.


In the rest of the developing world, similar
forces should be at work, which, coupled with
rising incomes and increased service-sector
demand, is expected to reduce the metals
intensity of demand.16


Nevertheless, growth in China and devel-
oping countries more generally is expected to
continue to outpace growth in the rest of the
world throughout the projection period.
Given China’s high metal intensities, develop-
ing-country growth should keep global metal
intensities from falling, at least initially. How-
ever, the beginning of the decline in Chinese
metal intensities should be reflected in a sig-
nificant weakening in the rate of growth of
metals demand during the period 2015–30.
Overall, global demand for metals is expected
to continue to grow somewhat more quickly
than global GDP, at about 4.0 percent
through 2015, before slowing to around 2.5
percent in the period 2015–30, a pace signifi-
cantly slower than that of projected GDP
growth itself.


Demand for food and other
agricultural products
The weaker growth in population and GDP
expected over the next few decades (see table
2.4) should cause global demand for food to
grow less quickly over the next 25 years.


Overall, the global population growth rate
is projected to decline from an annual average
of 1.6 percent between 1970 and 2005 to
about 1.0 percent over the following 25 years.
While most of the slowdown is expected to
take place in high-income countries, popula-
tion growth rates in every developing region
are expected to decline between 0.4 and 0.8
percentage points (figure 2.15).


Rising incomes in developing countries
imply that per capita food consumption will
increase in most of these countries, but the
impact on overall demand is expected to be
small. As the earlier analysis suggested, a
10 percent increase in per capita income will
increase grain demand by 6 percent in poor
countries (those with per capita incomes
below $2,000), but only by 2 percent in mid-
dle-income countries.17 Most of the heavily
populated developing regions have already


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


71


20.5


0.0


0.5


1.0


1.5


2.0


2.5


3.0
Average annual % change in population


Hig
h-i


nc
om


e
co


un
trie


s


Mi
dd


le-
inc


om
e


co
un


trie
s


Lo
w-


inc
om


e
co


un
trie


s


La
tin


Am
er


ica


No
rth


Am
er


ica


Oc
ea


nia


WO
RL


D
Afr


ica As
ia


Eu
ro


pe


Figure 2.15 Weaker population growth
should slow demand for food


Source: UN 2006.


Population growth, 1970–2005
Population growth projections, 2005–30


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 71




achieved incomes associated with income elas-
ticities close to 0.2 (figure 2.16).18


Demand for meat and dairy products (and
feed grains) will likely expand more rapidly
because these products tend to be more in-
come elastic than basic food stuffs.19 For ex-
ample, in Asia, demand growth for meat and
edible oils outstripped population growth by a
wide margin over the past 15 years, even ris-
ing somewhat faster than GDP in the case of
edible oils (figure 2.17).


Slower population growth will dampen
demand for agricultural products
Overall demand for food should slow over the
next few decades, despite income gains. The
Food and Agriculture Organization (FAO)
estimates global food demand will increase by
about 1.5 percent a year between now and
2030, with cereals, edible oils, and meats grow-
ing at 1.2, 2.3, and 1.7 percent, respectively—
somewhat slower than they did between 1990
and 2006 (table 2.8). Developing countries
have higher income elasticities, faster income
and population growth, and relatively large
populations, compared with high-income
countries. Thus, three-quarters of the addi-
tional global demand for food between now
and 2030 will emanate from developing
countries.


The implications of biofuels demand for
agricultural prices
The production of biofuels in Brazil, the
United States, and the European Union (which
together account for more than 90 percent
of global output) has increased by 18 percent
a year since 2000. Biofuels now use 16 percent
of global sugarcane production, 9 percent of
global vegetable oils production, and 13 per-
cent of global maize production, and have
been the key contributor to the rise in food
crop prices in recent years (Mitchell 2008).


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


72


0


2


4


6


8


10


Meats


Average annual % growth, 1990–2005


Figure 2.17 Demand for edible oils grew
much faster than population in Asia


Source: World Bank.


W
o


rld
As


ia


Population GDP Cereals Edible oils


BrazilChina


India


Russian
Federation


0.4


Grain consumption per capita (kg)
(Log scale)


1.1 2.9 8.1 22.0 59.8
GDP per capita (1,000 PPP $)


Note: Curve fitted on a log scale.


18


45


135


367


1,000


Figure 2.16 Per capita grain demand tends
to stop rising when income reaches around
$5,000


Source: World Bank.


Table 2.8 Developing countries will
account for most of the projected demand
for various foods, 2000–30


All Edible
agriculture Cereal oils Meats


WORLD 1.5 1.2 2.3 1.7
Developed 0.7 0.9 2.0 —
Transition 0.5 0.8 1.7 —
Developing 2.0 1.4 2.5 2.4


Sub-Saharan Africa 2.8 2.5 2.9 3.3
Middle East and 2.2 2.1 2.3 3.3


North Africa
Latin America and 1.8 1.2 2.6 2.0


the Caribbean
South Asia 2.3 1.6 2.7 4.0
East Asia and Pacific 1.7 1.2 2.4 2.1


Source: FAO (2006, pp. 33, 39–42, 47).
— Not available.


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The rapid expansion of production capac-
ity in the United States and Europe was
prompted by generous subsidies and use man-
dates, but high energy prices have made con-
tinued production without subsidies profitable
in many cases. As a result, demand for biofu-
els may mean that in the future prices for
crops used to produce biofuels will be higher,
and more volatile, than if these crops were
used only for food.


Indeed, when oil prices exceed the thresh-
old of roughly $50 a barrel, a strong correla-
tion can be observed between the price of
crude oil and crop prices that does not exist
when prices are below $50 a barrel (fig-
ure 2.18). At oil prices below $50 a barrel,
ethanol production is not very profitable.
However, at $50 a barrel, a 1 percent increase
in oil prices results more or less in a 0.9 per-
cent increase in maize prices, because every
dollar increase in the price of oil increases the
profitability of ethanol and hence biofuel de-
mand for maize.20 Since the oil market is
much larger than the market for maize (if all
the maize currently produced in the world
were converted into ethanol, it would equal
only 8 percent of global gasoline supplies), the
price of maize is now effectively determined
by the price of oil.


The impact of biofuels is not limited to the
crops used for biofuel production. As more
cropland shifts to produce the now-more-
profitable biofuel crops, then the supply of
other crops declines (or less productive land is
brought under cultivation), thus raising food
prices in general. As a consequence, the price
of wheat and soybeans have also become more
sensitive to oil prices in excess of $50.


The future impact of the oil market on the
demand for food crops and their prices is un-
certain. Technological improvements may
lower the cost of producing ethanol, in turn
lowering the threshold oil price above which
crops used for biofuels become sensitive to oil
prices. But technological change may also give
rise to other nonfood sources (such as cellulose)
for biofuel production or to other energy alter-
natives such as solar, wind, and hydrogen-based


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


73


Figure 2.18 Food crop prices have become
sensitive to oil prices
Oil price per barrel versus food price per ton


Crude oil ($/bbl)


b. Wheat vs. Crude Oil Prices


0


100


c. Soybeans vs. Crude Oil Prices


0


100


200


300


400


500


600


700


Crude oil ($/bbl)


Soybeans ($/ton)


0 20 40 60 80 100 120 140


0 20 40 60 80 100 120 140


200


300


400


500
Wheat ($/ton)


Crude oil ($/bbl)
0 20 40 60 80 100 120 140


a. Maize vs. Crude Oil Prices


0


50


100


150


200


250


300


350
Maize ($/ton)


Source: World Bank.


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Indeed, over the past 50 years these forces
have enabled global production of most com-
modities to rise despite falling, or at best sta-
ble, real prices. Production of aluminum, for
example, increased fivefold between 1965 and
2007, while that of crude oil, copper, and
wheat increased 2.6, 3.2, and 2.8 times, re-
spectively (figure 2.19).


Technological change has kept extraction
costs in check even as the quality of mines
and wells declined
Although the quality of newly discovered
mines and oil wells (and the ease with which
they can be exploited) tends to be lower on
average than older ones, technological im-
provements have reduced the cost of produc-
ing most commodities over the past 50 years,
allowing effective supply to keep pace with
demand (box 2.6).


In the case of oil, declining yields from on-
shore wells pushed exploration into offshore
fields that are much more difficult and ex-
pensive to exploit. Improved technologies al-
lowed these sources to be exploited prof-
itably even at low prices and even though
they are much more challenging to drill than
existing wells. As a result, nearly all of the
additional increase in global oil production
since 1978 has come from offshore wells
(figure 2.20).21


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


74


systems. Should this occur, demand for biofuel
food crops would drop off and food prices
with it.


Long-term supply prospects


The slowing of growth should bring com-modity prices down by roughly 25 percent
in 2009 (see chapter 1). But over the medium
to long term, they are not expected to decline
to the levels observed in the 1990s. How far
they come down, and their future trajectory,
will depend not only on the demand factors
already discussed but also on the pace at which
finite resources are exhausted; improvements
in the efficiency with which commodities are
found, extracted, and grown; and the policies
that are put into place to promote long-term
supply.


Energy and metals supply
Supply prospects for both oil and metals de-
pend on the competing forces of resource ex-
haustion and the declining quality of new
sources, on the one hand, and the pace of new
discoveries and improvements in the technol-
ogy with which commodities are discovered
and extracted, on the other.


The world is unlikely to run out of oil,
metals, and minerals in the foreseeable
future
Despite ultimately finite quantities of oil, met-
als, and minerals in the earth’s crust, there is
little likelihood that the world will run out of
natural resources (or food) in coming decades.
The existence of ample (and growing) re-
serves, and a history of significant improve-
ments in the technology with which resources
are found and extracted, suggests that supply
will continue to rise in pace with demand.
True resource exhaustion is unlikely not least
because, as resources become scarcer, their
prices rise, consumption declines, and alterna-
tives that once may have been uneconomic are
substituted for the scarce (and expensive)
commodity.


Output volumes, 1965–2007, index (1965 5100)


Source: World Bank.


100
150
200
250
300
350
400
450
500
550


2005


Crude oil


Aluminum


Copper


Wheat


Figure 2.19 Output of virtually all commodi-
ties has increased since 1965


1965 1970 1975 1980 1985 1990 1995 2000


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Technology has also helped maintain
surprisingly stable ratios of reserves
to output
Advances in the technology with which new
reserves are discovered and in the efficiency
with which the final product is extracted from


ore beds or wells has meant that known re-
serves of most extractive commodities have in-
creased over time—despite rising production.


Such technological improvements help ex-
plain the substantial rise in estimates of re-
serves over past decades. Two authoritative
sources of such data for oil are the Oil and
Gas Journal, which reports annual estimates
of proven reserves (figure 2.21), and the


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


75


Rising costs for producing a unit of output repre-sent a good a priori indicator of increasing
scarcity. The fact that the prices of most commodi-
ties have remained stable or declined for most of the
past 100 years is therefore a good indicator that at
least until 2003 the world was not running out of
them (Radetzki 2008a).


Production costs—especially for the marginal
producer—are an even better indicator. For the me-
dian producer, the real cost of producing a ton of
metal between 1985 and 2002 declined by 28 per-
cent for aluminum and copper and by 21 percent for
nickel (IMF 2006). For high-cost producers, the
decline was the same for aluminum but was only
18 percent for copper and nickel. Those numbers
suggest that while new projects to extract copper
and nickel were more expensive than preexisting


Box 2.6 Declining costs of resource extraction
ones, technological change had nevertheless reduced
the costs of production by more than the lower
quality of the underlying vein or its remoteness had
raised them.


Similarly, the average cost of bringing a new oil
field into production declined from $29 a barrel in
1981 to $9 in 1999 (IEA 2001). These cost reduc-
tions would be all the more marked if the numbers
were expressed in real terms. And although not all
of this cost decline can be attributed to technological
change, much can (Bohi 1999). Indeed, improve-
ments in extractive technology allowed copper prices
to decline more or less continuously between 1890
and 1970 even as the average grade of copper ore in
the United States fell from 6 percent to less than
2 percent between 1890 and 1920 and to less than
1 percent by 1960 (Lowell 1970).


0


15


30


45


60


75


90


Figure 2.20 Almost all of the additional oil
supply since the 1970s has come from
nontraditional sources


Source: Sandrea and Sandrea 2007.


World oil production, millions of barrels per day


Offshore Onshore


1970 1974 1978 1982 1986 1990 1994 1998 2002


0


200


400


600


800


1,000


1,200


1,400
World crude oil reserves, billions of barrels


Figure 2.21 Rather than declining, known oil
reserves keep rising


Source: Oil and Gas Journal.


1950 1958 1966 1974 1982 1990 1998 2006


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 75




United States Geological Survey (USGS),
which attempts to quantify the resource base
of the world’s major basins by including as-
sessments of known reserves, undiscovered re-
sources, and reserve growth (table 2.9).22


Estimates from the Oil and Gas Journal,
which include unconventional sources of hy-
drocarbon fuels such as Canadian oil sands
and oil shale, show known reserves rising
from just over 600 billion barrels in 1980 to
1.3 trillion barrels by 2008. Furthermore, the
reserve estimates for a number of major pro-
ducers in the Middle East have not changed
for years, reflecting both their current size
compared with production levels (national-
reserve-to-production levels imply adequate
reserves for 82 years of production for the
Middle East–producing countries) and the fact
that for decades these countries have not felt
an incentive to explore in more depth the
potential for additional reserves nor to verify
existing reserve estimates.


On the other hand, according to the USGS es-
timates (which include undiscovered resources),


total resources increased from 1.7 trillion bar-
rels in 1981 to 3.0 trillion barrels in 1996, so the
amount of known oil still in the ground re-
mained stable, at around 70 percent of the total
of oil ever found (see table 2.9).


Reserves of natural gas estimates are equally
high. According to the USGS, they were at 2.3
trillion barrels of oil equivalent in 2003, almost
as large as crude oil reserves (figure 2.22).


Yet, among the key hydrocarbon sources of
energy, coal is perhaps the most abundant. As
of 2007, the reserves-to-production ratio was
estimated at 133 years, according to BP. How-
ever, as mentioned earlier, the use of coal will
depend on the degree to which new techno-
logical advances will be able to ameliorate the
environmental concerns.


Finally, expansion of nuclear energy (and
other renewable fuel) supplies could lessen the
relative importance of hydrocarbon-based
fuels. For example, in addition to the exis-
tence of abundant feed stocks (at current con-
sumption rates, known uranium reserves are
expected to last almost a century), current
modern nuclear technologies not only produce
much less nuclear waste but also have lower
likelihood of accidents compared with nuclear
power plants in the past.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


76


Table 2.9 Historically, estimates of oil
reserves have kept pace with production


Date of assessment


Category 1981 1985 1990 1993 1996


(billions of barrels)


Cumulative 445 524 629 699 710
production


Known reserves 724 795 1,053 1,103 891


Undiscovered 550 425 489 471 732
conventional
resources


Expected reserve — — — — 688
growth


Estimated total 1,719 1,744 2,171 2,273 3,021
resources


Total resources 74 70 71 69 76
still in ground
(percent)


Source: U.S. Geological Survey, World Bank calculations.
Note: Estimated total resources is the sum of the first three
rows. Total resources still in ground is one minus the ratio of
cumulative production over total resources.
— Data are not available (the concept of reserve growth
was first introduced in 1996).


0


500


1,000


1,500


2,000


2,500
Billions of barrels (equivalent)


Figure 2.22 Gas reserves are almost as large
as oil reserves


Source: U.S. Geological Survey.


Reserve
growth


Undiscovered
resources


Known
reserves


Oil Gas


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 76




Reserves of metals and minerals have also
tended to rise with output
The story for metals and minerals is somewhat
more nuanced. Reserves expressed as a share
of production for a number of metals did
decline during the 1980s and 1990s. In part
this reflected their relative abundance (re-
serves exceeded more than 40 years for baux-
ite, copper, iron ore, and nickel), continued
rising production levels, declining prices, and
underinvestment. It also reflected the fact that
reserves are really a measure of the inventory
that producers have readily available for fu-
ture delivery, rather than a measure of the
physical quantity remaining of a commodity.
With demand and prices weak, and invento-
ries (reserves) ample, firms had little incentive
to invest in additional inventory.


Since 2003, when metal prices began rising
and production accelerated, exploration
expenditures have picked up (see earlier dis-
cussion). For some metals, the reserve-to-
production ratios have increased as a result
(table 2.10).


Increasing scarcity is unlikely to result in
resource exhaustion
Although the history of reserves data suggests
that much more oil is likely to be discovered,
ultimately the quantity of available oil is finite.


Long before the world begins to run out of oil,
however, prices would begin to rise and con-
sumption growth would slow. As a result, al-
ternatives such as natural gas, nuclear power,
and renewable energy sources would increase
their output share (see earlier discussion on
long-term demand). Reserves of crude oil
would not decline as rapidly as they would
have had prices not increased, and its use
would be reserved for those products (plastics,
chemicals, and polymers) where few alterna-
tives exist.


Overall, high prices will encourage
increased supply and substitution of
alternative sources
As indicated earlier, the supply of crude oil is
expected to continue to expand over the next
few decades, reaching about 112 mb/d by
2030. The supply of other energy sources is
expected to increase more rapidly than that
for oil, with coal and natural gas projected to
increase their shares in total energy supply
from 46 percent in 2005 to 51 percent in
2030. Renewable energy sources are projected
to see their share in total energy supply rise
from about 0.45 percent to about 1.7 percent
over the same period (table 2.11).


Biofuels are a source of renewable energy
whose share of global liquids production has


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


77


Table 2.10 Increased investment has stabilized reserve-to-production ratios for some
commodities
Year Oil Coal Bauxite Iron ore Copper Lead Nickel Tin Zinc


Proven reserves
billions of


barrels (Millions of metric tons)


1980 667 — 25,000 250,000 493 127 55 10 162
1990 1,003 — 22,000 150,000 350 70 49 8 147
2000 1,104 984,211 24,000 140,000 340 64 58 7 190
2007 1,238 847,488 25,000 150,000 490 79 67 6 180


Reserves/production ratio
(Years of production equivalent)


1980 29 — 280 280 64 36 77 42 26
1990 42 — 193 178 41 20 53 37 21
2000 40 230 178 132 26 21 46 29 22
2007 42 133 132 79 31 22 40 20 17


Source: Radetzki (2008a, 2008b), British Petroleum, U.S. Geological Survey.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 77




reached 1.6 percent, largely because of govern-
ment encouragement (box 2.7). Recent projec-
tions suggest that biofuel production will reach
the equivalent of 1.95 mb/d of oil by 2013 (a
45 percent increase over 2008), corresponding
to 2.1 percent of the projected global oil de-
mand (IEA 2008b; FAPRI 2008).23 While pop-
ular, biofuels are controversial, in part because
energy is required to produce energy, so the net
addition to the global energy supply from
corn-based ethanol is relatively small (Kojima,
Mitchell, and Ward 2006), and in part because
biofuels yield only limited environmental ben-
efits (Searchinger and others 2008; Fargione
and others 2008).


Long-term projections for metals and min-
erals supplies are optimistic, with expectations
that production will increase by a further 3.0
percent a year between now and 2030. At the
same time, the trend toward substitution of al-
ternative metal products is likely to continue.
For example, copper initially displaced lead in
plumbing applications, only to be displaced by


plastics most recently and by sand (fiber op-
tics) in telecommunications applications. And
the rapid expansion in demand for aluminum,
shown in figure 2.19, partly reflects its increas-
ing use as a lightweight alternative for steel.


Another element of growing importance in
the metals markets is the role of recycling,
which currently ranges from 55 percent of
final demand in the case of lead to about
5 percent in the case of zinc. In developed
economies, the proportion of metal available
from scrap is higher because of greater inven-
tories embodied in old cars and infrastructure
that can be recycled. Future increases in
scrap’s share of the metal supply in emerging
economies will slow the rate of growth of de-
mand for mined metal.24


Actual results will depend on policy
choices and technological progress
Supply of both energy and metals over the
long term depends critically on policies and
the pace of technological change. Rising con-
cerns about the environmental consequences
of economic activity, notably but not exclu-
sively those associated with climate change,
may alter the regulatory environment in im-
portant ways.


Emissions abatement policies may restrict
the use of hydrocarbons, either through man-
dates or tax policy that alters the economics
of both demand and supply—potentially ex-
tending reserve-to-production ratios signifi-
cantly. Environmental concerns may also re-
strict the use of extraction and production
techniques in other primary sectors in ways
that reduce supply or significantly raise pro-
duction costs. In the IEA’s aggressive emissions
abatement scenarios, global oil demand falls
by 29 percent.


How successful alternative fuels and
improved extraction technologies will be in
enabling the kind of substitution and in-
creased supply that has been observed in the
past will depend on how successful policy is in
supporting the creation and diffusion of new
technologies. Particularly important for poor
countries will be efforts to create affordable


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


78


Table 2.11 Oil’s share in global energy
supply is projected to decline


Average annual growth rate
(%)


Energy source 1990–2005 2005–15 2015–30


Coal 1.8 3.3 1.5
Oil 1.5 1.7 1.1
Gas 2.3 2.6 1.7
Nuclear 2.1 1.1 0.4
Hydro 2.1 2.7 1.6
Biomass & Waste 1.6 1.5 1.3
Other renewables 3.8 9.0 5.2


Total 1.8 2.3 1.4


Share in total energy supply (percent)


1990 2005 2015 2030


Coal 25.3 25.3 27.8 28.2
Oil 36.7 35.0 32.9 31.5
Gas 19.1 20.6 21.2 22.3
Nuclear 6.0 6.3 5.6 4.8
Hydro 2.1 2.2 2.3 2.3
Biomass, waste 10.3 10.1 9.3 9.1
Other renewables 0.4 0.5 1.0 1.7


Total 100 100 100 100


Source: IEA 2008a.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 78




and durable solar cells, whereas at the global
level efforts to reduce dependence on liquids
for transportation—such as a breakthrough in
battery technologies or hydrogen generation—
will be key.25


The structure of energy markets, includ-
ing the market power and supply decisions
made by OPEC may also play a role. The
concentration of oil reserves in the hands of
a few countries could limit the increase in
exploration and production anticipated in re-
sponse to high prices (box 2.8). OPEC con-
trols three-quarters of the world’s oil reserves
and dominates export markets.26 Moreover, a
number of producers have made their reserves
and fields off limits to private investors; two
of these countries (Mexico and Saudi Arabia)
officially prohibit the participation of foreign


companies, even in a consultancy capacity. In
the baseline scenario, more than 75 percent of
the increase in global production is expected
to come from OPEC member countries.
Should they decide to restrict supply, oil prices
could be sharply higher in the medium term,
and demand much lower. Although such an
episode would likely be very painful, ulti-
mately it would speed the switch into alterna-
tive energy sources (much as it did in the
1980s) and result in a significant decline in the
long-term demand for oil.


Agricultural supply
Increases in cultivated land and yields are
likely to result in strong growth in agricultural
production and declines in prices from their
current high levels, as has occurred during the


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


79


While biofuels have been used since the earlydays of the automobile (Henry Ford’s 1908
Model T car was designed to run on maize-based
ethanol), limited supplies and the availability of
cheaper and more efficient petroleum products
diminished the use of biofuels (except for a brief
revival during the petroleum shortages of World
War II).


In the United States, various amendments to the
1970 Clean Air Act and the 1992 Energy Policy Act
were instituted that favored the use of biofuels, espe-
cially maize-based ethanol. More recently, the 2007
Energy Independence and Security Act called for a
fourfold increase in biofuel production by 2022. As
a result, an estimated 25 percent of U.S. maize out-
put in 2007–08 was diverted to ethanol production.
In 2007, the United States produced 6.6 billion gal-
lons of ethanol, roughly equivalent to 4.5 percent of
its gasoline consumption.


The European Union began instituting mandatory
use of biodiesel (mostly from rapeseed oil) as early as
1992. During 2008, its biofuel output was expected
to reach 225,000 barrels a day of oil equivalent, rep-
resenting about 1.5 percent of its crude oil consump-
tion. The European Union has a target 5.75 percent


Box 2.7 The rise of biofuel production
of biofuel use by 2010, whereas a 2008 European
Commission directive proposed a 10 percent use
mandate by 2020.


In the 1970s, Brazil offered incentives to both
sugarcane producers and its car industry to encour-
age biofuels, and by the mid-1980s, Brazil was pro-
ducing 3 billion gallons of sugarcane-based ethanol
a year, while 90 percent of Brazilian-made cars were
designed to run on ethanol. The biofuel program
almost collapsed during the 1990s when the price of
oil was low, offshore oil discoveries weakened politi-
cal support for biofuels, and high sugar prices
strained the subsidy program and diverted sugarcane
to the world market. However, the recent crude oil
price spike along with the introduction of “flex-fuel”
cars that can use any combination of gas and ethanol
has encouraged reliance on ethanol.


In Brazil, the government no longer provides
subsidies to either the car or the sugar industry, and
the cost of producing ethanol is $1.40 a gallon (very
low compared with maize-based ethanol or edible
oil–based biodiesel), making the industry competitive
even if crude oil prices decline to $40 a barrel
(Kojima and Johnson 2005).


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 79




past 50 years. However, supply growth will
remain sensitive to public policy as well as to
investments in infrastructure and research.
Furthermore, prospects are subject to signifi-
cant risks, both upside (rapid technological
change) and downside (impacts of environ-
ment and climate change and links to oil
prices through inputs and biofuels demand).


Rising productivity and land under
cultivation have boosted agricultural
production
The past half century has witnessed a steady
increase in agricultural output, both in ab-
solute and per capita terms. Total factor
productivity in the agricultural sector has in-
creased by between 2.1 and 2.5 percent each
year (Coelli and Rao 2005; Martin and Mitra
2001) over the past 20 years, with the largest
productivity gains recorded in Asia and North
America (figure 2.23).


Reflecting this strong productivity growth,
most of the increase in agricultural output over
the past 40 years is attributable to increased
yields rather than to increases in the quantity
of cropped land (figure 2.24). Similar gains
were observed in the livestock sector, with the
quantity of meat produced per animal rising by


1.7 percent for chicken and 3.5 percent for
pork between 1980 and 2005 (FAO 2006).
Growth in productivity was responsible for
half of the increase in output since 1960 in
China and India and between 30 and 40 per-
cent of the increase in other East Asian coun-
tries (World Bank 2008). These productivity
improvements enabled a decline in the share of
labor force employed in agriculture (even as


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


80


The rising share of oil reserves and global produc-tion controlled by state-owned firms has
prompted concerns about future supply. The
concerns are about:


• Cartel-like behavior
• The efficiency and responsiveness of state-owned


firms to economic incentives
• The denial of access to multinational firms, which


have historically been among the most efficient


State-owned firms need not be less responsive or
less efficient than privately owned ones. To maximize
productivity, however, policy makers need to ensure
that government-owned or -controlled firms are not
overburdened with very high effective tax rates


Box 2.8 State-owned firms and output efficiency
(including profit remittances to the state and
obligations to sell oil at below-market prices) or social
mandates that limit the extent to which they are able
to invest in new technologies, infrastructure, and fields.


In some countries, such responsibilities have been
associated with disappointing results. For example,
oil production in República Bolivariana de Venezuela
has declined 19 percent since 2000, while it has been
stagnant and is now declining in Mexico; both are
countries with restrictive legislation or practice.


This contrasts with the 45 percent increase in
production and 49 percent increase in reserves (not
including the new Tupi field) recorded by Brazil’s
state-owned Petrobras, which has been encouraged to
reinvest profits and hire foreign experts when needed.


0.0


1.0


0.5


1.5


2.0


3.0


2.5


3.5


Figure 2.23 Agricultural productivity has
been rising rapidly over the past 20 years


South
America


AsiaAfrica Austral-
asia


North
America


Source: Coelli and Rao 2005.


Europe


Average, annual percentage change in agricultural TFP,
1980–2000


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 80




production and population increased) and a
25 percent increase in the average caloric per
capita consumption in developing countries
during the past 30 years.27


Among developing countries, crop produc-
tivity increases (which control for increases in
inputs such as capital and labor) have been
driven mainly by the expansion of irrigation,
improved seed varieties, and increased use of
fertilizer. Worldwide, the area devoted to im-
proved varieties has been expanding continu-
ously. In 2000, high-yielding grain varieties
were used on 90 percent of planted area in
South and East Asia, up from 10 percent in
1970 (World Bank 2007b). The use of im-
proved varieties is expanding in all regions, in-
cluding Sub-Saharan Africa, where it now rep-
resents almost one-quarter of cropped land.


Fertilizer use is also up. In developing
countries it has risen from only 10 percent of
global use in the 1960s to 77 percent now
(FAO 2008). However, fertilizer use in sub-
Saharan Africa is minimal, accounting for less
than 3 percent of global use versus a 40 per-
cent share in East Asia.


Most recently, yield growth has declined
for some commodities, notably wheat, rice,
and soybeans (figure 2.25). While such weak-
ening in yield gains has been attributed to


exhaustion of the gains that came from the in-
troduction of green revolution technologies,
persistently low commodity prices have also
played a role. Yields gains in other commodi-
ties have accelerated because of greater use of
genetically modified varieties, which boosted
yields in cotton in China and India by 19 and
26 percent, respectively (World Bank 2007b).
In addition, maize yields have benefited from
the more extensive use of techniques made
economically profitable by high prices.


The recent slowing of productivity gains
and the spike in food prices have raised con-
cerns about long-term output trends. Fears of a
food shortage over the long term are unwar-
ranted, however, given the enormous potential
for increasing agricultural output through cul-
tivating unused land and increases in yields.


Although much of the best agricultural
land is already in use, significant opportunities
for increasing output remain simply by in-
creasing the amount of land under cultivation.
About 12 percent of arable land worldwide
that is not currently forested could be brought
into agricultural production relatively easily
(Thompson 2008). Considerable amounts of
arable and unforested land in Africa could be
brought into production assuming appropri-
ate infrastructure were put into place, while in


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


81


0.0


1.0


2.0


3.0


4.0


5.0
Contribution to average annual increase in output, 1965–2008


Figure 2.24 For key crops, most of the
increase in output was due to increased
yield, not increased area planted


Rice MaizeWheat CottonSoybeans


Source: World Bank calculations based on U.S. Department of
Agriculture data.


Area growth


Yield growth


0.0
Wheat


Source: World Bank calculations based on U.S. Department of
Agriculture data.


Rice Maize Soybeans Cotton


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0
Annual % change in yields, 1965–99, 2000–08


Figure 2.25 Yield growth has decelerated
recently


1965–1999 2000–2008


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 81




Brazil about 180 million arable hectares that
are currently used as pasture could eventually
be brought into food crops. Sizable amounts
of unused or underutilized land also exist in
Ukraine and Russia.28


Another source of additional farmland is
the 18 million hectares in the United States and
Europe that have been set aside to reduce sup-
ply and keep producer prices high (Normila,
Effland, and Young 2004). Recent changes to
the Common Agricultural Policy have autho-
rized European farmers to use about half of
that land, which could see the amount of land
applied to agriculture in Europe rise by 3.5
percent this year. Similarly, the United States
recently released 1.5 million acres of the land
fallowed by its conservation program.


However, the new land is less productive
than existing land and will be more costly to
exploit, especially in an environment of high
prices for energy and equipment. Further-
more, the expansion of new land (especially in
Africa) will require large investments in infra-
structure and likely will take decades to ex-
pand significantly.


These calculations do not include land that
is currently forested but that is suitable for
rainfed crop production. Such lands exceed by
one and one-half times the total currently used
for agriculture (figure 2.26). Bringing all of
this land into crop production is probably nei-
ther desirable nor likely, but its existence
means that the agricultural supply potential of
the planet is far from exhausted.


Technological gains are likely to drive
continued increases in yields
Much of the increase in agricultural productiv-
ity over the past 50 years came about through
often scientifically simple improvements in
agricultural technique, including increased use
of irrigation, fertilizers, and commercially
optimized seeds. The adoption of these tech-
niques in the developing world is most ad-
vanced in Asia, and its impact on yields is evi-
dent in the very strong productivity growth
enjoyed by the region over the past half cen-
tury (table 2.12). Considerable potential exists


for extending the same kind of gains to other
regions, particularly Sub-Saharan Africa and
many countries in Europe and Central Asia,
that have adopted these techniques less exten-
sively (table 2.13).29 However, such expansion
will require policies to encourage research and


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


82


0


200


400


600


800


1,000


1,200


Hig
h-i


nc
om


e


co
un


trie
s


Ea
st


As
ia


an
d


Pa
cifi


c


Eu
ro


pe
an


d


Ce
ntr


al
As


ia


La
tin


Am
er


ica


an
d C


ar
ibb


ea
n


Mi
dd


le
Ea


st
an


d


No
rth


Afr
ica


Su
b-S


ah
ar


an
Afr


ica


Millions of hectares of arable rain-fed cropland


Figure 2.26 The stock of unused but poten-
tially arable land is enormous


Already in use


Source: Food and Agriculture Organization.


Currently unused


So
uth


As
ia


Table 2.12 Potential gains from extending
the green revolution remain large


Potential
gain


(PercentActual Potential Poential


ofRegion production production gain


current
(Millions of metric tons) production)


High income 423 440 17 3.9
East Asia and


the Pacific 501 508 7 1.4
Europe and


Central Asia 130 191 60 46.5
Latin America and


the Caribbean 140 161 21 15.0
Middle East and


North Africa 50 57 7 14.3
South Asia 250 259 9 3.7
Sub-Saharan


Africa 56 81 25 43.9
Total 1,551 1,697 146 9.4


Source: World Bank.


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 82




development (R&D) and extension directed
particularly at small-holders. If these countries
were to adopt more intensive techniques like
those used in Asia and elsewhere, global pro-
duction of cereals could be increased by as
much as 9.4 percent, enough to meet several
years’ worth of increasing global demand.


Based on similar observations, the FAO in
its most recent long-term forecasting exercise
expects global agricultural production to rise
by 1.5 percent a year for the next three
decades, somewhat slower than over the past
50 years but still significantly faster than pro-
jected population growth.


Prospects will depend on a number of
uncertain factors
Of course, the long-term supply prospects for
agricultural commodities are far from certain.
Past productivity gains are an imperfect indi-
cator of what might be expected in the future.
Moreover, a number of looming issues in the
global economy could affect supply conditions
in important ways.


Public investment in infrastructure and
R&D will be critical to realizing potential


productivity gains and to ensuring that such
gains benefit the poor. About 95 percent of
developing-country R&D expenditures in agri-
culture is publicly funded. As a result, this
R&D is mainly dependent on administrative
decisions, which may or may not respond to
market conditions. Therefore, it is imperative
that efforts to increase food production in
low-income countries should be part of a
comprehensive effort that includes investment
in R&D as well as dissemination efforts.30


Notwithstanding the swings in the prices of
agricultural products, agricultural R&D has
remained remarkably stable as a share of agri-
cultural value added, at about 0.85 percent be-
tween 1981 and 2000. Moreover, developing
countries are spending much less on R&D
than are high-income countries, both in ab-
solute terms and as a share of agricultural GDP
(figure 2.27).


Recent advances in biotechnology may offer
developing countries additional improvements
in yields through the introduction of new plant
varieties with heightened resistance to drought,
rain, diseases, and pestilence—characteristics


T H E C O M M O D I T Y B O O M : L O N G E R - T E R M P R O S P E C T S


83


Table 2.13 With some exceptions, yield
growth for key agricultural commodities
has been highest in South and East Asia
Category Wheat Rice Maize Soybeans Cotton


(Annual percent change in yields, 1965–2006)


World 2.0 1.7 1.8 1.5 1.7
Income level


High income 1.6 0.9 1.6 1.3 1.6
Middle income 2.0 1.9 2.6 2.8 2.3
Low income 2.6 2.0 1.1 1.4 3.1


Region
East Asia and


the Pacific 3.8 1.8 2.9 1.9 2.7
Europe and


Central Asia 0.1 0.0 0.8 0.1 0.7
Latin America and


the Caribbean 2.0 2.5 2.6 1.3 2.1
Middle East and


North Africa 2.5 1.2 2.7 3.0 1.2
South Asia 2.6 2.1 1.6 1.5 3.1
Sub-Saharan Africa 2.2 0.7 0.7 3.2 1.6


Source: World Bank calculations based on U.S. Department
of Agriculture data.


Su
b-S


ah
ar


an


Afr
ica


As
ia


an
d P


ac
ific


We
st


Afr
ica


an
d


No
rth


Afr
ica


La
tin


Am
er


ica


an
d C


ar
ibb


ea
n


De
ve


lop
ing


co
un


trie
s


Hig
h-i


nc
om


e


co
un


trie
s


0.0


0.5


1.0


1.5


2.0


2.5
R&D spending as a share of agricultural GDP


Figure 2.27 Developing countries spend less
on agricultural R&D than high-income
countries


Source: Pardey, Alston, and Jones 2008.


1991


Wo
rld


1981 2000


10363_Pg51_94:10363_Pg51_94 11/29/08 7:07 AM Page 83




that might be especially desirable during a pe-
riod of climate change. However, like the chem-
ical-based pesticides and fertilizers that helped
generate substantial improvements to yields
during the green revolution, they may also
carry with them hidden risks such as cross-
plant genetic contamination and potential
health impacts because of unexpected interac-
tions with human biology. Transparent and
cost-effective regulatory systems that inspire
public confidence will be needed to evaluate
risks and benefits on a case-by-case basis.


Moreover, the diffusion of these innova-
tions into developing countries has been un-
even, partly because of the high cost of these
seeds and their incompatibility with traditional
agricultural methods and partly because of the
unwillingness of seed companies to market
them into countries with weak regulatory
frameworks and intellectual property regimes
(box 2.9).


In the long term, climate change and
water scarcity could have significant
impacts on yields
Global temperatures are expected to rise by
0.4 degrees Celsius between now and 2030.
This could lead to an overall decline in agri-
cultural productivity of between 1 and 10 per-
cent by 2030 (compared with a counterfactual
where average global temperatures remained
stable), with India, Sub-Saharan Africa, and
parts of Latin America being most affected
(see next section).


Over the longer term, the impacts of cli-
mate change could be much more serious,
with agricultural productivity in many devel-
oping regions, notably Africa, potentially
declining by as much as 25 percent as com-
pared with a baseline of temperatures remain-
ing stable at their 2030 levels (Cline 2007).


Sustainable water supply forms another
longer-term risk facing future agricultural


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


84


The most important recent technological break-through in agriculture has been the development
of genetically modified (GM) crops. These crops tend
to be more disease resistant than traditional varieties
and lower cost because of increased yields and the
need for fewer pesticides.


Originally developed in the United States, they
have spread to many countries, including many in
the developing world. In 2006, farmers in 22 coun-
tries planted GM seeds on 100 million hectares,
corresponding to about 8 percent of global crop area
(World Bank 2007b). Although GM crops were ini-
tially taken up by commercial farming, increasingly
small farmers are now using the technology.


Yet GM crops have not been adopted widely in
developing countries despite considerable potential in
crops, such as bananas, that suffer large losses from
disease. This lack of uptake results partly from con-
cerns over environmental and food safety risks and
partly from private producers of these seeds that
are unwilling to allow them to be distributed in


Box 2.9 Genetically modified crops—the next green
revolution?


countries where they are unable to enforce their
property rights.


Some countries (such as China) have gotten around
this problem by developing their own varieties in pub-
lic research agencies that they make available to small-
holders. Other countries (such as Burkina Faso) have
entered into agreements with private companies that
allow them to develop GM seeds to be used by small-
holders under a general licensing agreement.


The current generation of GM technology has
concentrated on internalizing resistance to diseases
and pests. Research in the pipeline, however,
focuses on developing varieties with other charac-
teristics such as increased tolerance to drought,
wetness, and temperature, as well as slowing
product deterioration. As a result, whereas the
first generation of GM crops was tailored to the
agriculture of the developed world, the second
generation may be better suited to resolving the
kinds of problems found in the production systems
of developing countries.


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supply. About 85 percent of water use in
developing countries goes to agriculture, with
less than one-fifth of the cultivated area in de-
veloping countries producing two-fifths of the
value of agricultural output (World Bank
2007b). Already 15–35 percent of water with-
drawals worldwide are not sustainable, in the
sense that the amount being withdrawn from
aquifers or rivers exceeds the rate at which the
source is naturally resupplied. Perhaps the
most notable example of unsustainable use
was the rapid expansion of cotton production
in the Aral Sea basin, which has resulted in the
disappearance of 90 percent of the sea’s sur-
face area and a broadly based environmental
disaster. Improving water management will re-
quire countries to take more responsibility for
shared water resources, ensuring that they are
priced appropriately and that adequate water
management institutions are put in place to
prevent a recurrence.


Projections


As anyone following commodity marketsover the recent past can attest, forecasting
future demand, supply, and prices in commod-
ity markets is—at best—a hazardous under-
taking. While some commodities, especially
extracted commodities such as oil and metals,
may become more scarce in coming decades,
there is little likelihood of a serious shortfall in
supply. Nevertheless, the overall balance be-
tween demand and supply is very uncertain.
It will depend on a wide range of factors,
including climate change, productivity develop-
ments in commodity supply and commodity
demand markets, GDP and population growth,
and the policy environment. The remainder of
this chapter attempts to quantify the range of
possible outcomes in commodity markets.


Agricultural prices are likely to decline
over the long term
As discussed in chapter 1, agricultural prices
are forecast to decline over the next two years
but remain well above the levels of the first half
of this decade. While the long-term outlook for


agricultural prices is particularly uncertain, this
decline is expected to continue through the
forecast period.


As outlined earlier, the growth in demand
for agricultural products is expected to be
somewhat weaker in the next several decades
because of slower population growth and the
limited impact of higher incomes on food
demand. On the supply side, the availability
of additional land and further productivity
improvements should enable production to
keep pace with demand even as the agricul-
tural sector continues to release labor to work
in other parts of the global economy.


Based on long-term forecasts of population
and incomes and a continuation of the histori-
cal experience of rising productivity, annual de-
mand and supply are projected to grow by
about 1.7 percent on average between 2008 and
2030. This would imply a continued decline in
agricultural prices of about 0.7 percent a year
relative to manufacturing prices and the share of
the unskilled labor force working in agriculture
declines by 6 percentage points (table 2.14).


One particularly difficult issue in the long-
term forecasts for agricultural production and
prices concerns the impact of climate change.
Human-induced global warming has begun to
change growing conditions around the world,
particularly in developing countries. In many
countries, and for many crops, ideal growing
temperatures have been surpassed, stressing the
growth of plants. Perhaps more significantly,
more-extreme water-related events are occur-
ring, including more periods of persistent
droughts, drier soils from higher temperatures,
changing patterns of rainfall (for example the
monsoon arriving earlier or later), and more se-
vere rainfall falling in shorter periods. These cli-
mate events can reduce immediate production
and impair agricultural development, as poor
farmers faced with drought may be forced to
sell or eat animals, while severe storms damage
other types of capital such as irrigation canals.


Forecasts of the rise in temperature and the
impact on agriculture over the next two
decades are extremely uncertain. Lobell and
others (2008) anticipate that southern Africa,


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South Asia, and parts of Latin America will
rank among the hardest-hit areas, with maize
production in southern Africa, for example,
potentially falling as much as 30 percent
below what it would have been without cli-
mate change by 2030.


Our base case in table 2.14 assumes signif-
icant damage from climate change over the
long run. However, over the projection period
2030, the impacts are relatively modest. To
date, global temperatures have risen 0.8° C
since 1900 and are projected to rise a further
0.4° C by 2030 (Cline 2007). Scaling Cline’s
2080 estimates of damage to agriculture by
the estimated temperature change in 2030
leads to an overall decline in agricultural pro-
ductivity of between 1 and 10 percent by 2030
(compared with a future where average global
temperatures remain stable), with Canada and
Europe least affected and India, Sub-Saharan
Africa, and parts of Latin America most af-
fected.31 Were there to be no climate change
between now and 2030, global agricultural
productivity would be nearly 4 percent higher,
and the world price of food 5.3 percent lower.


These projections are subject to other im-
portant uncertainties. In particular, the pro-
jected productivity gains are contingent on
policies being put in place that permit produc-
tivity gains to continue rising as they have in
the recent past. The policies include the re-
moval of trade distortions, progress to limit
the increase in carbon emissions, construction


of infrastructure, and R&D investments in de-
veloping countries with lagging productivity.


As shown in Scenario I, should global agri-
cultural productivity rise by only 1.2 percent a
year on average instead of the 2.1 percent pro-
jected in the baseline, then prices, rather than
declining, can be expected to rise by as much as
0.3 percent a year relative to manufactures—
reversing the trend decline of the past 100 years.
Reduced productivity includes increasing the
quantity of cereal required to produce meat and
as a result total agricultural output rises, even
though final consumption declines by 0.3 per-
cent per annum. Final demand does not decline
by more, because lower productivity is partially
compensated for by increased inputs, including
a 1.2 percentage point increase in the share of
agricultural workers in the labor force com-
pared with the base case. Overall, by the end of
the projection period, real incomes in develop-
ing countries would be lower by about 3.4 per-
cent compared with the baseline.


Consistent with Scenario II, should the
weaker productivity be limited to developing
countries, in part because climate change is ex-
pected to affect them more adversely and per-
haps because policy fails to step up infrastruc-
ture, R&D, and dissemination of investments,
the overall impact in markets would be atten-
uated somewhat. Prices would fall by only
0.17 percent a year (compared with a decline
of 0.7 percent a year in the base case), and
agricultural sector employment would rise


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86


Table 2.14 Agricultural sector simulation results, 2005–30
Results in 2030 by scenario


I. II. III.
Global Developing- Strong demand


Baseline productivity slowdown country slowdown for biofuels


Total factor productivitya


Developing countries 2.1 1.2 1.2 2.1
High-income countries 2.1 1.2 2.1 2.1


Outputa 1.7 1.9 1.9 2.4
Pricesa 0.7 0.3 0.1 0.5
Employment (unskilled in develoing countries)a 6.0 4.8 5.3 5.4
Change in real incomeb 3.4 2.3 1.8


Source: World Bank ENVISAGE model.
a. Change in share of total employment between 2005 and 2030.
b. Percent of base income.


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slightly compared with the baseline. But devel-
oping countries, especially those whose popu-
lations continue to grow relatively rapidly
would become much more dependent on high-
income countries for their food supply.


Scenario III examines the potential impact
of biofuels production on food prices. While
biofuels have made a major contribution to
the rise in food prices over the past two years,
their impact in the future is difficult to esti-
mate. The decline in oil prices has already con-
tributed to the decline in food prices via its in-
fluence on biofuel demand for food crops.
Should oil prices remain moderate as pro-
jected (see below), the influence of biofuels on
food prices should also stabilize. If technolog-
ical progress improves the attractiveness of
nonfood biofuels inputs, the link between oil
and food prices may be broken. Alternatively,
biofuels could have a significant impact on
food prices if oil prices remain high or the cost
of biofuels production declines.


The simulation reported in table 2.14 ex-
plores the implications of a permanent increase
in the rate of growth of demand for food prod-
ucts as source material for biofuels. Under this


scenario, global demand is expected to grow
twice as fast as it does in the baseline. In this
instance, agricultural employment increases by
0.6 percent of the labor force, output of other
grains (including maize) rises by 350 percent,
but food prices increase by much less, due to
substitution away from these products.


Over the long run oil prices are expected
to stabilize (in real terms) at around $75
As described in chapter 1, despite rather recent
volatility, oil prices are not expected to fall
much below $60 in the medium term. Oil de-
mand should pick up as the global economy re-
covers, but supply conditions should also have
recovered, enabling the real price of oil to rise
gradually to around the $75 range. This fore-
cast assumes that, in the absence of policy
changes, demand for energy will continue to
rise faster than GDP. The actual rate of
increase of demand and how it is met will
depend critically on policies, technological
change, and the level of reserves.


The simulations presented in table 2.15 il-
lustrate the potential impacts of four alterna-
tive scenarios.


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87


Table 2.15 Energy sector simulation results, 2005–30
Results in 2030 by scenario


I. II. III. IV.
High Carbon Alternative Weak oil


2004 Baseline demand tax energy supply


Energy demand (average annual percent growth)
Coal 4.9 5.7 2.2 2.5 5.4
Oil 1.6 1.8 1.6 1.4 0.2
Natural gas (excluding distribution) 1.3 1.8 1.0 0.2 1.3
Total 3.0 3.5 1.7 1.6 2.9


Prices ($ per ton of oil equivalent)
Coal 59 60 62 55 54 60
Crude oil 256 428 475 420 219 760
Natural gas 157 288 306 281 231 296


Production level
Coal (metric tons) 5,680 18,312 21,907 10,184 10,185 19,993
Crude oil (mbd) 75 113 117 112 78 78
Natural gas (1e12 BTU) 59,435 82,951 93,105 76,020 56,156 84,356


Share in total energy supply (percent)
Coal 33.4 53.9 57.2 37.7 42.3 63.1
Oil 47.3 33.5 30.5 46.2 45.6 23.8
Natural gas 19.3 12.5 12.3 16.1 12.1 13.0


Source: World Bank ENVISAGE model.


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In Scenario I, energy demand rises 0.5 per-
cent faster (3.5 percent versus 3.0 percent) than
in the baseline each year because energy-saving
technologies and conservation measures fail to
come onstream as rapidly as anticipated.32 This
results in higher prices for all forms of energy.
The higher price of energy means that global
GDP grows somewhat more slowly, with the
cumulative impact on the level of output, com-
pared with the base case, equal to 2.7 percent
in 2030. Most of the increase in demand is con-
centrated in the use of coal (in absolute and
percentage terms). Relatively higher supply
elasticities for coal and gas lead to higher vol-
ume shifts for these two fuels, whereas the
tighter supply of the oil markets leads to a con-
comitantly higher price rise for oil and a rela-
tive shift away from oil consumption.


Scenario II examines the impact of a more
concerted effort to limit carbon emissions. In
this scenario, it is assumed that policies are put
into place beginning in 2011 that are consistent
with achieving a target concentration of 500
parts per million of carbon dioxide in the at-
mosphere by 2050. This implies a shadow
price of carbon of $21 per ton of CO2 in 2030
and a stock of emissions of around 11 gigatons
of carbon in 2030, a reduction of 32 percent
from the base-case level.33


Such a carbon price would lead to a signif-
icant drop in energy demand, with coal taking
the largest hit (from 4.9 percent to 2.2 per-
cent). Coal would be most affected because it
releases the most carbon emissions per unit of
equivalent energy. But a more significant fac-
tor is the large wedge in the price of coal (per
unit of energy) compared with oil and gas. In
other words, the uniform price of carbon has
a much larger percentage increase on the price
of coal than on oil and natural gas. As a corol-
lary, the countries with the greatest coal con-
sumption experience the largest decline in
energy demand.


Scenario III illustrates a situation where a
combination of policies to promote conserva-
tion, increase fuel efficiency, and invest in al-
ternative sources of energy such as solar and
wind power succeeds in reducing the demand


for traditional fossil fuels. In this scenario, the
global energy demand is lower by about the
same amount as in the carbon tax scenario, but
prices of crude oil and natural gas are much
lower. By the end of the period, coal consump-
tion is down by 45 percent from the base case
(from 4.9 percent to 2.5 percent), while nat-
ural gas and crude oil are 30 percent lower
than they are in the carbon tax scenario.


The price of various forms of energy in the
long run is little different from the baseline
scenario because the additional carbon tax in-
duces sufficient reductions in energy demand
to lower the final price by almost as much as
the tax itself.


Finally, under Scenario IV, oil reserves de-
plete more quickly than in the baseline scenario,
either because current estimates of reserves
prove too optimistic or because additional tech-
nology improvements do not materialize. In this
scenario, oil supply, instead of growing at about
1 percent a year, is broadly stable, with pro-
duction of about 78 mb/d in 2030. Oil prices
are about 80 percent higher and demand 32
percent lower than in the baseline, with the
difference being made up by about a 9 percent
stronger growth in consumption of coal.


The price of oil in this scenario rises to
about $122 a barrel but not higher because of
increased supply from alternative energy
sources induced by the higher prices.


Overall, the impact on global growth in
Scenario IV would be limited. By 2030 global
GDP would be only 1.4 percentage points
below the level in the base case. The bulk of
this decline would be felt by the middle-
income developing countries, where energy
intensities are highest.


Taken together, these scenarios illustrate
the considerable uncertainty surrounding the
assumptions of the base case. Nevertheless,
even the pessimistic scenarios have a limited
impact on global welfare. Over the long run,
economies have considerable potential to ad-
just to higher oil prices through switching to
other energy sources and conservation, thus
moderating the impact of higher oil prices on
growth and poverty reduction.


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Conclusions


The almost unprecedented duration andsize of the recent commodity price boom
gave the impression, at least as can be judged
by the popular press, that the world is running
out of natural resources. This is not true. A
combination of circumstances have shaped this
boom: an unusually long period of above-
potential growth among developing countries;
a long period of low oil and metals prices that
eroded supply capacity, in part driven by the
expansion of net oil exports from the transi-
tion economies of Eastern Europe once domes-
tic prices increased to world levels; the depreci-
ation of the dollar; the increase in subsidies for
biofuels that diverted resources from growing
crops for food; declines in grain stocks; increas-
ing demand from developing-country consumers
of oil and raw materials; and continued global
economic expansion in the face of rising com-
modity prices. As the rapid decline of commod-
ity prices since mid-2008 attests, the current
boom is best understood as yet another cycle in
a long history of commodity price cycles.


This does not mean that commodity prices
are necessarily going to fall all the way back to
the levels of the 1990s, nor are they likely to
return to recent heights when demand recov-
ers. In the oil and metals markets, it will take
time to build the machines and train the engi-
neers required to find and exploit new re-
sources, and this kind of exploration will re-
quire that oil prices be maintained at around
$75 a barrel in real terms.


However, in the long run, it will be difficult
to sustain very high oil prices (in excess of
$100 a barrel) for a lengthy period, because al-
ternative sources of oil (such as Canadian oil
sands and more-expensive offshore sources)
and substitutes for oil (such as solar, wind, and
biofuels) would become profitable, while the
potential for reductions in demand from con-
servation remain large. On average, the weak-
ening of global demand and increased supply
have caused metal prices to fall by more than
40 percent from their recent peaks. Neverthe-
less, they remain 2.5 times higher than they
were in the 1990s and even though they are


projected to decline a further 20-odd percent
(see chapter 1) in 2009, these prices are high
enough to ensure that sufficient further supply
will be forthcoming over the medium term. In
the longer run, metals demand should slow as
Chinese metal intensities first stabilize and
then fall, both because of lower investment
rates and because of a higher share of services
in Chinese GDP.


In agriculture, slower population growth
should slow demand for food, while productiv-
ity growth should be sufficient to ensure future
supply at the global level. However, prospects
for individual countries are less clear. Yields
have been declining among many of the coun-
tries that had the strongest gains from the
Green Revolution, unless they step up invest-
ments in infrastructure and R&D and remain
open to new technologies, agricultural pro-
ductivity growth in developing countries may
decline. Moreover, for those countries with
relatively high population growth, many of
which are in Africa, failure to make invest-
ments to boost agricultural productivity may
see them cease to be self-sufficient and forced
to import increasingly expensive food from
high-income countries where agricultural pro-
ductivity continues to rise much faster than
the population.


Central to these forecasts, and particularly
uncertain, are the prospects for technological
progress. Technology will determine the avail-
ability of oil reserves and the costs of extrac-
tion, the price levels at which different oil sub-
stitutes become profitable, the potential for
economizing on scarce oil and metals, and the
likelihood of rapid increases in crop yields.
Making assumptions for technological
progress 25 years in the future is a perilous un-
dertaking. Most likely to be missed are tech-
nological surprises that enable rapid increases
in productivity. So in a sense these forecasts are
conservative. But even without counting on
technological miracles, under reasonable as-
sumptions the supply of commodities is likely
to increase rapidly enough over the long run to
meet anticipated increases in demand at prices
that are lower than the current levels.


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Notes
1. The 1916–17 boom was associated with the


First World War. Similarly, all three booms since 1945
have been associated with a major, though geographi-
cally confined, military conflict (Korea, Vietnam, and
Iraq) and heightened geopolitical uncertainty, which
translated into market fears about the availability of
supplies.


2. However, real prices of domestic food commodi-
ties in developing countries increased by an additional
28 percent during the first three quarters of 2008.


3. This capacity was partly and temporarily utilized
during the time of the first Gulf war, when 5 mb/d of
capacity was shut in Iraq and Kuwait.


4. OPEC surplus capacity typically refers to capac-
ity that can be brought onstream within 90 days. Here,
OPEC’s surplus is conservatively estimated as that
lying dormant from previously higher (though not
peak) levels.


5. Although less important than in the past, these
firms still account for almost 50 percent of global up-
stream spending.


6. Upstream expenditures and the price of crude oil
are highly correlated; the correlation coefficient between
spending per barrel of oil and the price of oil is 0.95.


7. The balance of supply was made up from OPEC
natural gas liquids (1.8 mb/d); non-OPEC, non-FSU
production growth (3.1 mb/d); and rising OPEC capacity.


8. The pickup in oil demand was led by China,
where demand for electricity had outstripped supply
from public sector utilities, resulting in a spike in the
private use of diesel oil for electrical generators.


9. Private communication with David Humphreys,
chief economist at Norilsk Nickel.


10. The contrast between inputs in metal and in-
puts in the agricultural sectors is noteworthy. In agri-
culture, the same type of machinery can be used for vir-
tually all crops in all countries of the world. However,
machinery in metals is custom-made for each mine.


11. Jatropha curcus L. is a bush or small tree used
as a hedge by farmers in developing countries because
it is not browsed by animals. It produces a fruit with
high oil content, suitable for biodiesel production.


12. The poor harvests in Australia come against a
backdrop of an unprecedented, decade-long period of
unusually low rainfall and record-high temperatures,
which are at least partly a result of climate change.
These events have severely stressed water supplies in
the east and southwest of the country (http://www.bom
.gov.au/climate/drought/drought.shtml).


13. When hoarding and real-side speculation occur
in response to expectations of a future shortfall, stocks
(and prices) tend to increase in the short run (relative to
a baseline where the behavior did not occur). In turn,


this ensures that future stocks are higher and future
prices lower than they would have been otherwise. At
the same time it encourages producers to increase out-
put, thereby accelerating a return to more normal prices.


14. In member countries of the Organisation for
Economic Co-operation and Development, high prices
induced a substantial switch away from oil and toward
coal, natural gas, and nuclear power for electrical
generation.


15. Exceptions include nickel, which has been ris-
ing in Brazil; copper, which has been rising in India;
and aluminum, which has been rising in South Africa.


16. Although developing countries now account for
almost half of the world’s metal consumption, it should
be noted that their average per capita use of metals is
only a fraction of that in the developed economies.


17. These income levels correspond roughly to the
midpoint in the World Bank’s official range for
lower-middle-income countries and close to the
upper range for upper-middle-income countries.


18. At incomes of less than $1 a day (or annual per
capita income of less than $350), consumption of basic
staples such as maize, wheat, and rice tends to increase
along with income. At higher incomes, per capita
consumption of staples tends to remain stable, so the
growth of staples consumption falls below income
growth.


19. The income elasticity for meat products exceeds
3.0 for per capita incomes below $4,500 and declines
to 2.6 for countries with incomes in excess of $25,000.


20. When oil costs $120 a barrel (as it did in early
2008), wholesale gas prices would be around $3.25 a
gallon in the United States, and the fuel-equivalent
ethanol price would be $2.44 a gallon. At that price,
ethanol production from maize is profitable as long as
maize prices do not exceed $245 a ton, which was
more or less the price of maize at that time.


21. Global production from onshore sources in
2004 was 54 mb/day, almost identical to the 1973 level.


22. Reserve growth refers to the increase in the es-
timated sizes of fields that occurs as oil and gas fields
are developed. In the United States, the world’s most
intensely explored country, reserve growth is a major
component of remaining oil and gas resources. It is hy-
pothesized that reserve growth can occur worldwide in
similar proportions as exploration of new fields ma-
tures. Undiscovered resources, on the other hand, are
resources postulated from geologic information and
theory to exist outside of known oil and gas fields
(Kleitt and others 2000).


23. If all announced projects materialize, potential
capacity could reach 3.3 mb/d.


24. Concerns over the environment are likely to be
another constraint in future mining activities.


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25. Like electric cars, hydrogen-powered vehicles
allow the consumption of the power and the consump-
tion of the propellant to be geographically separated.
For electric cars, the energy source (be it coal, nuclear,
or solar) that powers the car is consumed at the power-
producing plant, whereas for hydrogen-powered cars
(as distinct from hydrogen fuel-cell cars), it is expended
in the plant that separates the hydrogen from water.
Thus a hydrogen-powered car can be considered just
another form of battery-powered car.


26. If OPEC is considered as a single producer, then
both oil-export and oil-reserve markets are highly
concentrated (Herfindahl index of 0.53 and to 0.57,
respectively). However, if the member countries
were to act independently, the market would not be
particularly concentrated (Herfindahl index of 0.07
and 0.09, respectively).


27. Specifically, average caloric consumption in de-
veloping countries rose from 2,110 kilocalories per
person per day to 2,650 (FAO 2006, p. 3).


28. Much of the underutilized land in the former
Soviet bloc was cultivated in the Soviet era but was left
to fallow when price signals rather than command and
control began to determine land use decisions.


29. The potential gains in the table reflect estimates
of the increase in production that could be expected if
fertilizer production in countries in each of these re-
gions were brought up to the 75th percentile level—
roughly the level in Pakistan. In contrast with the cal-
culations of Coelli and Rao (2005), which yield
broadly similar results, these control for climatic con-
ditions, income per capita, and soil conditions.


30. Investment expenditures in extractive industries
are highly correlated with the respective prices. For
example, when crude oil prices declined by 50 percent
from 1980 to 2000, investment expenditures followed
suit.


31. These estimates do not include the carbon fer-
tilization effect (on which scientific evidence is mixed),
whereby increases in atmospheric carbon concentra-
tion enhance plant growth The simulations may be
overestimating the negative impacts. The Cline esti-
mates have been scaled assuming linearity, but some
evidence suggests that the actual damage functions are
nonlinear. These simulations may therefore overesti-
mate damages in the short run and underestimate them
in the long run.


32. The baseline scenario incorporates an increase
in efficiency of energy use of 1 percent a year. This rep-
resents the culmination of new scientific advances (for
example, the use of carbon fiber materials instead of
metals); the replacement of old, more-energy-intensive
capital with new capital; and changes in behavior
(for example, switching from large vehicles to smaller
ones).


33. The questions regarding who should bear the
burden on reducing carbon emissions are critically
important but are set aside in this simulation to investi-
gate the impact on overall demand and prices. The rev-
enues generated by the price of carbon are assumed to
be recycled domestically with no international transfers.


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95


Dealing with Changing
Commodity Prices


3


As discussed in chapter 2, the rise in pri-mary commodity prices between 2003
and mid-2008 was much larger and more sus-
tained than those of earlier decades. Although
commodity prices have fallen sharply from
their recent highs, they remain well above their
levels in the early 2000s and are projected to
remain high relative to their levels in the 1990s
for a significant period of time.


The boom in commodity prices has gener-
ated dramatic transfers of income within and
among countries. While high commodity
prices have imposed a severe burden on many
consumers, they have also created significant
opportunities for producers. The short-term
macroeconomic, balance of payment, infla-
tionary, and growth implications of these
higher prices were discussed in chapter 1,
while long-term prospects for commodity
markets were discussed in chapter 2.


This chapter focuses on the challenges
that prolonged periods of high and then low
commodity prices pose for developing coun-
tries. In particular, it evaluates the policies
adopted by both commodity-producing
and -consuming countries during this boom,
as well as the potential role of the interna-
tional community in managing the commodity
price boom to maximize the development im-
pact and protect the most vulnerable.


The main messages arising from this analy-
sis are:


Commodity dependence need not hurt long-
term growth. Indeed, high commodity prices
provide a development opportunity but only
if the proceeds are not squandered and if the
right policies are adopted.


• Although commodity-dependent econo-
mies have, on average, grown more slowly
than more diversified economies, for most
economies dependence on commodities is
the result of slow growth, not the cause.
Several countries have achieved rapid de-
velopment based on the exploitation of
natural resources.


• To achieve the growth potentially inherent
in commodity riches, countries need to im-
plement policies that minimize the poten-
tial disruptive effects of volatile export rev-
enues, exchange rate appreciation that can
erode the competitiveness of manufactur-
ing, and incentives for rent seeking and
corruption.


Higher food prices, while damaging to urban
consumers, may help lower poverty in the
long run.


• Higher agricultural prices provide addi-
tional income in the rural economy, where
more than 75 percent of the world’s poor
live. Some of this income will go directly to


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farmers, potentially helping them move be-
yond precarious forms of subsistence agri-
culture. Another part will go to raise in-
comes of farm workers and increase
demand for related services such as trans-
portation, inputs, and processing.


• For these potential gains to be realized gov-
ernment will need to pursue policies that
invest in infrastructure, including roads
and marketing institutions to move farm
products to markets and inputs to farmers.


Resource-dependent developing countries
have done a better job than in the past of
managing the macroeconomic consequences
of rapidly rising foreign currency earnings.


• Government spending in most countries
has responded more prudently to increased
commodity revenues than in the past. In-
stead of spending temporary windfall re-
serves, many governments have accumu-
lated foreign reserves, and created and
augmented sovereign wealth funds. As a re-
sult, real effective exchange rates in most
resource-rich countries have appreciated by
less than in the past. Finally, resource-
dependent countries are less corrupt and
more transparent when compared with
more diversified economies than in the
past.


• As a result, the nonresource sectors of these
countries are more likely to have avoided a
large deterioration in international compet-
itiveness, and a strong procyclical cut in
spending is less likely to accompany the re-
cent decline in commodity prices. Improve-
ments in governance may also have con-
tributed to these developments and have
increased the chances that revenues are
being allocated toward projects that en-
hance the long-term development potential
of countries.


• Although in aggregate the story is encour-
aging, some countries are experiencing
strong inflationary pressures that may re-
duce their competitiveness and the sustain-


ability of growth. Others that lack a long
history of oil or mineral development have
pursued less prudent policies that may have
sewn the seeds of future difficulties.


High food and oil prices may have increased
the number of people living in extreme
poverty by between 130 and 150 million.


• High food and fuel prices have implied
enormous transfers in incomes between
producers and consumers. High fuel prices
have reduced real incomes in oil-importing
developing countries by some $162 billion
dollars but increased them by some $400
billion in oil exporters. With the exception
of a few import-dependent countries, food
is mainly consumed in the same country
where it is produced. As a result, the redis-
tributive impact of high food prices is
mainly between domestic producers and
amounted to some $277 billion between
January 2007 and August 2008.


• Within countries, the largest poverty im-
pacts have been among urban populations,
which have not benefited from increased
earnings to the same degree as the rural
population. Impacts were also larger in
countries with fewer domestic alternatives
to internationally traded grains, whose
prices rose the most (maize, wheat, and
rice).


To mitigate the poverty impacts of higher food
prices in a fiscally responsible way, countries
need to respond with targeted measures. The
record so far is mixed at best.


• Strict targeting of assistance programs is es-
sential to reach those most affected while
limiting the strain on fiscal accounts. The
costs of fully compensating people in devel-
oping countries for higher food and fuel
prices would be prohibitive both to coun-
tries and to the aid community. Costs range
between 6 and 27 percent of the GDP of in-
dividual countries.


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• Many policies imposed by countries so far
(lower taxes, export restrictions, and price
subsidies) have been costly and have im-
peded adjustment. Increased fiscal outlays
have exceeded 2 percent of GDP in many
countries. Moreover, policies designed to
keep domestic prices low have exacerbated
and prolonged high market prices by re-
ducing incentives to increase production
and reduce consumption.


• Countries should seek to expand or create
more-targeted safety net programs. Food
subsidy programs, fuel subsides, and tax
exemptions tend to be regressive, with
most of the benefits accruing to the non-
poor. In contrast, well-targeted schemes,
involving some form of means testing or
selection mechanisms such as geographic
targeting or a work requirement, are most
successful in reducing costs and concentrat-
ing benefits among the poor.


Some modest steps have been taken, but the
international community can do much more
to mitigate the impact of high prices and re-
duce the likelihood of further spikes and new
commodity booms.


• Given the magnitude of the problem, inter-
national efforts to assist the poor need to
focus on the most vulnerable. One ap-
proach would be to direct aid to assisting
the extreme poor in IDA-eligible countries
(countries whose poverty and lack of access
to market-based finance make them eligible
for concessional lending and grants from
the World Bank Group). The cost of com-
pensating the poor in these countries for
the rise in food prices between January
2005 and December 2007 would be about
$2.4 billion.


• International agreement is needed to place
more effective restrictions on the use of ex-
port bans, which have become too com-
mon. These bans have increased global
food price volatility and reduced confi-
dence in the reliability of world food mar-


kets, with potentially long-term impacts on
food policies.


• Efforts to improve information about and
coordination of global grain stocks could
reduce the probability of another food cri-
sis. Similarly, the effectiveness of humani-
tarian aid would be enhanced if the World
Food Programme (WFP) were provided
with a stable source of financing and a line
of credit that would allow it to respond
rapidly to emergencies.


• Biofuels policies that subsidize production,
impose high tariffs, and mandate consump-
tion need to be reconsidered in light of their
impact on food prices and their trade-
distorting effects. Such policies have led to
rapid expansion of biofuels production
from food crops, such as maize and veg-
etable oils, and have contributed to higher
food prices as well as to environmental
degradation. These policies have also re-
duced opportunities for lower-cost devel-
oping-country producers to expand pro-
duction and exports.


• A successful conclusion to the World Trade
Organization’s Doha Round will not re-
duce food prices in the near term, but it
does offer the prospect of greater discipline
in agriculture and more-rapid income
growth in developing countries.


The remainder of this chapter is organized as
follows. The next section considers the perspec-
tive of commodity-producing countries, evalu-
ating the extent to which their policies have suc-
ceeded in coping with volatility from
commodity prices, thus avoiding some of the
pitfalls that have typically caused such countries
to grow less quickly than resource-dependent
countries. The following sections examine the
boom from the perspective of consumers, focus-
ing on the impact of high prices on the poor and
the effectiveness of the antipoverty measures
imposed and their impact on long-term adjust-
ment. The chapter then considers the interna-
tional response to the rise in food prices and sets
out some concluding remarks.


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Commodity dependence and
growth


Economic dependence on primary com-modities has been long associated with
slow growth in development.1 While commod-
ity booms are often associated with a pickup in
growth, countries heavily dependent on the ex-
ports of commodities have slower growth over
the long term than those with more diversified
exports (the so-called resource curse). This sec-
tion argues that this relationship should not be
interpreted as causal and is, in fact, far from
inevitable. Provided the right policies are
adopted, the resource-rich developing coun-
tries have much to benefit from a period of
high commodity prices.


The idea that there exists a resource curse
derives from the observation that countries
dependent on primary commodities for their
export revenues have tended, on average, to
grow more slowly than more-diversified ex-
porters (figure 3.1). Developing countries,
which in 1980 derived more than 70 percent
of their export revenues from nonfuel primary
commodities, increased their per capita GDP
by only 0.4 percent a year between 1980 and


2006, and countries that mainly exported
fuels raised their per capita GDP by 1.1 per-
cent a year (figure 3.2). By contrast, more-
diversified exporters achieved per capita
growth of 1.6 percent a year. The same rela-
tionship holds if countries severely affected by
conflict are excluded, although the nonfuel
primary commodity exporters fare somewhat
better in this case.


Moreover, low-income countries tend to
be more dependent on nonfuel commodity
exports than high-income countries (see fig-
ure 3.2). More than 60 percent of the exports
of low-income countries derives from nonfuel
commodities compared with about 33 percent
for high-income countries.


Resource dependency reflects low GDP,
not resource wealth
However, resource dependence is not the same
as resource richness. Most countries that are
resource dependent (measured as the share of
non-oil primary commodities in exports) actu-
ally have relatively poor resource endowments
(measured as per capita income derived from
non-oil primary commodities). Conversely,
many countries that are rich in resources have
low resource dependencies because, in addi-
tion to having ample resources and large


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


98


Figure 3.2 Poorer countries are more
dependent on nonfuel primary commodities


Low-income
countries


Source: World Bank.


Upper-middle-
income countries


Lower-middle-
income countries


N
o


n
fu


e
lc


o
m


m
o


di
tie


s


Fu
e


ls


O
th


e
r


% share of merchandise export revenues, 2006


0


10


20


30


40


50


60


70


Figure 3.1 More-diversified developing
countries grew more rapidly from
1980 to 2006


All countries


Source: World Bank.


Note: Diversified exporters include countries that depend on
fuel and nonfuel primary commodities as well exports of
manufactures.


Excluding conflict countries


Nonfuel
primary
commodity
exporters


Fuel
exporters


Diversified exporters


Average growth rate, %


0.0


0.2


0.6


0.4


0.8


1.0


1.2


1.4


1.6


1.8


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 98




resource sectors, they also have thriving in-
dustrial and service sectors. Oil-exporting
countries are excluded from this comparison
because most of them are both resource rich
and resource dependent.


Resource dependency primarily reflects low
levels of GDP, not resource richness. While
the top 20 non-oil resource-dependent coun-
tries have an average annual per capita income
of just $1,099, the annual income of the top
20 resource-rich countries is 11 times higher
(table 3.1). These trends are reflected more
broadly. Even when oil exporters are included
in the mix, low-income countries have the
highest dependence on primary commodities,
but the lowest level of primary commodity ex-
ports per capita, and the inverse is true for
rich countries (figure 3.3).


Considerable efforts have been made to de-
termine if, after controlling for other determi-


nants of growth, dependence on primary com-
modities is associated with slower growth.
Several authors have found a negative rela-
tionship in cross-section regressions between
natural resource abundance and growth.2


Others find that natural resource abundance is
not responsible for the slow growth of re-
source-rich developing countries (Manzano
and Rigobon 2007), and that there is a posi-
tive relationship between resource abundance
and both short-term (Collier and Goderis
2007) and long-term growth (Lederman and
Maloney 2007) after accounting for other
growth determinants.


Commodity dependence may, but need
not, result in slower growth
While the causality behind these correlations
remains unresolved in the literature, there is
consensus about the channels through which
commodity dependence could contribute to
weaker growth. These include:


• A tendency for significant fluctuations in
export revenues, often exacerbated by


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


99


0


10


20


30


40


50


60


70


0


10


20


30


40


50


60


70


Primary exports per capita
(left axis)


Primary exports/exports
(right axis)


Value of per capita primary
commodities in exports
(US$ thousands)


Source: World Bank.


Share of primary
commodities in total


merchandise exports (%)


Figure 3.3 On average, poor countries are
dependent on commodities but relatively
resource poor


Low-income
countries


Lower-middle-income
countries
Upper-middle-income
countries


High-income
countries


Table 3.1 Non-oil or resource-rich
countries have higher per capita incomes
than resource-dependent countries, 2006


Share of Net nonfuel
nonfuel primary
primary commodity


Real GDP commodities exports
per capita in exports per capita


(US$) (percent) (US$)


Top countries dependent on non-oil primary commodities


1 Gambia, The 320 97 81
2 Uganda 275 91 17
3 Cuba — 85 49
4 Ethiopia 146 84 6
5 Niger 168 83 3
6 Malawi 145 82 24
7 Jamaica 3,357 81 276
8 Rwanda 262 80 4
9 Chile 5,896 79 2,596


10 Burundi 102 79 4


Top countries rich in non-oil primary commodities


1 New Zealand 15,199 62 2,597
2 Chile 5,896 79 2,596
3 Australia 23,262 48 2,389
4 Netherlands 25,678 16 1,447
5 Norway 41,446 14 1,436
6 Ireland 30,736 10 1,265
7 Denmark 32,484 23 1,142
8 Canada 25,894 17 1,082
9 Estonia 6,938 26 675


10 Kazakhstan 2,166 28 533


Source: World Bank.
Note: — Not available.


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100


As discussed in chapter 2, at the national level therevenues from commodities tend to be much
more volatile year to year than at the global level,
and they are more volatile than manufactures. As a
result, countries for whom primary commodities rep-
resent a large share of exports experience higher lev-
els of GDP volatility than countries with more diver-
sified exports.a Indeed, export revenues, the real
exchange rate, and per capita output were all more
volatile over the past 25 years among those develop-
ing countries where primary commodity exports
represented more than 70 percent of total exports
(box figure).b


High volatility in these annual data reflects
pronounced economic cycles that can have adverse
implications for growth and development.c Sharp
booms and busts can lead to unemployment and un-
derutilized capital during downswings and to bottle-
necks during upswings. High levels of uncertainty
concerning future prices and demand can depress


Box 3.1 The impact of severe shocks on economic
progress


the average level of investment over the cycle. Higher
risks may bias lenders toward shorter maturities,
further raising the risks of investment. And volatility
of consumption reduces welfare directly if most
consumers are risk averse.


For countries with the same level of primary com-
modity dependence, less-developed economies tend
to be more sensitive to such swings because they lack
the means of coping with volatility. In countries with
more-developed financial systems, individuals can
borrow to smooth consumption over the cycle, firms
can borrow to sustain operations in bad times, and
governments can run countercyclical fiscal policy to
reduce the macroeconomic implications of adverse
shocks. By contrast, in less-developed countries with
underdeveloped domestic financial systems and weak
access to international finance, these adjustment
mechanisms tend to function poorly. As a result, the
impact of volatility on long-term growth and welfare
is more severe.


Moreover, poor households suffer most from ad-
verse shocks, because they tend to have lower levels
of savings, have limited access to credit (and interest
rates from informal lenders tend to be high), and
must therefore respond to negative shocks by cutting
into already low levels of consumption. In addition,
if workers lose labor experience and connections and
children leave school, these permanent losses in
human capital may increase long-term poverty
(Ocampo 2003).


Whether month-to-month or day-to-day volatility
has similarly deleterious economic impacts is less
clear. High-frequency volatility tends to increase
transaction costs and reduce activity levels, but it is
less likely to cause the kind of cycles in investment
behavior and economic activity described above.
Moreover, high-frequency volatility is easier to over-
come through traditional financing mechanisms,
such as short-term credit and inventory adjustments.


An illustration of the difference between eco-
nomic cycles and measured volatility based on more
frequent data is provided by the recent boom in
commodity prices. While this was the longest and
largest commodity price boom in the past 100 years
(see chapter 2), price volatility, as measured by
changes in monthly data, increased only modestly


Box figure 3.1 The impact of severe shocks
on economic progress


Export revenues GDP per capitaReal exchange
rate


Nonfuel primary exporters


Diversified exporters


Standard deviation of percentage change


Economies dependent on primary commodities experience
more volatility


0


5


10


15


20


25


30


35


40


Source: World Bank.


Note: Volatility is defined as the standard deviation of percentage
changes over time (annual data). Commodity concentration
measured in 1980. Excludes countries with population of
less than 1 million.


Fuel exporters


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101


a. See Turnovsky and Chattopadhyay (1998) and Van der Ploeg
and Poelhekke (2007) among many others. Cashin, Cespedes,
and Sahay (2002) show that volatile commodity prices in-
creased the volatility of real exchange rates for 58 countries
over 1980–2002.


b. The more diversified exporters include countries that depend
on both fuel and nonfuel primary commodities, as well as ex-
porters of manufactures.


c. In cross-country regressions, Aghion and others (2005) find
that real exchange rate volatility lowered growth performance
in developing countries over 1960–2000. Fatas and Mihov
(2005) find that variability in inflation and government spend-
ing were related to lower growth in a cross-section of 91 coun-
tries. Aizenman and Marion (1996) find a negative relationship
between volatility and private (but not total) investment, and
Bleaney (1996) and Ramey and Ramey (1995) find a negative
relationship between volatility and growth but not between
volatility and investment. Empirically, there is a relatively ro-
bust negative relationship between high volatility of growth
rates and the level of development (Koren and Tenreyro 2003).
However, the direction of causation is unclear. Rather than sug-
gesting that volatility causes underdevelopment, the greater de-
pendence of poorer countries on relatively volatile primary
commodities may explain the correlation.


procyclical government spending, to accen-
tuate economic cycles, tending to depress
growth over the medium term (box 3.1);


• A tendency for exchange rate appreciations
associated with commodity booms to
weaken the competitiveness of the non-
commodity sectors of the economy (the
so-called Dutch disease); and


• A tendency for high commodity revenues
to incite individuals to attempt to appro-
priate the wealth generated by the resource
without investing in productivity or value-
enhancing activities (rent-seeking behavior)
or, in the worst cases, to engage in outright
corruption.


Of course, abundant commodity wealth, or
a large rise in the value of commodities stem-
ming from higher prices, can also contribute
to a country’s development, if the implied in-
come generated is fruitfully invested—for ex-
ample, in infrastructure, education, and health
or in additional productive capacity when the


rents accrue to the private sector. Although
more easily said than done, when government
controls the resource rents, care must be exer-
cised to avoid forcing the economy down an
artificial capital-intensive path instead of
using the commodity rents to exploit the econ-
omy’s comparative advantage, which could be
based on a combination of commodities, com-
modity-intensive sectors, and labor-intensive
services.


What determines whether resource wealth
generates wider development is the extent to
which the proceeds are consumed (appropri-
ate for a permanent increase in income) or
saved (appropriate for a temporary increase);
whether they are invested in high- or low-
return enterprises; the extent to which rents
accrue to the population at large or are
channeled through the government; and
whether they are deployed responsibly and
transparently by governments, or used to
fund a bloated civil service or are even stolen
outright.


Price volatility has not increased
systematically
Average absolute monthly percent price change


Crude oil Copper Aluminum Coal


2000–03 8.4 3.4 3.1 4.0
2004–07 6.9 6.2 4.6 5.7
2008 7.6 6.3 6.5 15.0


Wheat Corn Rice


2000–06 4.5 5.0 2.9
2007 7.9 6.1 1.8
2008 9.5 9.4 18.3


Source: World Bank.
Note: Volatility is defined as the average of the absolute value
of the month-to-month percentage change in detrended prices.


until 2008. Indeed, only some of the commodities
that have experienced a sharp rise in price experi-
enced greater volatility during the price rise than
they did previously (box table). Volatility did
increase for almost all of the principal commodities
in 2008, reflecting the rise in prices earlier in the
year and their subsequent decline.


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Overall, an abundance of natural resources
does not necessarily impair development and
can in fact promote it, but it does present
particular challenges that require appropriate
policies to overcome.


Managing primary commodity
booms


While dependence on primary commodi-ties does not condemn a country to slow
growth, it does require careful management of
macroeconomic policy to reduce the impact of
volatile export revenues (see box 3.1).


In past decades, the governments of sev-
eral developing countries failed to react
appropriately to commodity price booms,
increasing public expenditures on inefficient,
import-intensive investment projects (Cashin,
Cespedes, and Sahay 2002) and borrowing
excessively—expecting export revenues to re-
main high for longer than was the case.3 As a
result, many of them faced severe economic
difficulties when prices declined. For example,
the seeds for the Latin American debt crisis of
the 1980s were sown by the accumulation of
debts by countries during a period of high
commodity prices. The payments for these
loans proved to be unsustainable when inter-
est rates rose and commodity prices declined,
resulting in years of slow growth or economic
stagnation (Manzano and Rigobon 2007).


Commodity revenues
and fiscal spending
The tendency for a temporary rise in revenues
to be reflected in an unsustainable rise in gov-
ernment spending has historically been an im-
portant explanation for the poor long-term
growth performance of commodity-dependent
developing countries. Countries that are depen-
dent on point resources—oil and metals—are
particularly vulnerable because the government
is the direct recipient of a large share of boom
revenues, either through ownership of the re-
source or through taxing the rents accruing to
a limited number of private firms. By contrast,


government revenues are less sensitive to
booms in agriculture prices because agricul-
tural export crops are produced in many
locations by many producers, so production
expands to the point where, in normal times,
there are no rents for governments to appropri-
ate and no special tax regimes (Collier 2007).


Although the evidence is not conclusive,
the tendency for government spending to rise
with windfall revenues, while still present dur-
ing the current commodity boom, is less pro-
nounced than in the past. This in turn suggests
that perhaps the strong growth that has been
associated with higher commodity prices this
time may prove more sustained than in past
booms.4


Resource-rich developing countries have
shown greater fiscal restraint during the
current boom
During this boom, resource-rich developing
countries appear to have shown greater fiscal
restraint than they did during earlier booms,
thereby reducing the risk of a procyclical cut
in government spending now that commodity
prices are declining.5 The average general gov-
ernment budget surplus of oil-exporting coun-
tries improved from 0.6 percent of GDP in
2001 to 7.7 percent in 2007. Among develop-
ing-country exporters of oil, minerals, and
agricultural products, public consumption has
increased more slowly than private consump-
tion, external debt has risen more slowly than
during past booms, and government borrow-
ing has increased more slowly than private
borrowing (IMF 2008b).


While fiscal policy responses have been ex-
tremely diverse,6 government expenditures of
primary commodity exporters have increased
less strongly than during the 1980s, a period
like the current boom when the export rev-
enues of resource-dependent developing coun-
tries increased by about 7 percent of GDP
(figure 3.4).7


In the 1980s, government spending
tended to increase procyclically—rising in line
with the boom in GDP caused by windfall
commodity revenues. As a result, the ratio of


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


102


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 102




government expenditure to GDP was broadly
stable. On a cyclically adjusted basis, however,
government spending rose. Because much of
the additional money went to government
spending and transfer programs of a quasi-
permanent nature, the increased spending
proved hard to reverse when GDP slowed and
commodity prices reversed. Governments
were either obliged to cut spending procycli-
cally as commodity prices fell, which exacer-
bated the cycle, or allow the deficit and debt
to build up, increasing their macroeconomic
vulnerability


Most recently, governments have reacted
much more prudently. As a consequence,
while government expenditure has increased
in real terms, it has declined as a share of GDP
by almost 5 percentage points. Government
expenditure among nonfuel exporters has de-
clined the most, perhaps reflecting concern
that nonfuel commodity prices would remain
high only temporarily and the tendency for
governments to absorb a smaller share of
windfall revenues from high prices for nonfuel
commodities than from those for hydrocarbon
resources.8 Fuels (and minerals) exporters


have also taken steps to increase the share of
the windfall revenues that accrue to the state,
although care must be taken to avoid harming
incentives for production (box 3.2).


Much of the difference between the two
periods reflects more prudent behavior by
governments in Sub-Saharan Africa. During
the 1980s boom, government expenditures in
countries dependent on primary commodities
in Sub-Saharan Africa rose even more quickly
than GDP. In this decade, the ratio of govern-
ment expenditures to GDP has declined by al-
most 8 percentage points (figure 3.5). This
trend contrasts with the spending pattern in
Latin America and the Caribbean and the
Middle East and North Africa (other regions
have too few observations to report useful


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


103


Figure 3.4 Government spending by primary
commodity exporters responded less to
export booms in this decade than in the
1980s
Percentage change of the share of GDP


26


24


22


0


2


4


6


8


1980s 2000s


Source: World Bank.


Change in
exports/GDP


Change in government
expenditures/GDP


Note: The country sample includes developing countries where
primary commodities account for more than 70 percent of
merchandise exports. The figures represent the percentage point
change in merchandise exports divided by GDP, and government
expenditures divided by GDP, during the boom.


Figure 3.5 Public expenditures in Sub-
Saharan Africa grew much less quickly in the
2000s than in the 1980s


Percentage change of the share of GDP


a. 1980s


25
0
5


10
15
20
25


Latin America
and Caribbean


Middle East and
North Africa


Sub-Saharan
Africa


Latin America
and Caribbean


Middle East and
North Africa


Sub-Saharan
Africa


Percentage change of the share of GDP


b. 2000s


210


25


0


5


10


15


Source: World Bank.


Source: World Bank.


Change in exports/GDP
Change in government expenditures/GDP


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 103




averages), where government spending has
been more procyclical—rising at about the
same rate as GDP as during the 1980s.


Surprisingly the extent to which
governments are saving from increased oil
revenues is only loosely correlated with
the size of their reserves
For countries dependent on nonrenewable re-
sources, the optimal fiscal response to primary
commodity price booms in part depends on
the importance and expected life span of the
resource.9 Some countries, such as República


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


104


As commodity prices increased, a number ofcountries sought to increase the share of the
windfall that accrues to the state. Several energy
producers (including Argentina, Bolivia, Colombia,
Ecuador, and República Bolivariana de Venezuela)
have increased, or are considering increases in, the
rates for royalties or taxes. A few countries have
forced the renegotiation of contracts or nationalized
exploitation rights, which has had a chilling effect on
investors’ willingness to participate in some markets.
Developed-country governments (for example,
Alaska in the United States and Alberta in Canada)
also are increasing their revenue share.


The governments of several metal-producing
countries also have attempted to increase their share
of the rising profits in recent years (UNCTAD 2006).
For example, Mongolia instituted increased rights
for the government to acquire equities in new
ventures. The Democratic Republic of Congo is
reviewing contracts for mineral extraction signed
since 1995 with the purpose of increasing the
government’s stake. Governments, including Chile,
Mongolia, Peru, South Africa, and Zambia, have
taken steps or are considering proposals to raise
mineral taxes or royalty fees.


Countries that contract with private (often inter-
national) firms to exploit nonrenewable resources
have revised contracts to reflect higher prices. The
danger here is that arbitrary changes in their share of


Box 3.2 Efforts to capture a larger share of windfall
commodity revenues


revenues will reduce the companies’ incentive to in-
vest and lower confidence in the broader investment
climate. An alternative approach, which is now being
considered by several countries, is to base the gov-
ernment’s revenue share on the price. For example,
Colombia has proposed imposing an additional
5 percent tax on every $30 increase in the price of a
barrel of oil, thereby raising the tax rate to 75 per-
cent when oil exceeds $140 a barrel. This kind of
arrangement holds some promise of creating a stable
framework so that firms can evaluate investments
accurately and governments can capture a fair share
of windfall revenues when price increases.


It is understandable that countries wish to capture
a rising share of revenues from nonrenewable re-
sources as prices increase. However, such efforts
need to be carefully calibrated to maintain appropri-
ate incentives for making new investments and maxi-
mizing current output. Countries with state-owned
companies that control resource extraction have to
ensure that incentives facing these companies encour-
age efficiency. For example, whereas some state-
owned energy firms (for example Brazil’s Petrobras)
continue to enjoy very positive relations with service-
providing firms and are efficiently managed, others
(such as in Mexico and República Bolivariana de
Venezuela) face very high effective tax rates that
have resulted in chronic underinvestment, declining
output, and poor efficiency.


Bolivariana de Venezuela, could continue to
produce oil at current rates until almost the
end of this century before exhausting all of
the oil deposits detected under their soil
(table 3.2). However, other countries that are
heavily dependent on deposits of oil or mineral
resources could exhaust their reserves (as cur-
rently estimated) within one or two decades.10


If resources are viewed as a national asset
of both current and future generations, then
countries with low reserves should be saving
a much larger proportion of permanent (and
windfall) revenues—investing them in either


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 104




productive potential or financial assets that
will continue to generate an income even as
the original resource is depleted.11 To a de-
gree, this is what countries are doing. The
share of government spending in total GDP
among countries with low reserves has de-
clined, whereas those with high reserves have
been more procyclical (figure 3.6).12


Countries like Algeria, Angola, the Repub-
lic of Congo, Turkmenistan, and the Republic
of Yemen, all of which have less than 20 years
worth of reserves and rely upon hydrocarbon
exports for 80 or more of their merchandise
exports, face serious challenges. Unless their
savings from oil revenues are high, associated
expenditures are likely to lead to exchange
rate appreciation, with serious negative im-
pacts on the non-oil sectors of their economies
(see below).


Private sector saving from
commodity revenues
While governments appear to be saving more
of the windfall than they did in the 1980s,
private sector spending is rising rapidly—
especially among non-oil primary commodity


exporters. However, much of the demand is
going to investment goods. Investment de-
mand in commodity-dependent economies in-
creased 7.5 percentage points faster during
this boom than during the 1980s. As a result,
the current private sector boom should be
increasing domestic productive capacity that
will help countries sustain the high growth of
the past several years.


Reflecting the large share of commodity
revenues that accrue to the government in oil-
exporting countries and the relative prudence
that these governments have displayed, im-
ports in these countries have increased less
rapidly than GDP, and current account sur-
pluses have improved significantly as a share
of GDP during the recent oil price rise. This
pattern is similar to, but more pronounced
than, that prevailing during the 1980s boom
(figure 3.7).


In part because the benefits of high agricul-
tural prices accrue to a much wider segment
of the population, the private sector in non-
oil-commodity exporters appears to have in-
creased spending sharply during the recent
boom, with much of the increased demand


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


105


Table 3.2 Ratios of reserves to production
vary greatly among oil exporters
(Percent)


Share of oil in Ratio of oil reserves
Countries merchandise exports to current production


Algeria 95.7 16.8
Angola 92.0 17.6
Azerbaijan 85.1 29.3
Equatorial Guinea 83.8 13.8
Gabon 71.1 25.3
Iran, Islamic Rep. of 89.8 86.7
Iraq 88.1 157.6
Kazakhstan 52.8 76.5
Libya 98.7 61.9
Nigeria 95.6 40.3
Oman 85.2 20.5
Congo, Rep. of 92.1 19.9
Sudan 74.8 44.2
Syria, Arab Rep. of 58.3 19.7
Turkmenistan 81.0 9.2
Venezuela, R. B. de 80.5 77.6
Yemen, Rep. of 80.9 20.0


Source: World Bank, British Petroleum.


Percentage point change of the ratio


25


0


5


10


15


20


High reserves Low reserves


Figure 3.6 Oil-exporting countries with large
reserves spent a smaller portion of their
revenue from the recent boom in oil prices,
2000–06


Source: OPEC Secretariat, World Oil, Oil and Gas Journal,
World Bank staff calculations.


Note: Includes countries where oil accounts for more than 70
percent of merchandise export revenues and data on oil reserves,
oil production, and government expenditures are available
(Angola, Republic of Congo, Equatorial Guinea, Islamic Republic
of Iran, Kazakhstan, Libya, Nigeria, Oman, Syrian Arab Republic,
Turkmenistan, República Bolivariana de Venezuela, and Republic
of Yemen).


Government
expenditures/GDP


Exports/GDP


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 105




having been met through imports. The ratio
of imports to GDP increased by 6 percentage
points, and the current account balance has
remained roughly stable despite a 23 percent
rise in export revenues.


Real currency appreciation
The rapid increase in imports and the stability
of the current account in the face of rising ex-
port revenues and domestic demand is poten-
tially disturbing, because it suggests that the
domestic supply response in these countries
has been relatively weak. This situation is es-
pecially problematic if the increased imports
are consumption goods, and if they are associ-
ated with a real effective appreciation of the
currency that has impaired the competitive-


ness of the noncommodity sectors of the econ-
omy. To the extent that the imports reflect in-
vestment, they are less worrisome if they are
creating the future productive potential that
will allow these countries to continue growing
strongly when commodity prices and incomes
weaken.


Most resource-rich countries are showing
fewer signs of real effective exchange
rate appreciation
The relationship between export revenues and
the exchange rate is complex. While a real ex-
change rate appreciation is the appropriate re-
sponse to a long-term improvement in the
terms of trade, it may have a deleterious im-
pact on the economy if the appreciation
proves short-lived. Potential negative effects
include adjustment costs, such as increased
unemployment or the bankrupting of mar-
ginal firms, and reductions in potential posi-
tive externalities in tradable goods sectors,
such as


• More-rapid technological progress through
learning by doing in industries character-
ized by firm-specific knowledge


• Demonstration effects, where the gains in
efficiency of one firm are easily copied by
others


• Increased incentives for accumulation of
human capital


• More-stable and faster-growing markets in
manufactures than primary commodities13


During the most recent boom, there is some
evidence that developing countries have suc-
ceeded in limiting the appreciation of their cur-
rencies, thus reducing potential adjustment
costs as prices decline (figure 3.8). On average,
the currencies of non-oil primary commodity
exporters have actually depreciated by a modest
4 percent in real effective terms, while the cur-
rencies of developing-country oil exporters have
appreciated only 8 percent in real effective
terms—although most recently domestic infla-
tion has risen to more than 10 percent in
Angola, the Islamic Republic of Iran, República


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


106


a. Oil exporters


25
210
215
220


0


1980s 2000s


5
10
15
20
25
30


0
21
22


1


1980s 2000s


2
3
4
5
6
7


Percentage change of the share of GDP


Source: World Bank.


Figure 3.7 Imports and current account
positions suggest more savings from
commodity revenues by oil exporters than by
nonfuel commodity exporters


b. Non-fuel exporters


Percentage change of the share of GDP


Imports/GDP Current account/GDP


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 106




Bolivariana de Venezuela, and the Republic of
Yemen (see chapter 1 for a discussion of infla-
tion and commodity prices) (figure 3.9).14


The limited currency appreciation in re-
sponse to the commodity price boom is in part
attributable to the fiscal restraint discussed
earlier. Government expenditures fall most
heavily on nontraded goods. As a result, in-
creasing government expenditures tend to
raise the price of nontraded goods relative to
traded goods, which causes the real exchange
rate to appreciate.


Commodity-dependent countries also
avoided real appreciations by sterilizing the
inflows of foreign currency by converting


them into foreign-denominated assets. Oil-
exporting developing countries doubled their
official foreign reserves from $36 billion in
2000 to $70 billion by mid-2008, or from
about four months of import cover to around
eight months in 2008. At the same time, some
of these countries created new sovereign
wealth funds (Algeria, Kazakhstan, and Libya)
or greatly expanded preexisting sovereign
wealth funds (Azerbaijan, Russian Federation,
and República Bolivariana de Venezuela)
(Griffith-Jones and Ocampo 2008). The assets
of developing-country exporters of oil and
minerals in such funds reached $367 billion by
mid-2008 (table 3.3).


New entrants into oil production may be
exceptions to these welcome trends
Several resource-rich developing countries are
enjoying the fruits of newly found natural
wealth or are experiencing their first com-
modity boom as an independent state, notably
the oil-producing countries of central Asia
that were formerly part of the Soviet Union.
These countries have less experience in


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


107


Figure 3.8 Primary commodity exporters
limited the real appreciation of their
currencies during the recent boom
Percentage change in trade-weighted real effective
exchange rate


220


215


210


25


0


5


10


Non-oil exporters Oil exporters


Source: IMF data. World Bank staff calculations.


1980s boom


Recent boom


Ch
ad


Co
ng


o,
Re


p.
of
Alg


er
ia
Ga


bo
n


Nig
er


ia
Om


an
Lib


ya
Su


da
n


Ye
m


en
,
Re


pu
blic


of


Ka
za


kh
sta


n


An
go


la


Az
er


ba
ijan Iran


Ve
ne


zu
ela


,
R.


B.
de


25
210


0
5


20
15
10


Figure 3.9 Many oil exporters are suffering
significantly higher inflation


Source: World Bank data.


Annual % increase in CPI, 2007


Table 3.3 Assets in sovereign wealth
funds grow in commodity-exporting
countries
($US billions)
Country As of mid-2008


Algeria 47.0
Azerbaijan 5.0
Botswana 6.9
Chile 15.5
Equatorial Guinea 2.9
Iran, Islamic Republic of 12.9
Kazakhstan 21.5
Libya 50.0
Mexico 5.0
Nigeria 11.0
Russian Federation 162.5
Timor-Leste 3.0
Trinidad and Tobago 2.0
Venezuela, R. B. de 22.0
Total 367.2


Source: Sovereign Wealth Fund Institute
(www.swfinstitute.org).
Note: Latest available information as of June 2008, but all
estimates may not refer to 2008. Excludes funds with assets
under $1 billion. Data for Equatorial Guinea as of 2005.


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managing a resource boom than countries that
have been producing substantial amounts of
oil for many years.


Perhaps because of this lack of experience,
many of these countries show signs of experi-
encing the same kind of macroeconomic
volatility that characterized developing, re-
source-rich countries in the 1980s. Their cur-
rencies have appreciated in real terms (against
the U.S. dollar) by 43 percent from 2001 to
2007, their inflation rates are higher, and gov-
ernment expenditures have been rising in line
with GDP (figure 3.10).


While these developments may be consistent
with prudent management of newfound wealth
and a careful investment strategy designed to
enhance future production capacity, they mir-
ror, disconcertingly, those of the 1980s among
more established producers. New producers


must therefore pay particular attention to
macroeconomic management going forward to
ensure that the current downturn in primary
commodity prices does not lead to a sharp re-
versal of economic progress.


Another troublesome aspect of the current
boom, especially given the financial crisis, is the
rapid increase in bank lending to commodity-
dependent economies in Sub-Saharan Africa,
in part to finance investments in oil and min-
eral projects. Despite enjoying substantial in-
creases in their export revenues, many of these
economies remain poor and need to be partic-
ularly careful in incurring foreign currency
liabilities on market terms. Commercial bank
commitments to these economies rose from an
average of just under $2 billion a year in
1995–2000 to more than $5 billion a year in
2004–06, and to $11 billion in 2007 (fig-
ure 3.11). These countries’ total stock of private-
source external debt has not increased signifi-
cantly above the $35 billion level reached in
2000 and has fallen as a share of GDP. The
downturn in commodity prices could result in
disappointing returns to these projects and
difficulties in servicing this debt on the part of
firms, especially as existing loans come due in
the current environment of much tighter credit
conditions and higher risk premiums for
developing countries. Should companies have


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


108


Figure 3.10 New oil exporters are experienc-
ing more macroeconomic volatility than
established producers
% change


210


0


10


20


30


40


50


60


Real exchange
rate with US$


Percentage
change in
CPI, 2008


Change in
government
expenditure/


GDP, 2001–07


Source: World Bank and IMF data.


Note: New producers are defined as countries dependent on oil
that began production after 1985 or were established as a country
after 1985, including Azerbaijan, Chad, Equatorial Guinea,
Kazakhstan, Sudan, and the Republic of Yemen (Turkmenistan
lacks data for inflation and the real exchange rate). The
established producers include Algeria, Angola, Republic of Congo,
Gabon, Islamic Republic of Iran, Libya, Nigeria, Oman, and
República Bolivariana de Venezuela. We use the real exchange
rate with the United States (rather than the trade-weighted real
exchange rate as in figure 3.5), to include sufficient countries for
a useful comparison between the two groups.


a. Real exchange rate with the U.S. dollar, where increase
indicates appreciation. Data for Equatorial Guinea are for
2001–04.


b. Percentage change in consumer price index in 2008.


c. Change in ratio of government expenditure to GDP from
2001 to 2007.


New producers


Established producers


4,000


2,000


0


6,000


12,000


10,000


8,000


Figure 3.11 Commercial bank lending to
commodity-dependent economies in
Sub-Saharan Africa is rising


Source: Loanware 2008.


Gross commitments, US$ millions


19
95




20
00


,


av
er


ag
e 20


01
20


02
20


03
20


04
20


05
20


06
20


07


10363_Pg95_140:10363_Pg95_140 11/29/08 7:08 AM Page 108




difficulty refinancing, this could transfer into a
sovereign risk—–especially in those cases
where the debtor firms are state-owned.


Governance and transparency
Resource riches can yield disappointing
growth outcomes by creating incentives and
opportunities for corruption, mismanage-
ment, and political instability. Resource
wealth has been a source of political conflicts
in Africa (Gelb 1998) that have been enor-
mously destructive of wealth, while in coun-
tries with weak governance and institutions,
the concentrated wealth deriving from point
resources too often lends itself to corrupt
practices by politicians and civil servants
charged with overseeing the firms exploiting
them.15 Indeed, some econometric analyses
have found that dependence on oil, metals,
and minerals, where the government plays a
central role in determining the allocation of
rents, lowers the quality of institutions.16


Partly reflecting the influence of these in-
centives, countries dependent on nonrenew-
able resources (equal to more than 70 percent
of merchandise exports) tended in 1996 to be
more corrupt than those dependent on agricul-
tural commodities and more diversified exports
(figure 3.12).17 More recently, corruption levels
in the oil, metals, and mineral exporters have
drawn much closer to the developing-country


average. These are relative rankings and thus
cannot indicate absolute improvements in in-
dividual countries. Nevertheless, this progress
may reflect the reforms instituted over the past
10 years to counter the corrupting influence of
high resource rents and may also indicate that
resource wealth is being more effectively de-
ployed in promoting the overall development
of these economies (box 3.3).


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


109


Figure 3.12 Corruption is highest among
fuel exporters, although the difference has
narrowed


Index


21.0


20.8


20.6


20.4


20.2


0.0


1996


Be
tte


r
W


o
rs


e


2006


Note: The lower the value of the index, the worse the level of
corruption relative to other countries. Countries are classified as
oil or mineral, or agricultural exporters if they earn more than 70
percent of merchandise export revenues from these sources.
Diversified exporters are all other developing countries.
Classification is based on shares in 2000.


Source: Kaufmann and others 2007; World Bank data.


Oil and mineral exporters


Agricultural exporters


Diversified exporters


Arecent example of efforts to reduce the scope forcorruption in commodity-rich countries is the
Extractive Industries Transparency Initiative.
Launched in 2002, it aims to increase the account-
ability of governments in resource-rich countries
through the publication of company payments and
government revenues from oil, gas, and mining. As
of July 2008, 23 countries were in the process of
meeting the conditions for transparency supported
by the initiative, and 17 of 42 major oil companies


Box 3.3 Combating the corrupting influence of high
commodity revenues


were supporting the initiative.a These developments
could be strengthened if the home countries of multi-
national companies were to require these firms to ac-
count more explicitly for the funds they disburse to
local governments.b


a. See the Transparency International Web site, transparency.org.


b. Statement by Michel Roy, from the French NGO Secours
Catholique, published in a press release from Publish What You
Pay (www.publishwhatyoupay.org).


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Sovereign wealth funds
The increased prevalence of sovereign wealth
funds among resource-rich countries is another
recent innovation aimed at increasing the de-
velopment impact derived frommineral wealth,
both by increasing the returns that countries re-
ceive on their savings from resource revenues
and by insulating those savings from procycli-
cal spending and corrupt practices.


The success of these funds in managing nat-
ural resource revenue and reducing procyclical
spending has been mixed (Asfaha 2007). In
general, countries with sovereign wealth funds
have tended to experience less-procyclical fis-
cal policies and less-volatile macroeconomic
outcomes.18 However, the commodity here is
unclear. Such funds tend to be most successful
in countries that are already fiscally prudent
and are most likely to be established in coun-
tries with strong institutions. As such, sover-
eign wealth funds are no substitute for strong
fiscal institutions (box 3.4).19


Dealing with revenue volatility
The volatility of commodity prices and output
means that revenues also tend to be volatile


(see chapter 2). At the macroeconomic level,
this manifests itself as greater GDP, exchange
rate, and export volatility (see box 3.1). For
individual producers, this volatility increases
the riskiness and quantity of investment, espe-
cially in developing countries where financial
systems that could provide temporary financ-
ing to bridge shortfalls are underdeveloped.
As a result, the overall production potential of
the sector rises less quickly, which may be re-
flected in poor growth outcomes. Perhaps
more importantly, for the poor who are
dependent on farm-related incomes (close to
75 percent of all poor; see below) and living
close to the subsistence level, the impacts can
be particularly devastating.


Traditionally, developing (and developed)
countries have sought to offset this kind of
volatility with price stabilization schemes,
marketing boards, and the like (box 3.5).
However, the track record of these schemes
has not been good and they have fallen into
disfavor. More recently, countries are entering
into more market-based mechanisms such as
long-term contracting arrangements and
market-based conditional contracts.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


110


For a sovereign wealth fund to be successful, trans-parent procedures must be established for manag-
ing the allocation of resources to the fund and the in-
vestment of these resources. For example, clear rules
for forecasting prices (necessary for the calculation
of permanent income that underlies allocation deci-
sions) and, where available, reliance on independent
forecasts can help insulate allocation decisions from
political pressures. National revenue funds in Nor-
way and Botswana benefited from stable and democ-
ratic political systems that encouraged decision mak-
ing based on long-term considerations (Eifert, Gelb,
and Tallroth 2002).


Rules for the allocation of a share of resource rev-
enues to a wealth fund must not be too rigid. Several
countries have changed, bypassed, or eliminated such


Box 3.4 Successful sovereign wealth funds
rules when conflicts arose (IMF 2007). Such changes,
although often needed, can limit the impact of the
fund if they occur too frequently as has happened in
Oman (UNCTAD 2006).


Transparency in the procedures governing the
fund must be matched by overall strong governance
to ensure that fiscal policy is consistent with the allo-
cation of resources to the fund. For example, in
some instances governments have effectively circum-
vented the goals of a sovereign wealth fund by bor-
rowing (using the fund as collateral). In República
Bolivariana de Venezuela, for example, resources
were deposited in the national revenue fund accord-
ing to the rules, but at the same time the government
borrowed heavily to finance procyclical expenditures
(Fasano 2000).


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Long-term contracting provides large-scale
producers with some protection from
output volatility
Over the past decade or so, a number of re-
source-dependent developing countries have
entered into long-term contracts with client
countries that guarantee sales volumes and in
some cases prices. These contracts cover an
extended period, sometimes with specific esca-
lator clauses that ensure that prices, while
more stable than market prices, do not vary
too far from market norms, causing one part-
ner or the other to renege on the deal.


Russia and oil-producing countries in Eu-
rope and Central Asia have engaged in such
contracts with Hungary, the Czech Republic,
Poland, and Ukraine as well as with several
high-income countries. Because these con-
tracts specify prices over the duration of the
contract, these consuming countries have not
observed as large a swing in energy costs as
other countries (and supplier countries have
not experienced as large a boom).


Such contracts are sometimes entered into
in the context of a foreign direct investment
deal by either the resource-exporting country
or, increasingly, a resource-importing country
hoping to gain security of future supply.20 Sev-
eral African countries have entered into such
relationships with Brazil, China, India, and
Malaysia, among others, in exchange for a
stable demand-supply relationship and access
to foreign capital (most often in the form of
foreign direct investment) to develop domestic
resources.


China, or Chinese state-owned firms, have
taken equity positions in oil ventures in Africa
equal to some $13.5 billion as of early 2007.
Investments have been made in Angola, Chad,
Côte d’Ivoire, Equatorial Guinea, Kenya,
Mauritania, Niger, Nigeria, São Tomé and
Principe, Somalia, and Sudan, but the bulk
of production is currently concentrated in
Angola, Nigeria, and Sudan (Downs 2007).
Chinese companies also have invested in the
development of minerals, such as copper and


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


111


Marketing boards in developing countries typi-cally got their start during colonial times as a
way to facilitate the export of agricultural commodi-
ties to Europe and to stabilize prices for food crops.
Newly independent governments generally retained
marketing boards because they provided a conve-
nient way for the governments to maintain control
over the distribution of strategic commodities such
as food staples and export crops.


Marketing boards are state-controlled or state-
sanctioned entities legally granted control over the
purchase or sale of agricultural commodities (Barrett
and Mutambatsere 2008). They flourished in the
20th century in both developed and developing
countries but have declined in number under pres-
sure for domestic liberalization and international
trade rules. Where reforms have been widespread
and successful, marketing boards have vanished or
retreated to providing public goods, such as strategic


Box 3.5 National and international marketing strategies
grain reserves or insurance against extraordinary
price fluctuations. Where reforms have been less
successful, the weakness of private agricultural
marketing channels has been revealed by the rollback
of marketing boards, often leading to calls for rein-
statement of the powerful boards.


Similar efforts to minimize volatility have been
tried at the global level as well. These included the
International Sugar Agreement of 1954 and interna-
tional agreements for tin (1956), coffee (1962),
natural rubber (1980), and cocoa (1981). These
agreements used some combination of supply
control, buffer stocks, and export controls to limit
price changes. All of these commodity agreements
broke down or lapsed in the 1980s and 1990s either
because of their ineffectiveness or because of difficul-
ties in coordinating production among members
(Gilbert 2005).


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other resources in Zambia, and cobalt and cop-
per in the Republic of Congo (Lyman 2005).
Chinese companies also have invested in Latin
America, with the bulk of this investment re-
lated to the production of primary commodi-
ties, such as oil in Ecuador (Caspary 2008).


Market-based conditional contracts offer
protection from both price and volume
volatility for large-scale market
participants
Some countries are attempting to reduce the
impact of volatile commodity prices through
market-based derivative instruments. Unfortu-
nately, developing-country producers, and
particularly agricultural small-holders, have
little access to the market-based risk manage-
ment instruments now available, because of a
lack of knowledge; lack of collateral for mar-
gins; the small scale of their operations; and
the complexities of executing, monitoring,
and administering hedging transactions.


These hurdles can be overcome through a
large domestic entity that pools price risk
from many small producers and hedges them
in international markets. In Mexico, the gov-
ernment organization, ASERCA, does this to
hedge price risks for cotton farmers. Through
ASERCA, the government offers farmers the
chance to participate in a program to guaran-
tee a minimum cotton price for a fixed fee.
ASERCA then hedges its price risk by using
the fee to purchase a “put” option in interna-
tional financial markets, which pays if the
international price of cotton falls below the
specified price. This payoff is in turn paid out
to farmers, effectively providing them with
market-based insurance against the cotton
price falling below the specified minimum that
is demand driven and inexpensive to adminis-
ter (Larson, Varangis, and Yabuki 1998).


The over-the-counter market is very active
for oil (over-the-counter risk management in-
struments are highly liquid and can extend as
far as seven years in the future) and precious
metals (contracts are considered competitive
over the three-to-five-year time horizon).
Exchange-traded instruments also exist for


highly traded tropical products such as coffee
and cocoa, and for maize, soybeans, and
wheat, which are produced and exported by
the United States. However, the over-the-
counter market is more limited for the base
metals exported by many developing coun-
tries.21 Moreover, many agricultural products
produced and consumed by developing coun-
tries are difficult to hedge efficiently.


In any event, small-holders in developing
countries have little access to these instru-
ments. The provision of agricultural risk insur-
ance to small-holders also has proven difficult.
State-managed insurance schemes have been
largely ineffective and unsustainable without
subsidies to cover premiums. One hopeful
development is the advent of index-based
weather insurance. These schemes, which pro-
vide for a different way of underwriting, and
transferring, weather risk to the market, are
now being scaled up by private initiatives in
India and elsewhere. In addition to the direct
benefits these contracts provide to producers,
by reducing overall revenue volatility, they
reduce the risk by potential lenders and can
improve farmers’ access to credit.


So far these efforts have been limited to
large-scale farms. To bring similar benefits
to small-scale producers, more direct govern-
ment involvement may be required to ensure
that supply-chain actors, who are the only ac-
tors large enough to enter into such contracts,
have the incentives to share their benefits with
small-holders.


Food markets are more complicated
politically
Food markets present a particularly difficult
risk management challenge, because the re-
quirements (objectives) of consumers and pro-
ducers are often in conflict. Historically, gov-
ernment interventions in food markets have
had significant adverse effects on the supply
side, creating strong disincentives for private
sector storage, finance, and trade. All too
often, the ensuing shortfall in private sector
investment in these markets—and the corre-
spondingly weak development of local and


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112


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regional trade—exacerbate the price and sup-
ply volatility that the interventions were at-
tempting to mitigate in the first place.


More recently, governments have used cus-
tomized price and supply risk management
contracts to help reduce volatility and ensure
security of supply in a way that strengthens
rather than weakens private sector trade.
Trading companies and banks in southern
Africa are now offering contingent purchase
agreements that use “call” options as a basis
for physical supply contracts (box 3.6). Risk
management can also be enhanced by more-
open borders and private trade, as in the suc-
cessful management of flood-induced rice
shortages in Bangladesh in 1998.


Poverty impacts of higher
commodity prices


While resource-rich countries have facedchallenges in capitalizing on the rise in
commodity prices, poor consumers confront
severe difficulties in coping with the substan-
tial decline in real incomes. The rise in real
commodity prices in developing countries was
much less marked than in the United States
(see chapter 1); nevertheless, the increases were
substantial and imply severe consequences for
the poor in developing countries.


The rise in food prices presents the greater
challenge for the poor, most of whom spend
more than half of their incomes on food. The


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


113


In 2005–06, southern Africa experienced a severedrought-related food shortage. Affected countries
included Malawi, Mozambique, Zambia, and
Zimbabwe. Initial estimates suggested that as much
as 2 million metric tons of maize imports might be
required.


The government of Malawi, with assistance from
the World Bank and the British government, used
call options from the South Africa Exchange Market
(SAFEX) to help cap the cost of managing the food
shortage. The government was concerned about both
high price increases and its ability to secure addi-
tional grain on world markets. As a result, a cus-
tomized call option for 60,000 metric tons of white
maize with a total value of approximately $17 mil-
lion and a premium payment of $1.53 million was
written. To ensure that the maize was delivered (if
needed), the contract was written on a delivered
basis, thus combining the price for white maize on
the SAFEX exchange with the transport costs to
Malawi.


In the event, with spot prices rising and the food
shortage growing more severe in November and
December 2005, the government exercised the call
option, elected physical settlement, and allocated the


Box 3.6 Malawi government hedging of maize price
and supply risks, 2005–08


majority of the maize to humanitarian operations.
During the delivery period, spot prices for a metric
ton of white maize rose $50–$90 above the ceiling
price of the contract following increases in the
SAFEX white maize price and transport costs over
the October-January period. The maize purchased
through the option contract had a better delivery
performance than most other procurement
procedures.


Since then the government, facing a projected
maize surplus, worked with the World Bank to struc-
ture contingent export contracts. These were put op-
tions structured to ensure foreign markets would
take up any surplus grain and provide a price floor
in the case that maize prices fell. Although the con-
tracts were not taken up, they did demonstrate how
contingent contracting could be used to help manage
risk associated with surpluses. In May of 2008, the
Malawi government issued a request for proposals
for a repurchase option, which will be based on a
trade finance structure for grain held in the country
combined with a call option. The objective of this
approach is to set up a second layer of grain reserves
that operates financially through the private sector
(Dana, Gilbert, and Shim 2006; Dana 2008).


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urban poor are most directly affected, both
because they consume more commercially
produced foods and because they are much
less likely than the rural population to benefit
from increased revenues from food sales or
improved employment opportunities arising
from higher food prices. The poor are less af-
fected by rising fuel prices because they spend
less of their incomes on fuel; however, high
fuel prices are still a burden to the poor, espe-
cially those in colder climates.


The remainder of this section explores in
more detail the impacts that higher prices have
had on the poor in developing countries.


Higher oil prices and poverty
As discussed previously, oil price increases
since 2003 pushed up consumer spending in
oil-producing developing countries by some
$400 billion in 2008, while the annual in-
crease in the food bill due to the price in-
creases between January 2007 and May
2008 was some $240 billion—assuming in
both cases that international prices were
fully passed through to consumers. Of
course not all of these price increases have
been passed through. In these cases, the costs
are either being borne by governments as in-
creased expenditures or by firms in the form
of forgone revenues when price increases are
controlled.


Most estimates suggest that the poverty im-
pact of higher oil prices was smaller than the
impact of higher food prices, mainly because
in most developing countries, the poor spend
only about 10 percent of total household
spending on energy, compared with 50 percent
for food (Grosh, del Ninno, and Tesliuc
2008). For example, the poorest 20 percent of
Bolivians, Malians, and Sri Lankans spend
more than 40 percent of their income on food,
but only 3 percent on energy (World Bank
2008a). Moreover, when energy costs rise, the
extremely poor tend to turn to alternative
sources of energy (principally biomass). Even
where the poor receive subsidized fuel for
cooking, consumption tends to be low, in part
because they resell it on the black market.22


At the same time, the direct cost of higher
energy prices may well underestimate their
total cost. While direct energy consumption
may be low, higher energy prices increase the
prices of energy-intensive goods and services
consumed by the poor. For example, surveys
of poor communities in China, India, Indone-
sia, and the Lao People’s Democratic Republic
indicate that households have reacted to
energy-induced increases in the prices of elec-
tricity and transportation by reducing lighting
and increasing their isolation (UNDP 2007).
Moreover, the switch to lower-cost biomass
energy sources carries with it hidden costs
in the form of increased indoor pollution, in-
creased incidence of respiratory disease, blind-
ness, heart disease, and obstetrical problems
such as stillbirth and low birth weight (IEA
2002).


Many efforts to measure the poverty im-
pact of higher oil prices have taken an indirect
route because few household expenditure sur-
veys have enough detail on the consumption
of petroleum or petroleum products to esti-
mate poverty impacts directly.23 Some country
studies have relied on input-output tables
combined with household surveys, or on com-
putable general equilibrium models, to esti-
mate the impact of an oil price rise on poverty.
The results are mixed, with most studies con-
cluding that a 20 percent rise in oil prices
could impose a 1–3 percent reduction in the
incomes of poor households (table 3.4).


Global studies of the impact of oil prices on
poverty have first estimated the impact of
higher fuel prices on GDP and then the impact
of lower GDP on poverty. For example,
Herrera and others (2005) estimate that a $10
increase in the price of a barrel of oil would
reduce GDP in the short run by about 0.8 per-
cent in developing-country oil importers. They
calculate that poverty rates would increase in
the more severely affected countries by a range
of 1.4–1.5 percentage points.


A simplistic extrapolation of these results
(which are based on an everything-else-equal
assumption) to the $110 increase in crude
prices between 2003 and mid-2008, would


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114


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lead to the conclusion that the GDP in devel-
oping-country oil importers would have
declined by more than 8 percent and that the
incidence of extreme poverty in developing
countries would have increased by some
15 percentage points. However, everything
else was not equal and for most of the period
during which oil prices were rising, GDP in
oil-importing developing countries was ex-
panding by more than 6 percent a year (much
faster than in the past). At least for the initial
increases in oil prices between 2003 and mid-
2006, such a simplistic calculation substan-
tially overstates the impact of higher oil prices
on GDP and poverty.


That said, the most recent oil-price hikes
occurred under very different conditions than
the initial ones. Global capacity was con-
strained, inflation was rising, and the initial
cushions that allowed the first oil price hikes
to be absorbed were exhausted (see chapter 1).
Partly as a consequence, global growth in oil-
importing developing countries slowed by
1.7 percentage points between 2007 and
2008. Although not all of that slowdown can
be attributed to oil prices, if it were, applying
the poverty elasticities used by Herrera and
Pang (2006) would lead to a conclusion that
the most recent hike in oil prices may have in-
creased headcount poverty rates by as much as
1.7 or 2.0 percentage points.


The rise in the food bill is attributable to
higher prices
The balance of payments implications of the
rise in food prices are important for a few
countries, including some oil or metals ex-
porters, a few countries beset by civil conflicts,
and several small island states that sell services
and import most of their needs, including
food. However, with the exception of a few
foods such as palm oil and a few countries, in-
cluding several island states and some Middle
Eastern countries, the bulk of food products
are consumed in the same country where they
are produced.


Nevertheless, the increased food bill facing
consumers has been extremely large, equaling
on average about 2.4 percent of gross national
income in developing countries, or 8.0 percent
of government expenditures. For some coun-
tries, the costs rise as high as 20 percent of
gross national income, equal to the total of
government expenditures (figure 3.13).


The magnitude of these costs would make
it impossible for most governments (or the in-
ternational community) to completely finance
the rise in expenditures on grains required to
maintain consumption at 2006 levels. As a re-
sult, the greater part of the adjustment must
be borne by consumers, while government in-
terventions need to focus on programs that
strictly target the poor.


D E A L I N G W I T H C H A N G I N G C O M M O D I T Y P R I C E S


115


Table 3.4 Country studies suggest that high oil prices have large poverty impacts
Study Country Impact on poor of 20 percent increase in oil price (unless otherwise specified)


Coady and Newhouse (2005) Ghana Poor incomes decline by 3.6 percent


World Bank (2003) Iran Cost of living of rural poor rises by 3.1 percent


ESMAP Report done in 2001a Pakistan Cost of living of poor rises by 1.15 percent


McDonald and van Schoor (2005) South Africa Rural households suffer drop in income of 0.76 percent, versus
0.83 percent for urban households, with poor households less
affected than rich households


Clements, Hong-Sang, and Gupta (2003) Indonesia 25 percent rise in oil prices reduces average real consumption by
2.5 percent, with high-income groups slightly more affected than
low-income groups


ESMAP (2005) Yemen Increasing fuels to import parity (62 percent) increases household
expenditures by 14.4 percent for poorest decile


Kpodar (2006) Mali Household expenditures of poor rise by 1.8 percent


Source: Kpodar 2006.
a. As cited in Kpodar (2006).


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116


Higher food prices and poverty
Although estimating the direct poverty effects
of high oil prices is difficult, a more direct ap-
proach is possible for analyzing the poverty ef-
fect of higher food prices, because household
expenditure surveys tend to provide more de-
tail on the consumption of food.


Changes in food prices can affect poverty
through consumption and income channels.
On the consumption side, as food prices rise,
the cost of a given basket of food increases
and consumer welfare declines. However, for
the segment of the population whose income
depends directly or indirectly on agriculture
(that is, farmers, wage workers in agriculture,
and rural landowners), higher food prices rep-
resent an increase in income. Thus, for each
household, the net welfare effect of an in-
crease in food prices depends on the combina-
tion of a loss of purchasing power (consump-
tion effect) and, for some households, a gain
in income (income effect). At the country
level, the poverty effect of higher food prices
depends on


• The initial incidence and depth of poverty
• The proportion of the poor that have little


or no direct income from agriculture, such
as the urban poor


• The importance of food in the budgets of
the poor


• Households’ ability to substitute between
food items


A rise in the price of food relative to other
goods and services tends to raise poverty in
the short term. The recent increase in interna-
tionally traded food prices (mostly grains and
oilseeds) is estimated to have increased
poverty in eight of nine developing countries
studied by Ivanic and Martin (2008). This
finding reflects the fact that most of the poor
in developing countries (including those in
rural areas) are net food buyers, as demon-
strated by a number of studies based on de-
tailed household surveys (Christiaensen and
Demery 2007; Seshan and Umali-Deininger
2007; Byerlee, Meyers, and Jayne 2006).


Analyzing the poverty impact of higher
food prices is complicated, however, because
net sellers are disproportionately poor (Aksoy
and Isik-Dikmelik 2008). As a consequence,
high food prices can transfer income from
richer to poorer households. Moreover, over
the longer run, higher food prices that boost
farm income may also increase other rural
incomes by boosting employment and wages
among the landless rural poor. Thus the im-
pact of rising food prices on poverty can differ
substantially between urban and rural areas.


Higher food prices increase urban poverty
unambiguously
The overall impact of higher prices on poverty
may be complicated to sort out, but there is
broad consensus that higher food prices in-
crease urban poverty, mainly because most of
the urban poor have no offsetting income ef-
fects. The upper panel of table 3.5 reports the
estimated effects on urban poverty levels in
the six World Bank regions of a hypothetical
10 percent increase in food prices. The esti-
mates are calculated using the Bank’s model
for Global Income Distribution Dynamics
(GIDD) (see box 3.7 for a discussion of the
assumptions underlying this and other model-
ing exercises reported here).24


10


15


5


0
Countries


20


25


Figure 3.13 The increased grain bill could
exceed 5 percent of GDP in more than
20 countries


Source: World Bank.


Estimated change in grain expenditures, % of GNI


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The largest impacts, both in the increase
in the proportion of individuals in the urban
population living in absolute poverty (the
headcount poverty rate) and in the extent to
which the average income of the poor falls
below the poverty line (the income gap ratio),
are observed in East Asia, South Asia, and
Sub-Saharan Africa and are attributable to the
heavy weight that food plays in the household
consumption basket in these regions and to
the high initial poverty headcounts in these re-
gions (see table 3.5). The increase in head-
count poverty in Sub-Saharan Africa is some-
what lower than in South Asia because food
represents a smaller share of the urban poor’s
overall budget.25 Low food shares in Latin
America and the Caribbean and very low ini-
tial poverty levels in Europe and Central Asia
mean that the urban poverty effects of higher
food prices in those regions are close to zero.


In a similar exercise, Dessus, Herrera, and
De Hoyos (2008) estimated that the increase
in financial resources needed to alleviate


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117


Table 3.5 Higher food prices raise poverty more in urban areas than in rural areas
Estimated change in poverty from a 10 percent increase in food prices


Initial Change


Poverty headcount Income gap ratio Poverty headcount Income gap ratio
Region (percent) (percent) (percentage point) (percentage point)


Urban population
East Asia and the Pacific 13.2 20.3 2.9 1.2
Europe and Central Asia 2.5 8.7 0.6 2.5
Latin America and the Caribbean 3.7 37.6 0.3 0.0
Middle East and North Africa 2.7 17.8 0.6 1.1
South Asia 32.3 25.0 4.4 1.5
Sub-Saharan Africa 34.1 38.1 2.8 0.5


Developing world 15.3 27.1 2.2 0.8


Rural population
East Asia and the Pacific 31.9 23.2 1.8 0.3
Europe and Central Asia 8.2 6.6 0.3 1.0
Latin America and the Caribbean 18.6 43.9 0.2 0.2
Middle East and North Africa 15.4 22.9 0.3 0.2
South Asia 43.3 24.0 1.7 0.5
Sub-Saharan Africa 54.9 41.5 0.2 0.3


Developing world 37.1 28.2 1.2 0.1


Source: Computations using data from the World Bank’s GIDD.
Note: The poverty line is set at 1.25 international dollars (2005) a day per capita. The ratio of food in total consumption among
the poor is computed as described in De Hoyos and Lessem 2008. East Asia excludes China. The Middle East comprises only
Jordan, Morocco, and the Republic of Yemen.


urban poverty arising from the recent increase
in food prices is less than 1 percent of GDP for
the majority of countries, rising to 3 percent
of GDP among those most affected.26 The au-
thors find that around 90 percent of the in-
crease in costs derives from a reduction in the
real incomes of households that were poor be-
fore the price shock and that the rest is attrib-
utable to an increase in the number of poor
caused by higher prices.


Higher food prices also tend to raise
poverty in rural areas, but by less
Most households under the extreme poverty
line live in rural areas. In 2000, 7 out of every
10 poor individuals lived in a household where
agricultural activities represented the main
occupation of the head, with lower average in-
comes among these households being a con-
stant pattern across all regions and countries
(Bussolo, De Hoyos, and Medvedev 2008).27


The lower panel of table 3.5 reports the
effect on rural poverty of the same uniform


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10 percent increase in food prices. It assumes
that farm-related incomes of rural households
also rise by 10 percent. This could be an un-
derestimate, because total spending on food
includes retailing and transportation margins.
Assuming that all of the real increase in food
prices was attributable to increased food com-
modity prices, then the percentage increase in
farmgate prices would have been proportion-


ately larger than that of retail prices (see tech-
nical appendix).


In every region, the deterioration in the
rural poverty indicators is milder than it is for
urban poverty, primarily because of the effect
of increased prices on the incomes of farmers.
Rural poverty actually declines somewhat in
Latin America and Sub-Saharan Africa,
whereas it increases a fair amount in East Asia


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118


The poverty analysis reported in this chapter isbased on microsimulations using the World
Bank’s model for Global Income Distribution Dy-
namics (GIDD). The GIDD comprises household-
level data for 73 countries covering around 60 per-
cent of the developing world population.


In the reported simulations a number of simplify-
ing assumptions had to be made.


1. All households within a country face the same in-
crease in the real price of food, measured as the
rise in the price of food deflated by the rise in the
average price of all nonfood items. Data are taken
from national consumer price indexes.


2. The income generated by the rise in food prices is
redistributed to rural households in proportion to
their agricultural-generated incomes. Information
on the share of rural household income from
agricultural activities is taken from the “Rural
Income Generating Activities” (RIGA), a project
of the Food and Agriculture Organization (FAO)
and World Bank based on 17 Living Standards
Measurement Surveys. This information is
extended to the remaining 56 countries in the
GIDD by estimating a simple polynomial relation-
ship between the share of agricultural-related
income and the level of income (at the centile
level) across the 17 RIGA countries and then
applying the estimated coefficients to the
remaining countries in the GIDD.


3. One issue is whether self-employed workers and
wage earners are likely to share in the rise in in-


Box 3.7 Critical assumptions underlying the
estimation of the poverty impact of food price increases


come from higher food prices. Because it is not
possible to identify which households are self-
employed and which are wage earners, the addi-
tional income attributable to high food prices is
distributed equally among them. This approach is
equivalent to assuming that all of the income goes
to the self-employed (i.e., assuming that agricul-
tural wages and employment are constant) and
that all of the agricultural wage earners in a given
centile work for a self-employed farmer from the
same centile.


4. Household-level information on food consump-
tion is available for only 21 countries in the
GIDD. Engel curves, relating food shares to
household per capita income (or consumption)
and other household characteristics (see De
Hoyos and Lessem 2008) are estimated, and esti-
mated parameters plus a randomly drawn residual
are used to impute food shares in countries that
do not report this information.


5. The simulations show the instantaneous impact
of the rise in food prices, assuming no substitu-
tion or conservation on the part of consumers
(or producers).


The technical annex to this chapter reports the
sensitivity of the poverty estimates to variation in
assumptions made concerning the size of the price
shock and the distribution of resources within both
the rural and urban sectors.


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and South Asia, reflecting the greater impor-
tance of nonfarm incomes within the overall
incomes of the rural poor in those regions and
the large share of food in consumption (see the
second column of table 3.6).


The actual extent of food price increases
varies widely across countries
The analysis so far has assumed that all food
prices increased by a uniform 10 percent. In
fact, observed changes have been very differ-
ent. As discussed in chapters 1 and 2, while
prices of internationally traded commodities
denominated in U.S. dollars increased by as
much as 74 percent between January 2005
and December 2007, the real increase ob-
served in individual developing countries was
much smaller. Indeed, among the 73 countries
for which distinct monthly consumer price
index and household survey data are avail-
able, the majority had real food price increases
of 12 percent or less (figure 3.14).28 Only four
countries saw real food prices rise by as much


or more than the average increase of real in-
ternationally traded food prices. The differ-
ence between domestic and international
prices arises because internationally traded
foods represent only a small share of total
food consumption in most developing coun-
tries. Moreover, different foods have very dif-
ferent weights across developing countries,
and many developing countries have policies
that have prevented local prices from fully re-
flecting changes in international prices.


Table 3.7 reports the result of simulations
of the poverty impacts of the observed in-
crease in real food prices. Like the earlier sim-
ulations, it assumes that the farm incomes in
rural households rise in line with the real in-
crease in national food prices.29


As with the uniform shock, all regions ex-
cept Europe and Central Asia and Latin Amer-
ica and the Caribbean experience a significant
increase in the incidence and depth of poverty.
At the global level, the headcount ratio in-
creases by 1.3 percentage points, representing
an additional 130 million individuals falling
below the poverty line.30


The largest increases in the absolute num-
ber of poor are in Asia and Sub-Saharan


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119


Table 3.6 Observed real price shocks and
food shares of consumption vary across
developing regions
(Percent)


Food share
Region Price Shock among the poor


Rural population
East Asia and the Pacific 12.4 71.5
Europe and Central Asia 0.2 63.4
Latin America and


the Caribbean 6.9 51.2
Middle East and


North Africa 25.9 64.5
South Asia 5.0 65.3
Sub-Saharan Africa 9.6 68.0


Developing world 6.7 66.1


Urban population
East Asia and the Pacific 13.8 67.5
Europe and Central Asia 0.5 57.9
Latin America and


the Caribbean 1.6 44.1
Middle East and


North Africa 12.5 57.1
South Asia 4.8 64.4
Sub-Saharan Africa 4.9 53.0


Developing world 4.1 60.4


Source: World Bank.


0


5


10


15


20


40


Percentage of developing countries


Source: World Bank.


Note: Real local currency price increase of internationally traded
food commodities is shown by vertical line.


220 0 20
Percentage change in real food prices


Distribution of cumulative increases in relative food prices
(Local currency unit, January 2005–December 2007)


Figure 3.14 Real food prices in developing
countries rose less than prices of interna-
tionally traded foods


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Africa, reflecting the large number of people
in each of these regions living just above the
poverty line. The share of the urban popula-
tion in extreme poverty is estimated to dou-
ble from 2.7 to 5.2 percent in the Middle
East and North Africa and to increase by al-
most 50 percent in the East Asia and Pacific
region.


Some caution should be exercised in inter-
preting the figure for East Asia because the
GIDD data set does not include China, by far
the largest country in the region. As a result,
the GIDD model reports an initial poverty


headcount ratio of 24 percent for urban and
rural populations combined, a figure substan-
tially higher than the 18 percent reported in
Chen and Ravallion (2008), which includes
China. The impact that this discrepancy has
on the global poverty estimates depends on
the difference between the poverty effects of
higher food prices in China and those effects
in the average East Asian country. In the ab-
sence of household-level information for
China, the underlying assumption is that the
poverty impacts there (that is, the change in
the headcount ratio and the income gap ratio)
will be equal to the average poverty effects for
the region.


Overall, the rise in food prices increases the
global poverty deficit (the amount that a per-
fectly targeted poverty alleviation program
would need to spend to bring all of those liv-
ing on less than $1 a day up to the poverty
line) from 8.2 to 13.4 percent of developing-
country GDP, or an increase of $37 billion.
The income gap ratio (the average difference
between the incomes of poor people and the
poverty line, expressed as a percent of the
poverty line) rises by much more in urban
than in rural areas, reflecting increased earn-
ings in rural areas when food prices rise. The
difference is particularly dramatic in East Asia
and the Middle East, where the increase in the
income gap ratio in urban areas is more than
4 times larger than it is in rural areas.


The results presented in table 3.7 hide im-
portant heterogeneities across countries. In-
deed, the increase in the poverty headcount
and the deficit resulting from the rise in food
prices is less than one-fifth of a percentage
point for almost half of the countries ana-
lyzed. In around 40 percent of the countries
analyzed, higher food prices raise the head-
count ratio by at least 0.2 percentage point;
and in 6 countries, the change in relative
prices reduces the incidence of poverty by at
least 0.2 percentage point. In some countries,
the measured impact of higher food prices
on poverty is small, or even negative, because
nonfood prices rose more quickly than food
prices during the period in question.31


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120


Table 3.7 Poverty effects of the changes
in relative food prices
January 2005–December 2007


Initial levels: Change in:


Poverty Income Poverty Income
Region headcount gap ratio headcount gap ratio


(percent) (percentage point)


Urban population
East Asia and


the Pacific 13.2 20.3 6.3 2.7
Europe and


Central Asia 2.5 8.7 0.0 0.2
Latin America and


the Caribbean 3.7 37.6 0.1 0.7
Middle East and


North Africa 2.7 17.8 2.4 5.7
South Asia 32.3 25.0 2.0 0.5
Sub-Saharan Africa 34.1 38.1 1.7 0.3


Developing world 15.3 27.1 2.9 0.5


Rural population
East Asia and


the Pacific 31.9 23.2 4.9 0.7
Europe and


Central Asia 8.2 6.6 0.0 0.0
Latin America and


the Caribbean 18.6 43.9 0.1 0.1
Middle East and


North Africa 15.4 22.9 0.7 0.9
South Asia 43.3 24.0 0.8 0.3
Sub-Saharan Africa 54.9 41.5 0.3 0.0


Developing world 37.1 28.2 2.1 0.1


Source: World Bank.
Note: Computations using data from the GIDD. Poverty line
of 1.25 international 2005 dollars per day. The ratio of food
in total consumption among the poor is computed as de-
scribed in De Hoyos and Lessem 2008. East Asia excludes
China. The Middle East comprises Jordan, Morocco, and the
Republic of Yemen.


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Over the long term, higher food prices will
raise incomes in the agricultural sector
In most developing countries, higher food
prices raise the number of poor and lower in-
comes of the existing poor in the short term.
Over time, however, the impact on poverty
becomes less clear. The increased incomes of
food sellers will raise incomes in rural areas
(where the majority of poor live). The simula-
tions summarized here do not reflect the mul-
tiplier effects of higher food prices on incomes
in the agricultural sector nor any long-term
dynamic effects that may arise because agri-
culture has strong links to the rest of the econ-
omy. These include backward links, when
farmers purchase inputs such as chemicals,
fertilizers, and farm equipment for agricul-
ture, and forward links, when agricultural
production provides raw materials to food
and fiber processing in the nonfarm sector.


Moreover, increases in agricultural incomes
are usually spent on locally produced goods
and services, which generate local employ-
ment. In many African countries, for example,
on average for every $1 of additional farm
income, an additional $1.47 in net income
is generated in the wider economy, some of
which accrues to the poor (Delgado, Hopkins,
and Kelly 1998).


The long-term impacts of higher agricul-
tural prices are difficult to measure because
they are lengthy and complex (World Bank
2007). They depend in part on public invest-
ments in roads, markets, irrigation, infrastruc-
ture, education, and health as well as on in-
vestments in the main factors of agricultural
production—land, labor, and capital—all of
which take a long time to adjust. Over time,
increases in agricultural prices relative to
other sectors slow migration out of agriculture
and increase capital investment, which results
in increased agricultural output.32


To the extent that agricultural sectors do
sustain more rapid growth because of higher
food prices, rural poverty will be reduced, espe-
cially where the concentration of land owner-
ship is low and labor-intensive technologies are
used (Gaiha 1993; Datt and Ravillion 1998).


Dealing with high food
and fuel prices


The priority for governments is to addressthe immediate needs of the poor while
minimizing the impact on already-strained
budgets. Care must be exercised to do so in a
way that does not exacerbate the crisis or im-
pair the economic adjustment of the economy
to higher prices. Given the necessity to respond
quickly and the time and cost involved in gath-
ering information on the poor, governments
have tended to respond to the rise in food
prices by increasing resources to existing an-
tipoverty programs. While a logical response,
in many cases care has not been taken to
clearly define the temporary boost in spending
to compensate for a temporary rise in food
prices by announcing, for example, a limited
time for improved benefits or by tying them
explicitly to food prices to avoid creating an
unnecessary, permanent, and unsustainable
fiscal burden.


Over the medium term, governments need
to put in place more efficient policies for pro-
tecting the poor and supporting agriculture, so
that the next crisis can be met without seri-
ously impairing incentives for production or
ramping up wasteful spending. Such policies
would entail better targeted and more efficient
safety nets, along with steps to achieve the po-
tential for strong improvements in agricultural
production described in chapter 2, including
investing in agricultural research and infra-
structure, promoting the diffusion of best
practices, and reducing carbon emissions to
minimize the extent of climate change in the
long term.


The immediate response has been policies
designed to mitigate the impact of rising
food and fuel prices
The immediate response of most countries to
the rapid rise in food and fuel prices during
the course of 2008 has included a mix of mar-
ket interventions and the scaling up of existing
antipoverty measures. Almost three-quarters
of the 80 developing countries surveyed by the


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121


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World Bank in March 2008 have taken some
policy action in response to the rise in food
prices (figure 3.15).


The most common response was reduced
tariffs on imports combined with price con-
trols or consumer subsidies, followed by bans
or restrictions on exports and decisions to add
to official grain stocks. Most oil-importing
countries have passed through all or more
than all of the fuel price increases since 2003,
but on average oil-exporting countries have
passed through only about one-half of the in-
crease (Mati 2008).33 Indeed, as oil prices hit
the $140 range, the fiscal cost of fuel subsidies
became very large in some oil-exporting coun-
tries and represented a significant challenge to
fiscal sustainability. Some 36 countries re-
sponded to higher fuel prices by increasing
subsidies and 43 by lowering fuel taxes (IMF
2008a). Those countries that have expanded
existing safety net programs have favored cash
transfers and school-feeding systems. Food for
work and food stamps were also popular op-
tions (figure 3.16).


Overall, the additional fiscal costs of mea-
sures aimed at offsetting higher fuel and food
costs varies from zero to a maximum of
4.8 percent of GDP, with food and fuel price
subsidies the most costly measures imple-
mented (table 3.8). However, individual coun-


try experience varied widely. Indeed, although
the majority of countries increased spending—
either because preexisting subsidy policies
became much more expensive or because of
direct measures—some actually reduced the
scope of programs and cut into spending be-
cause of increased budgetary cost.


Policies need to be more targeted and
more supportive of medium-term
adjustment
Although subsidies and export restrictions
have helped dampen the immediate impact
of higher prices in the countries where they are
implemented, they are very expensive and
often poorly targeted. Moreover, they tend to
exacerbate the extent and duration of the


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


122


0


20


10


30


40


50


60
Percent


Figure 3.15 Developing countries have
responded to rising food prices with a
variety of policies


Source: Revenga, Wodon, and Zaman 2008.


NoneIncrease
foodgrain


stocks


Export
restrictions


Price
controls/


consumer
subsidies


Reduce
foodgrain


taxes


0


20


10


30


40


50


70
Percent


60


Figure 3.16 Countries have tended to expand
cash transfers and school feeding programs
when responding to higher food prices


Source: Revenga, Wodon, and Zaman 2008.


NoneFood for
work


Food ration/
stamp


School
feeding


Cash
transfer


Table 3.8 Fiscal costs of selected
antipoverty measures vary widely


Number of Maximum Median
countries increase increase


where (percent of (percent of
Measure implemented GDP) GDP)


Food tax decreases 31 1.1 0.1
Food price subsidies 28 2.7 0.2
Targeted transfers 21 2.0 0.2
Public sector wage hikes 10 1.9 0.6


Fuel subsidies 38 4.0 0.7
Fuel tax reductions 37 1.3 0.3


Aggregate costs 79 4.8 0.7


Source: IMF 2008a.


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crisis by reducing producers’ incentives to in-
crease output and consumers’ incentives to re-
duce demand. Over the medium-term, policy
makers need to redress the balance, placing
more emphasis on well-targeted antipoverty
measures and on policies that promote in-
creased supply and more prudent use of nat-
ural resources.


Subsidies and price floors are expensive
and poorly targeted antipoverty measures
Food and fuel subsidies tend to be costly and
poorly targeted, even when steps are taken to
make the subsidized material available only to
certain segments of the population. For exam-
ple, the Egyptian system of food subsidies is
targeted at the poor by restricting access to
subsidized flour to the truly poor, by locating
distribution points in poor neighborhoods,
and by using lower-quality products. Never-
theless, the system is very expensive (with an
estimated financial cost of 2 percent of GDP)
and ineffective (World Bank 2005a). Between
one-quarter and one-third of the poor do not
benefit from it, and fully 83 percent of the
value of the food subsidies goes to the non-
poor. Moreover, those poor and vulnerable
households that do benefit receive so little that
the net effect is to lift only 5 percent of the
population out of poverty.


General fuel subsidies tend to be even more
regressive and more costly than food subsidies
because they involve substantial leakages of
benefits to higher-income groups. A study of
five countries from various regions found that
on average 78 percent of fuel subsidies went to
the richest 60 percent of households (Coady
and others 2006). Even when targeted
through voucher programs, fuel subsidies tend
to be ineffective. In India, for example, about
half of subsidized kerosene34 (which is made
available to poor families on a quota basis at
9 rupees a liter) is diverted to the black mar-
ket where it is either sold at a higher price or
is used to adulterate diesel, which sells for
about 30 rupees per liter.35


More generalized price subsidies or price
floors (including indirect ones such as man-


dating the national oil company to sell at
below cost) are also common and can be very
expensive.36 Estimates suggest that India’s
total fuel subsidies amount to about 2 percent
of GDP. Even after reform, the fuel subsidy in
Indonesia is expected to total 127 trillion
Indonesian rupiah ($13.9 billion) in 2008 and
make up about 13 percent of the country’s
total budget (more than the total of spending
on education and health).


The imposition of export bans by food-
exporting countries has the same basic goal of
keeping consumer prices below the market
level.37 Some 20 developing counties have
introduced such bans since 2007, including
Argentina, China, Egypt, India, Kazakhstan,
Pakistan, Russia, Ukraine, and Vietnam. Sev-
eral different policies have been used, includ-
ing export taxes on a particular commodity
(India), taxes on transport (Kazakhstan), re-
stricting licenses to export (Argentina), and a
complete ban on exports (Vietnam).


Price containment policies distort
incentives, reducing supply, limiting
conservation, and exacerbating and
prolonging high prices
While expensive and generally poorly targeted,
all of these policies (price subsidies, price
floors, and export bans) do succeed in limiting
the immediate domestic impact of rising inter-
national prices. However, they do so at a cost.
Not only are they fiscally unsustainable in
many cases, but they also tend to exacerbate
and prolong the price increase. Lower pro-
ducer prices mean that less new supply is forth-
coming, while lower consumer prices means
that demand is not curtailed—both domesti-
cally and internationally. For example a series
of steps taken by Serbia in 2007 to secure do-
mestic supply, including a temporary ban on
exports of wheat, maize, soybeans, and sun-
flower backfired. Serbia’s wheat plantings fell
to a 90-year low (partly because of bad
weather) and prices rose (USDA 2007).


The problem with export bans is even more
severe. Although they are domestically appeal-
ing, these bans decrease confidence of net


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importers in the international trading system
as a reliable source of food. For example, fol-
lowing India’s ban on exports of premium rice
on October 9, 2007, domestic prices remained
well below international prices, but the with-
drawal of supply from international markets
sparked an almost immediate rise in interna-
tional rice prices (figure 3.17).38


Although countries’ food security concerns
are legitimate, a widespread return to policies
of food self-sufficiency could be very costly
depending on how quickly it is achieved, the
resource endowments of the country and the
policies used to achieve it.39 If investments in
research and infrastructure are made to im-
prove productivity, the costs may not be too
high. Although the rate of return on such
investments is high, it can take many years
to raise production enough to achieve self-
sufficiency.


If price policies are used to boost domestic
production, the costs could be very high and
the effectiveness uncertain. First, the supply
response of the agricultural sector as a whole
is low (Cavallo 1988).40 Raising the total of
agricultural production as opposed to produc-
tion of a single crop takes many years. Thus,
unless a policy is very carefully constructed, it
risks increasing production in one food item at
the expense of reduced production (and in-
creased dependence) in another.


Moreover, using a price subsidy or import
restrictions to boost domestic prices and in-
duce additional production is often a costly
alternative to importing (table 3.9). For exam-
ple, to increase domestic rice output by
10 percent, a country would have to increase
domestic prices by as much as 50 percent.41


For the 10 largest rice importers over 2000–05
(who imported about 10 percent of their total
consumption), achieving self-sufficiency in
this way would imply a $24 billion dollar in-
crease in food costs compared with the current
situation where the rice is imported—mainly
because the extra 50 percent would have to
be paid both on the rice currently produced
domestically as well as on the new rice to be
produced (currently imported).


A better approach would be to enter into
long-term supply arrangements, such as those
discussed earlier in the context of the oil mar-
ket. Under these agreements, importing coun-
tries could agree to buy a minimum amount of
grain or other food crop each year in exchange
for a commitment by the exporting country
to meet larger imports when needed. Alterna-
tively, countries might make more intensive


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124


Figure 3.17 After India banned rice exports,
international prices rose


300


07
/17


/07


07
/31


/07


08
/14


/07


08
/28


/07


09
/11


/07


09
/25


/07


10
/09


/07


10
/23


/07


11
/06


/07


11
/20


/07


12
/04


/07


12
/18


/07


315


330


345


360


375 India banned rice
exports


US$/ton


Source: International Grains Council, USDA.


Note: Price for Thailand's export price ($/ton) for 100 percent B
white rice.


Table 3.9 Increasing rice self-sufficiency
can be more costly than relying on imports


Cost of rice
consumption


Import Self-
Production Consumption Imports strategy sufficiency


(millions of metric tons) ($US billions)


China 123.2 133.8 10.6 28.8 43.2
Indonesia 33.8 36.1 2.3 7.8 11.6
Nigeria 2.2 3.7 1.6 0.8 1.2
Iran,


Islamic
Rep. 1.6 2.9 1.3 0.6 0.9


Iraq 0.1 1.1 1.0 0.2 0.4
European


Union 1.7 2.6 0.9 0.6 0.8
Philippines 8.7 9.6 0.9 2.1 3.1
Bangladesh 25.3 26.0 0.8 5.6 8.4
Senegal 0.1 0.9 0.7 0.2 0.3
Côte


d’Ivoire 0.5 1.2 0.7 0.3 0.4
Total 197.2 217.9 20.7 46.8 70.3


Source: World Bank.


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use of the kinds of conditional contracting re-
cently used by Malawi (see box 3.6).


Over the medium term, countries need to
move toward more flexible and targeted
social safety net schemes
Having weathered the initial consequences of
high food and fuel prices, countries need to
transfer more of the burden of dealing with
high prices to better-targeted social safety nets
and market mechanisms. Doing so will bring
both fiscal and economic benefits, in the form
of increased poverty reduction, reduced cost,
and lower commodity prices.


There is no magic prescription for effective
social safety nets, especially among developing
countries where both fiscal and administrative
resources are often in short supply. Successful
systems usually consist of several individual
programs that complement each other as well
as other public or social policies. Ultimately,
the particular policy mix put into place will
depend on the country context.


Nevertheless, there is general consensus on
the relative strengths and weaknesses of dif-
ferent forms of support. A loose ranking of
programs would favor targeted cash transfers
of adequate coverage, generosity, and quality
as the best option and could include increasing
pensions and unemployment benefits when
they target the poor (box 3.8).


Emergency food aid distribution, used in
places like Afghanistan and Angola, often in
partnership with agencies such as the World
Food Programme (WFP), ensure food security
for vulnerable groups and are appropriate
where markets are functioning poorly or
where foreign assistance is only available in-
kind, but the physical transfer and potential
leakages can make these programs costly.
School feeding programs can be used for a
quick response, but these do not typically ad-
dress child malnutrition at its most critical
point—when children are in their infancy. Con-
ditional cash transfer programs can help foster
increased use of health and education services
and are generally most efficient, but they are
not always a feasible option in low-income


countries with weak administrative capacity.
Finally, public works programs, in food or
cash (such as in Cambodia and Mozambique),
can be effective only for a few areas and for
people who are currently unemployed.


Household targeting systems—such as
proxy means tests or means tests, sometimes
community-based decision making, or hybrids
among these—can be effective in directing re-
sources to the poor. Where a household tar-
geting system is not in place, a combination of
geographic targeting, self-targeting, or demo-
graphic targeting can produce at least moder-
ately good results, reducing the cost of admin-
istrative targeting.42 For example, school
feeding programs targeted geographically to
poor rural areas may have relatively low
errors of inclusion. Self-targeting can be
achieved by setting low wages for labor-inten-
sive public works. Open market operations
for food sales can be geographically targeted
to slum areas, with a limitation on quantity
and provision of an inferior staple commodity
inducing some degree of self-targeting. Fees
for networked electricity can be differentiated
by use level or neighborhood. Provision of for-
tified weaning foods that are culturally ac-
ceptable for only very young children is a
good use of demographic targeting.


Although the economics of reform are
solid, eliminating existing but inefficient
antipoverty measures is politically difficult
Removing subsidies is difficult and can be met
with strong opposition and violent protest.
Nevertheless, given the fiscal burden that
such subsidies impose—especially on oil
importers—governments have little choice but
to reform. While many different approaches
have been followed, those that have worked
have tended to use a strategy that replaces the
subsidy with a better-targeted benefit, pre-
ceded by an effective publicity campaign that
emphasizes the poorly targeted nature of the
existing subsidy (Kojima and Bacon 2006).


Several countries have used some variation
of this approach. Chile made a one-time pay-
ment of $28 to low-income households to


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compensate for higher fuel prices and provided
extra cash compensation to 1.4 million house-
holds consuming less than 150 kilowatt-hours
of electricity a month. Indonesia used an effec-
tive public relations campaign, coupled with a
cash compensation scheme and general trust in
the government, to more than double gasoline


and diesel prices and nearly triple kerosene
prices in 2005 with no substantial opposition.
Ghana combined prior analysis of who bene-
fited from fuel subsidies with a campaign pub-
lishing the measures that would be used to
compensate for removing subsidies in a suc-
cessful effort to remove subsidies (box 3.9).


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126


Targeted cash transfers are the cornerstone ofsafety net programs in most of the countries
with safety nets. They help protect poor households
by providing them with the resources they need to
maintain a minimum level of consumption. These are
the most flexible programs and can be adapted to
particular circumstances. It is not surprising that tar-
geted cash transfers are used in countries of varying
income level, from Albania to Mexico to Zambia.


Even poor countries can afford to allocate re-
sources for safety net programs. The fiscal costs of a
well-targeted safety net for the poorest need not be
unduly high. For a large share of developing coun-
tries, spending on overall safety nets has been on the
order of 1–2 percent of GDP in recent years. How-
ever, the costs of the responses differ according to
the scope, generosity, and degree of targeting: rang-
ing from a mere 0.04 percent of GDP in Chile (for a
well-targeted response) to more than 1 percent of
GDP in Ethiopia (for lifting the value added tax on
food grains, raising the wage on the cash-for-work
program, and distributing wheat to the urban poor
at a subsidized price). A careful fiscal-planning exer-
cise will be needed in each country. Such a plan
should seek to protect critical growth-enhancing
spending and prune low-priority expenditures, and
be embedded in a medium-term fiscal sustainability
strategy so that the longer-term fiscal sustainability
of the program is ensured. For the poorest countries,
international assistance will be essential.


The quality and care with which programs are
designed and implemented, including the selection,
provision, and monitoring of benefits, have a large
impact on program efficiency and effectiveness.
No program is a guaranteed success, and few are
guaranteed failures. The role of good systems and


Box 3.8 Conditional cash transfers are most effective
in getting money to the poor


adroit managers in getting the most from a program
cannot be overemphasized.


Conditional cash transfer programs have a good
reputation and are an effective mechanism for direct-
ing assistance toward the poor. Large-scale condi-
tional cash transfer programs were developed in
Mexico (Progresa, Oportunidades) and in Brazil
(Bolsa familia) and later spread to other countries in
Latin America and the Caribbean and to the rest of
the world. Those programs are well targeted to poor
families through a combination of geographic priori-
tization and household assessment mechanisms and
are particularly efficient in providing transfer to the
poor. Administrative costs are relatively low, averag-
ing about 5 percent of total program costs after
start-up, compared with food-based programs,
whose administrative costs average 36 percent of
total program costs. However, because they are more
difficult to set up than unconditional programs and
might exclude the neediest where services are scarce,
cash transfer programs can be part of an emergency
response, for example to high food prices, where
they are already established.


Care must be taken to ensure that the policy re-
sponse to temporary crises is temporary. Although a
permanent increase in fiscal space may be justified in
countries that have underinvested in adequate safety
net systems, in countries that already had broadly
adequate safety nets a temporary expansion of bene-
fits may be best. Permanent changes in the benefit
levels or scope of the transfer program can be
avoided by targeting additional benefits at those al-
ready qualified for a program; making payments in a
lump sum or explicitly time-limited fashion.


Source: Grosh, del Ninno, and Tesliuc 2008.


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The international response to
high commodity prices


The effectiveness of the policy response tothe recent rise in food and fuel prices
will, in the main, depend on the ability of in-
dividual governments to put in place well-
targeted programs to ameliorate hardship
and to provide the infrastructure, services,
and appropriate incentives required to raise
food production and encourage adjustments
to high food and fuel prices. For the poorest
countries, some form of additional assistance
will be required, while for other countries in-
ternational coordination may be required to
help restore confidence in global food mar-
kets and provide emergency assistance for
poor consumers.


The loss of real income from higher food
prices is too great to compensate all
consumers
As discussed earlier, the rise in food and fuel
prices substantially reduced the purchasing
power of the poor throughout the developing


world. During such episodes, short-term assis-
tance is urgently needed to avoid hardship.
However, effective targeting of assistance is
critical. The cost of compensating all con-
sumers for the rise in food prices alone since
January 2007 is impossibly large—perhaps
more than $270 billion annually. Moreover,
insulating consumers from the effects of price
increases (and taxing producers to finance this
assistance) delays the necessary adjustments in
demand and supply that will eventually bring
prices down.


Even if a program could be devised that
concentrated aid only on the poor, it would
cost some $38 billion annually, or about
14 percent of all official development aid in
2007. Focusing international assistance on
the poorest countries makes sense, in part be-
cause higher proportions of their populations
are extremely poor and because their own fis-
cal resources are particularly weak. The total
cost of reversing the poverty impact of higher
food prices in IDA-eligible countries would
be a more manageable $2.4 billion.


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127


Ghana could not continue fuel subsidies as worldoil prices rose in 2004, and the government
launched a poverty and social impact assessment to
study the situation. Guided by a steering committee
of stakeholders from ministries, academia, and the
national oil company, the assessment was completed
in less than a year. By the time the government an-
nounced the 50 percent price increases in February
2005, it could use the assessment findings to make
its case for liberalizing fuel prices to the public—
including the fact that the price subsidies mostly
benefited the better-off.


The minister of finance launched the public rela-
tions campaign with a broadcast explaining the need
for the price increases and announcing measures to


Box 3.9 Removing fuel subsidies in Ghana
mitigate their impact. A series of interviews with
government officials and trade union representatives
followed. The Energy Ministry used newspaper ad-
vertisements with charts to show that Ghana’s fuel
prices were the lowest in West Africa, after Nigeria’s.


The mitigation measures, which were transparent
and easily monitored by society, included an immedi-
ate elimination of fees at government-run primary
and junior secondary schools and a program to
improve public transport. Although the trade unions
remained opposed to the price increases, the public
generally accepted them, and no large-scale demon-
strations occurred.


Source: Bacon and Kojima 2006.


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The international community has reacted
swiftly to the rise in food prices
The international community has been quick
to recognize the serious risks that higher food
prices posed for the poor. The United Nations
has established a Task Force on the Global
Food Security Crisis to formulate a unified re-
sponse to the food crisis (box 3.10).


Donors ramped up existing programs and
launched new initiatives to speed the provi-
sion of food aid to the poor. Examples include
the Food and Agricultural Organization has
launched the Initiative on Soaring Food Prices,
which assists small-holders in critically af-
fected countries (beginning with Burkina
Faso, Haiti, Mauritania, and Senegal) to ob-
tain seeds, fertilizers, and animal feedstock;
the International Fund for Agricultural Devel-
opment (IFAD) is making up to $200 million
from existing loans and grants available to im-
prove poor farmers’ access to seeds and fertil-
izer; bilateral donors (for example, the U.S.
Agency for International Development and
the U.K. Department for International Devel-
opment) are focusing existing programs on
countries most affected by the food crisis; the
European Union has committed ⇔€1.0 billion
in funds from European farm subsidies that


have not been used (because high prices have
reduced the compensatory amounts payable
to farmers) to farmers in developing countries,
mostly in Africa; and the World Food Pro-
gramme has pledged $214 million to provide
assistance to vulnerable groups.


For its part, the World Bank has created a
$1.2 billion rapid financing facility, the Global
Food Crisis Response Program (GFRP), to ad-
dress immediate needs arising from the food
crisis. The facility includes $200 million in
grants targeted at vulnerable poor countries,
with priority given to the most fragile states.


The GFRP strives to create a balance be-
tween short-run food stabilization and mea-
sures to ensure that countries are able to cope
better in the medium term. Countries can se-
lect measures most relevant to their individual
situations from program components that
address price policies, social protection and
nutrition, and immediate supply response pro-
visions for getting seeds and fertilizers to
farmers.


The World Bank is also establishing a mul-
tidonor trust fund, with an initial contribution
from Saudi Arabia, to help the poor respond
to high energy and food prices. This fund will
operate in parallel with the GFRP and will


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


128


The UN secretary-general established a Task Forceon the Global Food Security Crisis aimed at pro-
moting a unified response to the global food price
challenge. An initial meeting was held in June 2008,
attended by 181 countries, and 60 nongovernmental
and civil society organizations.


The summit concluded with a declaration calling
on the international community to increase assis-
tance for developing counties, in particular the least
developed countries and those that are most nega-
tively affected by high food prices. The immediate re-
sponse was to call for increased humanitarian assis-
tance to those hardest hit by the rise in food prices


Box 3.10 The international response to rising
food prices


through food aid and balance of payments support
to countries. The medium-term response has been to
assist countries to put in place revised policies and
measures to help farmers, particularly small-scale
producers, to increase production and integrate into
local, regional, and international markets along with
measures to moderate the fluctuations in food grain
prices through increased stockholding capacity and
better use of risk management practices. Longer-term
responses have focused on how to increase the re-
siliency of food production systems to challenges
posed by climate change.


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provide priority assistance to countries whose
economies are most severely affected by the
increase in the price of imported fuel, that
have already embraced or are pursuing ener-
gies policies that are more fiscally sustainable,
and that propose cost-effective social safety
net programs.


Improvements are required in the
architecture for humanitarian aid to
strengthen the response to the food crisis
The dramatic increase in food prices has un-
derlined the importance of improving the effi-
ciency of programs to deliver emergency food
aid. Bilateral food aid programs are largely
based on the disposal of surplus commodities.
This approach has played an important role in
garnering political support for the provision
of food aid. However, 60–86 percent of the
aid is tied, either directly to commodities pro-
vided by the donor country or through con-
straints on the use of cash donations (FAO
2006). As a consequence, the cost of this aid
can be 30–50 percent higher than nontied
sources (OECD 2005). Moreover, tied food
aid of this type slows the delivery of food aid,
and reduces supplier incentives in local food
markets. 43


Progress is being made in improving the
administration of food aid programs. Some
donors have lifted requirements that food aid
be procured domestically and have shifted
from providing commodities to providing
cash, making it possible to purchase some food
locally. Resources have shifted toward the pro-
vision of emergency aid, implying an improve-
ment in the targeting of food aid (FAO 2006).
Additional efforts to provide cash aid and
allow the food to be purchased where and
from whom made most economic sense would
reduce costs and help make food aid a more
efficient instrument in reducing poverty.


Improvements in food aid management are
required at the international level as well. The
main multilateral provider of food assistance
is the UN’s World Food Programme, which
delivers more than half of the humanitarian
food aid in the world. Higher food prices have


made it very expensive for the WFP to pur-
chase food on international markets, threaten-
ing its capacity to deliver emergency humani-
tarian aid in a timely manner.


A strengthening of the financing arrange-
ments for the WFP could markedly improve the
efficiency of its operations, allowing for an ex-
pansion in food aid and a reduction in costs.44


Financing of the WFP depends on voluntary
contributions from donor countries that are
largely tied to assistance for specific countries
or programs on a year-to-year basis.45 As a re-
sult, WFP programs can be designed and im-
plemented only after financing is committed.
Contributions are often based on surplus dis-
posal, with provision that the food be trans-
ported on the carriers of the donating nation.


These arrangements are major constraints
on the WFP’s ability to respond flexibly and
efficiently to the need for assistance. The time
required to obtain donor commitments makes
it difficult to respond to unexpected shocks.
The timing of commitments also can mean
that food purchases must be made when prices
are at seasonal highs rather than following
harvest when prices are at seasonal lows. Sev-
eral donors provide commodities rather than
cash, significantly increasing the cost of food
compared to local purchases. Providing an an-
nual dollar budget equivalent to the value of
current commitments would dramatically im-
prove the efficiency of WFP operations. Given
the volatility of food prices, this budget might
be supplemented by a line of credit upon
which it could draw in years when either
prices or needs are unusually high.


Steps to assist the replenishment of
international grain stocks would help
The role that low stocks have played in the
rise of food prices has raised the issue of
whether or not an international food stockpile
should be created to help prevent a repetition
of the past year’s high prices, in part by ensur-
ing that supply would be available to the
market and by dissuading speculative behav-
ior. While an appealing notion, it is not clear
that such a stockpile would be effective—or


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needed. To have a significant dampening effect
on the market, such a stockpile would have to
be large and would be very expensive to create
and maintain. Rough calculations suggest that
a stockpile equivalent to 10 percent of global
production would cost about $66 billion
to create and some $8–10 billion annually
to maintain.46 Moreover, the creation of the
stockpile would add significantly to global
food demand and price pressures during the
period in which it was being created. Nor is it
clear that a global stockpile would actually in-
crease world stocks. The public stock increase
may well be matched by a reduction in private
stocks, thus transferring the costs of keeping a
stock to the public sector without necessarily
improving the stability of the market.


A more effective strategy might be to im-
prove information flows about stocks and cre-
ate mechanisms by which they can be man-
aged. Currently most stocks are held by a
limited number of major producers and im-
porters. It may be possible to create an inter-
national agreement that provides for the shar-
ing of some of these costs—perhaps along the
lines of the International Energy Agency
agreement governing oil reserves. As in that
agreement, the rules for accumulating and dis-
tributing grain stocks would need to be clearly
defined to prevent their being used for surplus
disposal or price support and to ensure they
are used for humanitarian purposes.


More multilateral discipline in trade policies
would help mitigate the rise in food prices
A range of multilateral and trade policies
(export restrictions, biofuel subsidies, tariffs,
mandates, and global protection of agriculture
more generally) have contributed to the rise
in food prices. Moreover they have reduced
confidence in the international food trading
system and interfered with consumer and pro-
ducer incentives, reducing supply and increas-
ing demand. As a result, the price hike has
been larger and longer lasting than it would
have been otherwise.


A strengthening of existing international
rules governing the imposition of export re-


strictions may be desirable. Currently, unlike
countervailing duties, the conditions that must
be met before export restrictions are intro-
duced are ill defined, and although there is a
requirement that the World Trade Organiza-
tion be notified of their implementation, it is
not enforced.47 Even the enhanced rules pro-
posed under the Doha Round should probably
be strengthened.48 Helpful measures might in-
clude including stricter (even pre-) notification
requirements, limits on the allowed duration
of restrictions, and possibly a definition of the
conditions under which such restrictions
might be admissible.


Policy makers should also consider phasing
out biofuel subsidies and production man-
dates, especially where these are coupled with
tariffs that restrict imports from lower-cost
producers. This step would both reduce pres-
sure on food prices and help low-cost and
environmentally cleaner developing-country
biofuel producers that are currently shut
out of major markets by these rules.49 There
are indications that a number of developed
countries are beginning to reexamine their
biofuel policies, but it remains a contentious
issue.


More fundamentally, decades of trade-
distorting policies (such as tariffs, quantitative
restrictions, and subsidies) are partly responsi-
ble for the current spike in food prices, having
encouraged inefficient agricultural production
in rich countries and discouraged efficient
production in developing countries (Chauf-
four 2008). The kind of agricultural trade bar-
rier reductions contemplated in the Doha
Round might lead to higher agricultural prices
in the short term, but in the long run, they
should help establish a more transparent,
rules-based, and predictable food trading sys-
tem that would stimulate trade and raise in-
comes around the world. An ambitious pro-
gram could reduce global poverty by as much
as 8 percent (World Bank 2004).50


Moreover, removal of the rules that allow
such trade restrictions would help ensure that,
as prices come down, countries cannot intro-
duce new subsidies and restrictions in an effort


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to prevent domestic producers’ prices from de-
clining as sharply as they would otherwise.


Conclusions


The rise in primary commodity prices since2003 was much larger and more sustained
than those of earlier periods. This boom gen-
erated dramatic transfers of income within and
among countries and has imposed severe bur-
dens on some consumers. However, it has also
created opportunities for producers and these,
if managed properly, can provide significant
growth opportunities. The boom has also ex-
posed weaknesses in domestic and interna-
tional policies that have contributed to and
prolonged the period of high prices and re-
duced confidence in international markets.


For commodity producers, commodity
dependence need not hurt long-term growth.
Although commodity-dependent economies
have, on average, grown more slowly than
more-diversified economies, for most
economies dependence on commodities is the
result of slow growth, not the cause. To
achieve the growth potential inherent in com-
modity riches, countries need to implement
policies that minimize the potential disruptive
impacts of volatile export revenues, exchange
rate appreciation that can erode the competi-
tiveness of manufacturing, and incentives for
rent seeking and corruption. It would appear
that producing countries have responded to
higher prices in a more prudent manner dur-
ing this boom than in the past. Fiscal policy
has been less procyclical than in the past,
countries have made greater efforts to save
windfall profits, and rate appreciation has
been muted. As a result, they are less likely to
endure the major setbacks that characterized
the 1980s as prices declined. An exception to
this generally welcome response has been the
performance of countries with newfound
commodity wealth and some newly indepen-
dent resource-rich countries that may have
repeated some of the mistakes of the past.


Consumers have faced daunting challenges
from the commodity price boom. The rise in


food prices has presented the greater challenge
because the poor in developing countries spend
as much as half of their incomes on food, while
fuel is a smaller share of their expenditures. The
rise in food prices has increased poverty and
boosted the cost of many countries’ poorly tar-
geted and inefficient subsidy programs, which
by limiting the impact of food and fuel prices
impede the necessary adjustment to high prices.


The expansion of existing programs and the
adoption of emergency measures are under-
standable, given the magnitude of the oil and
food price increases, the potentially dire impli-
cations for the poor, and the limited time. How-
ever, the high cost of this response underlines
the importance of putting in place well-targeted
and efficient safety net programs, so that next
time countries can address the needs of the
poor without incurring undue fiscal costs. This
episode has also shone light on the need for
international coordination to encourage coun-
tries to avoid counterproductive policies and
to marshal aid resources to help the poor.


Policies to deal with the rising food and
fuel prices have often exacerbated the prob-
lem by slowing necessary adjustments. Such
policy responses have included price controls
and export bans that have impaired incentives
to reduce consumption and invest in the addi-
tional capacity that would help bring prices
down, while weakening confidence in the
international trading system.


The dramatic increase in food prices has
underlined the importance of improving the
efficiency of programs to deliver emergency
food aid and transition these programs from
largely surplus disposal programs to effective
humanitarian assistance programs with fewer
constraints on their use. A range of multilat-
eral and trade policies (export restrictions,
biofuels subsidies, tariffs, mandates, and
global protection of agriculture more gener-
ally) have contributed to the rise in food
prices and need to be reconsidered. The Doha
Round, while not likely to lower food prices
in the near term, would provide longer-term
discipline to agricultural policies and raise
incomes around the world.


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Technical Annex: Sensitivity
Analysis


The poverty effects of higher food pricesdiscussed in chapter 3 are based on a num-
ber of assumptions. This annex reports the
sensitivity of the results (change in the number
of poor and the change in the income gap
ratio) under different assumptions regarding
the nature of the price shock and the propor-
tion of increased food expenditures that accrue
to agricultural households.


The results presented in the main text de-
flate the increase in food prices by the non-
food deflator. More traditionally in high-
income countries, where food represents a
small share of total spending, real food prices
are deflated by the overall consumer price
index. If the whole consumer price index had
been used to deflate the increase in food
prices, the overall shock would have been
much smaller and hence the estimated poverty
effects would have been milder. Under this
scenario, labeled “real price change” in table
3A.1, the total number of poor would be
around half as large as in the central scenario.


Another important assumption driving the
estimated poverty effects is the allocation of
the revenues from higher food prices to differ-
ent households. In the central scenario, pro-
ducer prices are increased by the same pro-
portion as consumer prices. To the extent that
all of the increase in retail food prices is at-
tributable to an increase in farmgate prices,
then the proportional increase in farmgate
prices should have been larger than that expe-
rienced by retail prices.51 The other issue is
how the price change affects the incomes of
different households. In the kind of short-term
simulation being conducted here, wages and
employment are normally held constant.
Therefore, only the incomes of self-employed
agricultural workers or landowners, who sell
the final product, should increase, not those of
agricultural wage laborers. Unfortunately, the
GIDD database does not distinguish between
different income sources. Therefore the data
in the GIDD is complemented with informa-
tion from the Rural Income Generating Activ-
ities (RIGA) project. RIGA is an FAO–World
Bank funded project that uses data from 21
(household) Living Standards Measurement


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


132


Table 3A.1 Sensitivity analysis
Real price change Relative price change


Central Scenario:
Self-employment Self-employment


All agricultural agricultural incomes All agricultural agricultural incomes
Region incomes affected affected incomes affected affected


Change in number of poor (million)
East Asia and the Pacific 52.1 59.9 103.7 114.7
Europe and Central Asia 0.0 0.0 0.1 0.1
Latin America and the Caribbean 0.4 0.8 0.7 1.3
Middle East and North Africa 1.9 3.0 4.6 7.2
South Asia 10.8 14.3 16.8 24.4
Sub-Saharan Africa 2.0 2.2 5.7 5.9
Developing world 67.2 80.3 131.6 153.5


Change in income gap ratio (percent)
East Asia and the Pacific 0.36 0.43 0.78 0.93
Europe and Central Asia 0.00 0.00 0.00 0.00
Latin America and the Caribbean 0.00 0.01 0.01 0.01
Middle East and North Africa 0.03 0.06 0.09 0.15
South Asia 0.17 0.24 0.28 0.43
Sub-Saharan Africa 0.10 0.11 0.30 0.32
Developing world 0.16 0.21 0.33 0.41


Source: World Bank.


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Surveys (LSMS) to identify the various income
generating activities of rural households.52


The information on total agricultural incomes
and self-employment agricultural incomes re-
ported in RIGA is used to estimate the econo-
metric relationship between this and per-
capita household income and consumption,
which was then used to impute agricultural in-
come shares in all the households included in
the GIDD (De Hoyos and Medvedev 2008).53


If the short-term price increase benefits
only self-employed landowners, the increase
of self-employment agricultural incomes
should be larger than the increase in retail
prices. At the limit, if agricultural wages and
employment are held constant, then all of the
additional income would accrue to landown-
ers and none to farm workers.


Mathematically,


Pc1 * Q1 1 * SE W1 * E other costs,


where Pc1, Q1 are the retail price and quantity
consumed of good 1, respectively. 1, W1 are
remunerations of self-employed workers (in-
cluding the return to land to self-employed
landowners) and wage earners, respectively.
Rearranging:


Pc1 1 W1 ,


where SEQ is profits share in total output.
We denote these as alpha and those of other
costs as beta, giving us:


Pc1 1 W1(1 ) .


Taking the total derivative while holding
wages and other costs constant gives us:


Pc


or


Pc.d
dt


1

d
dt


d
dt


d
dt


other cost
Q


SE
Q


EAG


Q
other costs


Q


Numerically, if the landowner’s share in the
value of output initially is 50 percent, then the
percent increase in his revenues will be twice
that of the increase in the retail price (assum-
ing all the changes in retail price are translated
into increases in profits).


In the central scenario, all agricultural in-
comes are raised by the same amount as retail
prices. This is tantamount to assuming that
wages, self-employed profits, and other costs
all rise by the same proportion as the increase
in consumer food prices.


It is also equivalent to assuming that all of
the increase in farm incomes accrue to
landowners but that all the farm workers
work for poor landowners.


An alternative assumption is to assume that
only landowner incomes and other incomes
rise in the same proportion as consumer
prices. This essentially assumes that none of
the agricultural workers work for proper
landowners. Under this assumption, the head-
count poverty rate increases by substantially
more— 153 million (see results in table 3A.1
under the label “self-employed agricultural in-
comes affected”).


The lower panel of table 3A.1 reports the
change in the income gap ratio (Foster, Greer,
and Thorbecke 1984)—the average difference
between the per capita income of poor house-
holds and the poverty line stated as a percent of
the poverty line—for the various scenarios. The
differences in the income gap ratio between dif-
ferent scenarios confirm that larger poverty im-
pacts are found when the change in relative
prices is used as the shock and when only self-
employment agricultural household incomes are
assumed to respond to change in relative prices.


Notes
1. The idea that dependence on natural resources


may impede development dates back at least to the de-
cline of Spain, a period when it was benefiting from
substantial gold inflows from the New World in the
17th century (Landes 1999). The idea was forcefully
restated by development theorists in the decades fol-
lowing World War II (such as Prebisch 1950 and Singer
1950) and continues to attract attention.


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2. Sachs and Warner (1995, 2001) are perhaps the
most influential. See also Gylfason, Herbertsson, and
Zoega (1999); Leite and Weidmann (1999); Auty
(1998); and Bravo Ortega and De Gregorio (2005).
Gylfason (2001) finds that resource dependence is as-
sociated with lower education levels, implying that
economies dependent on primary commodities have
limited incentives to invest in human capital. Lederman
and Maloney (2007) find that the Sachs and Warner re-
sults are not robust to data modifications and changes
in estimation techniques.


3. Bevan, Collier, and Gunning (1991) provide
case-study evidence of excessive expenditures, debt ac-
cumulation, and low-quality investments during com-
modity price booms in Sub-Saharan Africa. Cudding-
ton (1989) finds that many developing countries
overspent during and after the 1970s boom.


4. Manzano and Rigobon (2006), for example, find
that the post-boom slowdown in Latin America in the
1980s was almost entirely explained by the debt over-
hang accumulated during the boom period.


5. The average data presented in this section tend to
obscure the great diversity of country experiences, be-
cause both the rate of increase in government expendi-
tures and in exports (relative to GDP) vary enor-
mously. The difference between changes in the ratio of
exports to GDP and changes in the ratio of government
expenditures to GDP may be viewed as a rough sum-
mary indicator of the fiscal response to primary com-
modity booms. In both the 1980s and the 2000s, this
difference varied by as much as 60 percent of GDP
between countries.


6. Historically, the very different circumstances fac-
ing individual countries were reflected in diverse fiscal
responses to commodity booms. For Sub-Saharan
Africa, see Deaton and Miller (1995); for a more geo-
graphically diverse collection of countries, see Collier
and Gunning (1994).


7. This analysis includes developing countries
where primary commodities accounted for more than
70 percent of merchandise exports. Boom periods are
defined as sequential increases in merchandise export
revenues that average more than 10 percent a year.
Thus “booms” do not represent trough-to-peak
changes in prices but simply periods of rapid growth
in export revenues in countries dependent on primary
commodities. We report simple averages of the per-
centage point change in the ratios of exports and gov-
ernment expenditures to GDP.


8. Because of the small number of countries in the
sample for fuel exporters during the 1980s (owing to
the lack of government expenditure data for many
countries), these results must be treated with caution.
The basic results for nonfuel primary commodity ex-
porters remain robust to the exclusion of the two


largest outliers in the sample (São Tomé and Principe,
whose government expenditures declined by 45 per-
centage points, and Paraguay, whose export revenues
rose by 37 percentage points of GDP).


9. For any given price forecast, countries with 70 or
80 years of reserves at current production levels have a
higher permanent income from the oil price rise than
countries with only 10 or 20 years of reserves at cur-
rent production. Thus, assuming countries wish to
smooth the revenue flow over an extended period of
time, countries with large reserves relative to produc-
tion should spend a larger share of the current revenues
than countries with smaller reserves.


10. The countries of concern here are mostly oil ex-
porters. Based on available data, only one country
(Zambia) relies on minerals for more than 70 percent
of export revenues. (Botswana’s dependence on dia-
monds would be another example, except that a large
share of diamond exports are counted as processed
goods in trade statistics.)


11. The calculation of the life span of reserves is
subject to considerable uncertainty, given that geolo-
gists are continually increasing estimates of reserves,
and changes in technology and in prices raise the share
of proven reserves that can be exploited profitably (see
chapter 2).


12. This calculation does not take into account the
share of the increase in export revenues captured by the
government. Most of the high-reserves countries con-
trol their oil resources through a state company, but
even so the government may not see the full proceeds
from the increase in price.


13. A brief discussion of this type of reduction in
the context of the Dutch disease is given in Sachs and
Warner (1995). See also the references they cite and
Torvik (2001).


14. Comparisons with the experience of the 1980s
are difficult to draw because of missing data for oil-
exporting countries. Moreover, after initially appreci-
ating, the currencies of many non-oil primary
commodity exporters depreciated sharply in real terms
in the 1980s in reaction to the debt crisis, so that for-
eign exchange was limited, despite the rise in export
earnings.


15. On corruption, see Lane and Tornell (1999),
Baland and Francois (2000), Torvik (2002), and Wick
and Bulte (2006). On resource wealth and civil wars,
see Collier and Hoeffler (2004). On inefficient distrib-
ution of rents, see Acemoglu and Robinson (2001).


16. Mehlum, Moene, and Torvik (2006) provide
evidence that natural resource abundance has a nega-
tive impact on growth only in countries with poor in-
stitutions. Murshed (2004) finds that oil and mineral
wealth slows growth through impairing institutional
development.


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17. Oil and mineral wealth can be more heavily
taxed than agricultural wealth (see above) and thus
generates more opportunities for corruption.


18. The relationship between government revenues
and expenditures has been found to be weaker in coun-
tries with national revenue funds than in countries
without such funds (Davis and others 2001; Crain and
Devlin 2003). Analysis of 15 oil-dependent economies
over 30 years indicates that national revenue funds are
associated with reduced volatility of broad money and
prices, but the relationship with real exchange volatil-
ity is weak (Shabsigh and Ilahi 2007).


19. In countries with strong political institutions (as
measured by the existence of effective checks and bal-
ances in decision making), government consumption is
unrelated to changes in oil revenues (that is, it is not
procyclical), but in countries with weak institutions,
government consumption is strongly related to oil rev-
enues (Humphreys and Standbu 2004).


20. Such deals are, by no means a new phenome-
non. Firms from high-income countries have entered
into such contracts for several decades.


21. Factors such as delivery specifications, contract
liquidity, particular industry structures in various
countries, and transportation differences make defin-
ing standardized contracts more difficult.


22. “Indian Fuel Prices, Too Hot to Touch,” Econ-
omist, November 29, 2007.


23. Estimating the impact of rising metals prices is
even more difficult, because metals tend to enter into
the consumption basket of households only indirectly
in the form of manufactured goods.


24. The GIDD data set consists of 73 recent house-
hold surveys for low- and middle-income countries
complemented with more aggregate information on in-
come distributions for 25 high-income and 22 devel-
oping countries, together representing 90 percent of
the world’s population.


25. According to household surveys in Africa, the
relationship between food shares and per capita house-
hold incomes is concave, that is, for very low levels of
income, food shares accelerate as the households be-
come richer. The household surveys indicate that in ex-
tremely poor households, consumption items such as
wood or kerosene are incompressible.


26. The cost is estimated as the change in the
poverty deficit (Atkinson 1987), that is, the variation
in financial resources required to eliminate poverty
under a perfect targeting scenario.


27. This share assumes the same poverty line for
rural and urban areas. Ravallion, Chen, and Sangrula
(2007) use a higher poverty line for urban areas and
show that the rural share of poverty is 75 percent.


28. Real price increases are calculated as the total
increase in the ratio of the food and nonfood consumer


price index (CPI) over the period January 2005–-
December 2007. This differs from the common prac-
tice in high-income countries where the numerator is
the level of the overall CPI including food prices. The
definition adopted here provides a better measure of
the relative increase in food prices because food is a
very large share of the overall CPI in most develop-
ing countries. Were the more usual measure to be em-
ployed, the real price increases would be seriously
underestimated.


29. For details on this and other reported simula-
tions, see De Hoyos and Medvedev (2008).


30. Despite a very different methodology and a
much smaller sample set, Ivanic and Martin (2008)
arrive at a similar figure—105 million.


31. In part, this reflects the influence of higher oil
prices on nonfood prices—-the numeraire used for cal-
culating real food price increases. Unfortunately, too
few countries had information on the actual impact of
high fuel prices on the consumer price index to use a
nonfood non-oil index to deflate the increase in food
prices.


32. An analysis of Argentina suggests that a 10 per-
cent increase in prices will increase output by 3.6, 7.1,
and 17.8 percent after 5, 10, and 20 years respectively
(Cavallo 1988), a result that is consistent with Bin-
swanger’s (1989) estimate that long-run effects may
take between 10 and 20 years to play out.


33. The pass-through was defined as the ratio of
absolute changes since December 2003 in the retail
price of fuel and the local currency price of the relevant
fuel import product.


34. Many countries subsidize kerosene, which is
used for lighting and cooking fuel by the poor, and
unlike gasoline and diesel, whose retail prices rose
by more than the international price in 2007, the
median increase in domestic kerosene prices was only
85 percent of the international price increase (Mati
2008).


35. “Indian Fuel Prices, Too Hot to Touch.” Econ-
omist, November 29, 2007.


36. For example, diesel is kept artificially cheap by
preventing state oil companies from raising prices; in
return these companies issue oil bonds that the govern-
ment guarantees.


37. Export bans are not new (the United States im-
posed one on soybeans in the 1970s and the European
Union banned wheat exports in 1995), but their use
has become more common.


38. India’s ban was later replaced by a minimum
export price, which was then replaced by another com-
plete ban on exports. Other factors also contributed to
the increase in international rice prices, including the
thinness of the international rice market and a simulta-
neous decision by consuming countries to increase


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demand to build stockpiles. Increased government-to-
government rice sales, which are not subject to the ban,
have reduced its effectiveness.


39. Reacting to its inability to secure imports of rice
in early 2007, the Philippines recently passed policies
aimed at achieving rice self-sufficiency.


40. Although the supply of a single crop may re-
spond quickly to an increase in prices, supply is nor-
mally achieved through crop switching.


41. Binswanger (1989) estimates the long-term
price elasticity of supply to be approximately 0.2.


42. Self-targeted programs are designed to mini-
mize the incentives the nonpoor may have to partici-
pate, typically achieved through a mix of rationing
benefits (such as limiting food quantities), imposing
physical requirements (such as manual work for food),
and limiting the subsidies to inferior commodities.


43. For example, delivery of emergency food aid
provided under U.S. Title II takes five months, on av-
erage (CARE 2006).


44. This discussions is based on “Strengthening the
World Food Program’s Role in Humanitarian Food
Assistance,” a note prepared by World Bank staff.


45. Fully 93 percent of commitments are tied to
specific operations. A few countries (Canada, the
Netherlands, Russia, and the United States) have begun
making limited three-year pledges.


46. Financing costs (based on a 6 percent interest
rate) would be around $4 billion, while storage costs
would be around $1.4 billion, based on U.S. storage
costs of $0.29 a bushel or $10.70 a metric ton incurred
during 2004–07 for wheat in the Bill Emerson Human-
itarian Trust (pers. comm., Fred Blott, USDA, August
11, 2008). Assuming that 3–5 percent of the stockpile
spoiled each year (consistent with losses in high-income
countries), the annual cost would be an additional
$3–5 billion.


47. Under existing rules, export restrictions are al-
lowed to prevent or relieve critical shortages of food-
stuffs or other essential products. The last notification,
by Hungary, dates to 1997.


48. The Doha rules, for example, proposed that
notification be made within 90 days from the entry into
force of the measure and that it explain the reasons for
their introduction. The rules also would limit the dura-
tion of export restrictions to 12 months unless import-
ing members agree to an 18-month period.


49. This need not eliminate the impact of biofuels
production on food prices, because at some level all
biofuel production inevitably competes with food for
agricultural land, water, and other resources


50. A pro-poor agreement in which rich countries
cut tariff peaks to 10 percent in agriculture and 5 per-
cent in manufacturing, combined with cuts of 15 and


10 percent in developing countries, respectively, could
yield gains in developing countries of $315 billion over
10 years along with gains of $170 billion for rich coun-
tries (World Bank 2004).


51. The difference would stem from transport, mer-
chandising, and other costs.


52. For more details on the LSMS household surveys
see http://www.worldbank.org/LSMS/. For a complete
description of the RIGA project, including publication
of the first results, see Carletto and others (2007).


53. Notice that given the data restrictions, all rural
households are assumed to have positive agricultural
and self-employment agricultural income shares, and
therefore a good part of the distribution story behind
higher food prices is lost.


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141


Appendix
Regional Economic Prospects


East Asia and the Pacific
Recent Developments


Substantial headwinds buffeted the economiesof East Asia and the Pacific during 2008,
causing GDP growth to slow sharply, from the
10.5 percent pace of 2007 to 8.5 percent in
the year. The surge and relapse of crude oil
and non-energy commodity prices affected a
large and diverse set of countries in the region,
from the hydrocarbon-exporting countries of
Indonesia, Malaysia, Papua New Guinea, and
Vietnam, to food and agricultural raw materi-
als exporters, Thailand, the Philippines, and
again Indonesia and Malaysia. The fall to
negative ground in U.S. and Japanese import
demand—under way for more than two years
in the case of the United States—began to take
a toll on the region’s export growth and to
dampen the earlier buoyancy of intra-region
trade.1


What began in August 2007 as financial dif-
ficulties in the United States tied to subprime
mortgage-based securities had turned into a
global financial crisis as of October 2008, rais-
ing risk perceptions for several economies in
East Asia. Equity markets were hard hit,
spreads on international sovereign- and espe-
cially corporate debt increased sharply, ex-
change rates depreciated rapidly, and gross
capital flows to the region fell by half during
the first 9 months of 2008. Slower investment
growth in East Asia is now expected to spill
over into still weaker production, employment,
household spending, and GDP growth.


Growth outturns were fairly diverse across
the region in 2008. China registered a dimin-
ished 9.4 percent advance, down from 11.9
percent during 2007, on a slowdown in in-
vestment and smaller positive contributions to
growth from net exports. The larger members
of the Association of South Eastern Asian
Nations (ASEAN)—Indonesia, Malaysia, and
Thailand—grew 5.2 percent in the year, down
from 6.1 percent during 2007. Growth in
Vietnam dropped by 2 full percentage points
to 6.5, in part as oil and non-energy com-
modities prices slumped, while a group of
smaller economies saw a pick-up in growth to
5.1 percent from 3.7 percent, on the back of
recovery in Fiji and continued strong growth
in Papua New Guinea, powered by oil exports
(table A1).


Even before the financial crisis intensified,
there were signs of slowing growth. In China,
GDP in the third quarter of 2008 eased to a
gain of 9 percent (year-over-year) from 11.2
percent in the final quarter of 2007, marking a
fifth consecutive quarter of slowing growth
(figure A1). Thailand and Malaysia witnessed
a larger falloff, with Thailand dropping to 2.9
percent in the second quarter from 7.1 (saar) in
the fourth quarter of 2007, and Malaysia
falling to 4.2 percent from 6.7 percent, on
softer exports and private consumption. In
contrast, growth in Indonesia accelerated,
boosted by public spending financed from in-
creases in windfall revenues thanks to high
prices for hydrocarbons, fats, and oils.


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umes are expected to decline from 8.3 percent
in 2008 to 2.6 percent; investment to ease to
7 percent (still relatively strong due to devel-
opments in China), and net trade to contribute
no impetus to regional growth for the first
time in some years.


Commodity prices plummet;
export-market growth contracts
East Asia (excluding China), along with the
Latin America region, has benefitted from high
food and fuel prices from 2005 through mid-
2008. During this period, terms of trade
improved by a cumulative 10.3 percent in Viet-
nam, 4 percent in Indonesia, and 4.8 percent in
Malaysia. In contrast, the terms of trade
moved against China by a substantial 11.4 per-
cent, with little effect, however, on the current
account surplus. The steep decline in commod-
ity prices since mid-2008 should benefit China
and other oil importers in the region, helping
to improve East Asia’s aggregate terms of trade


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


142


4


2


6


8


10


12


GDP growth (percentage change, saar)


Figure A1 GDP growth eases in several East
Asian economies


Source: World Bank and national agencies.


a. China 5 year-on-year.


Chinaa Thailand Malaysia Indonesia


Q4, 2007 Q1, 2008 Q2, 2008 Q3, 2008


Regional GDP is projected to slow to 6.7
percent in 2009, the weakest since the dot.com
recession of 2001, and prior to that, the East
Asia crisis of 1997–98. Regional export vol-


Table A1 East Asia and Pacific forecast summary
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


GDP at market prices (2000 US$)b 8.4 9.1 10.1 10.5 8.5 6.7 7.8
GDP per capita (units in US$) 7.1 8.2 9.2 9.7 7.6 5.9 7.0
PPP GDPc — 9.1 10.0 10.5 8.4 6.7 7.8


Private consumption 7.3 7.5 2.6 3.4 5.6 6.7 7.9
Public consumption 9.0 10.9 9.5 11.8 13.0 13.4 10.4
Fixed investment 10.3 12.6 12.6 12.9 10.5 6.9 8.4
Exports, GNFSd 11.7 18.5 18.6 15.4 8.3 2.6 9.7
Imports, GNFSd 11.2 11.0 11.6 10.9 10.8 3.4 11.7


Net exports, contribution to growth 0.3 4.1 4.6 3.8 0.2 0.0 0.5
Current account balance/GDP (%) 0.1 5.8 8.6 10.5 9.0 8.7 7.7
GDP deflator (median, LCU) 6.7 6.5 5.8 4.0 7.5 6.6 4.9
Fiscal balance/GDP (%) 0.7 1.1 0.6 0.2 0.9 1.4 1.5


Memo items: GDP
East Asia excluding China 4.8 5.4 5.7 6.2 5.3 4.0 5.3
China 10.4 10.4 11.6 11.9 9.4 7.5 8.5
Indonesia 4.2 5.7 5.5 6.3 6.0 4.4 6.0
Thailand 4.5 4.5 5.1 4.8 4.6 3.6 5.0


Source: World Bank.


Notes: — not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.


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by 3.5 percent in 2009, with China’s picking
up 5.5 percent.


Sharply higher food and fuel prices and
overheating in several economies accelerated
inflation in the region, from a median 5.7 per-
cent increase during 2007 to 11.9 percent by
July 2008 (year-over-year). September figures
(8.2 percent) suggest that favorable inflation
responses are coming in step with the falloff in
commodity prices and improved terms of
trade since mid-2008. Headline consumer
price inflation has eased substantially in
China, for example, from a peak of 8.5 per-
cent in April to 4 percent by October 2008;
but Indonesia and the Philippines continue to
witness building price pressures, stoked in the
former by still strong consumer demand.


The spread of technical recession from the
United States to Japan and the Euro Area dur-
ing the second half of 2008 has begun to make
a dent in export performance for the region,
with China’s outbound shipments (in dollar
terms) easing below 20 percent growth (year-
over-year) in October from the 30 percent pace
of early 2007 (figure A2). Growth of exports
from Hong Kong, China, reflecting in large
part transshipments from the mainland, have
halved to 5 percent. And the falloff in export
performance is particularly acute in Singapore
and Taiwan, China, where exports are now de-
clining, affected in particular by a sharp drop


in demand for high-tech products. Export
growth is also slowing in Malaysia and Thai-
land, which are experiencing sluggish manu-
factures shipments as well as the effects of
commodity price declines on the dollar value
of oil and agricultural exports. As recession
deepens across the countries of the Organisa-
tion for Economic Co-operation and Devel-
opment (OECD) during the course of 2009,
East Asian export volumes are likely to fall
sharply—to negative territory for many
countries—with China seeing a modest ad-
vance of some 4.2 percent, down from the
10.1 percent gain of 2008.


Ripples of the financial crisis are
reaching East Asia
The region was spared significant fallout dur-
ing the early stages of the financial crisis in
2007, because, outside of China, holdings of
securities backed by subprime U.S. mortgages
were quite small. But with the intensification
of the crisis, effects within the region are
spreading. A sharp increase in risk aversion at
the global level, plus a process of deleveraging
by firms and banks that have suffered large
losses in both high-income and developing
countries, resulted in a heavy sell-off of global,
including East Asian, equities. The benchmark
MSCI Asia-Pacific Index plummeted by a cu-
mulative 50 percent from January through
October 2008, while China’s ‘B’ share market
in Shanghai is off a full 75 percent. The pro-
ceeds of these sales have been converted out of
local currencies, resulting in a sharp deprecia-
tion for many regional currencies against both
the dollar and the yen (figure A3). The Philip-
pine peso, for example, has given up some
18 percent against the dollar over 2008 to
date and 30 percent versus the yen. These de-
velopments have sharply increased the cost of
capital for regional firms and escalated the
local currency cost of international debt ser-
vicing, both factors likely to dampen private
investment outlays in the coming months.


In international debt markets, sovereign
spreads for East Asia jumped by some 610
basis points since the spring of 2008, reaching


R E G I O N A L E C O N O M I C P R O S P E C T S


143


Export values (US$, percentage change, 3-month moving
average year-on-year)


Source: Haver Analytics.


0


5


10


15


20


25


30


35


Figure A2 Export growth in East Asia turns
down on falling OECD demand


Jan.
2007


May
2007


May
2008


Sep.
2008


Sep.
2007


Jan.
2008


Hong Kong,
ChinaMalaysia


China


Thailand


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 143




825 basis points as of late October, well above
the high of 450 basis points at the peak of the
East Asian crisis in 1998. But as conditions in
international markets began to unfreeze, and
more and more countries announced fiscal
stimulus packages to underpin their
economies, spreads narrowed once more to
560 basis points during the first week of No-
vember. As of November 7, 2008, spreads
were up by a modest 50 basis points for
China, 300 points for Malaysia, 250 points in
the Philippines, but a more-substantial 570
points in Indonesia. Spreads for corporate bor-
rowers have increased by far more, and those
for noninvestment grade corporations—the
majority of private sector issuance in the
region—have skyrocketed (see chapter 1). For
several countries in East Asia, the hike in
spreads has become problematic, effectively
shutting down bond issuance as a cost-effective
means of finance.


Given the process of deleveraging now
under way among high-income financial insti-
tutions, the retreat from regional equity mar-
kets should be viewed together with a sub-
stantial falloff in capital flows to the region
over the course of 2008. Gross capital flows to
East Asia and the Pacific, not including for-
eign direct investment (FDI), dropped from
$100 billion to $60 billion from January
through August 2008, down 40 percent from


the same period in 2007. The bulk of the
falloff may be traced to sharp contractions in
the issuance of initial public equity offerings
(IPOs), largely from China, which were off
65 percent, from $56 billion to $19 billion in
the year, in line with the deterioration of con-
ditions in international markets. But banking
flows also dropped 12.5 percent to $35 bil-
lion, and bond issuance eased by 7.5 percent
to $7 billion (figure A4).


In contrast, FDI flows to the region surged
by some two-thirds to a fresh record $175 bil-
lion in 2007, with FDI to China picking up
75 percent to near $140 billion, and with ad-
vances of 40 percent in Malaysia to $8.5 bil-
lion. Estimates for 2008 suggest a modest in-
crease in overall FDI flows, showing some
resilience in the face of the crisis. Measured by
the extent to which sovereign spreads have
increased, equity markets declined and ex-
change rates depreciated since September 15,
together with the sharp falloff in capital flows
in the last year, East Asian economies hit hard-
est by the crisis to date include Fiji, Indonesia,
the Philippines, Thailand, and Vanuatu.


Difficult policy decisions
The general stance of policy in the region is
moving from a tightening posture—initiated


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


144


0


10


20


30


Bond issuance Equity issuance Bank borrowing


40


50


60
US$ billions


Figure A4 Gross capital inflows to East Asia
contracted 40 percent in 2008


Source: World Bank.


Jan.–Aug. 2007 Jan.–Aug. 2008


Local currency unit/US$ index (Jan. 01, 2008 5 100)


Source: Thomson/Datastream.


Note: Increase implies weaker local currency.


80


90


100


110


120


Figure A3 Exchange rates decline sharply
as carry trades unwind


Jan. 1
2008


Mar. 1
2008


Jul. 1
2008


Sep. 1
2008


Japanese yen
Thai baht


Philippine peso


Nov. 1
2008


May 1
2008


Malaysian ringgit


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 144




to deal with rising inflation—to a more re-
laxed one; large efforts have been made to free
up liquidity to support banking systems from
the contagion of financial stress from the high-
income countries.Moreover, measures to under-
pin growth at a time of downside risks have
also come to the fore. In China, bank rates
were raised to 7.47 percent in January to help
dampen inflation, then reduced to 6.66 per-
cent on October 28, as the risk of financial
disruptions and loss of liquidity in the banking
system increased in importance. Further
actions undertaken by China to prop up eco-
nomic activity have included the announce-
ment of a massive $586 billion stimulus pro-
gram to focus on infrastructure, housing and
income support, and increasing export tax re-
bates. In contrast, the Philippines first reduced
policy rates to 7 percent to stimulate growth,
then raised rates in four steps of 25 basis
points to 8 percent to help stem a ramp-up in
inflation.


Medium-term outlook
As always, developments in China will play a
key role in shaping the region’s growth profile
through 2010. China’s buffers against the
financial crisis are impressive: $1.6 trillion in
international reserves; a fiscal surplus of 1 per-
cent of GDP; and a current account surplus of
almost $400 billion or 10.4 percent of GDP in
2008. Policy efforts to underpin exports and
household spending—to maintain GDP
growth at rates near 9 percent in 2009 and
forward—should carry positive effects. But an
extreme falloff in export volume growth to
4.2 percent, on the back of recession in high-
income countries, and slippage in investment
to 8 percent in the year is projected to slow
GDP growth to 7.5 percent in 2009, from the
9.4 percent pace of 2008 (table A2). A step-
down in China’s import growth to 6.5 percent
will dampen the momentum of intraregional
trade, causing exports for East Asia in aggre-
gate to slide to 2.6 percent from the 8.3 per-
cent advance of 2008.


Growth among the larger ASEAN coun-
tries is expected to ease to 3.8 percent from


R E G I O N A L E C O N O M I C P R O S P E C T S


145


5.2 percent in 2008, as export volumes decline
by a percentage point, and the squeeze on
commercial credit hits fixed investment, drop-
ping it from growth of 8.8 percent in 2008
to 3.6 percent. Lower commodity prices and
weaker import demand are projected to im-
prove the group’s current account surplus to
$58 billion in 2009 from $55 billion in 2008.
Among smaller countries, including Fiji, the
Lao People’s Democratic Republic, and Papua
New Guinea, output growth is projected to
slow to 3.4 percent from 5.1 percent in 2008,
on the back of a sharp 5 percent decline in
exports.


Recovery in regional growth during 2010
is anticipated to be fairly swift. The downturn
in investment should be relatively short-lived,
as credit and capital flows begin to thaw, and
expectations for stronger domestic and exter-
nal demand underpins a revival in regional
capital spending to 8.4 percent (see table A1).
Export growth is expected to rebound to
9.7 percent in the region (to 10.7 percent for
China), as OECD and regional demand re-
turn to positive territory. Moreover, a moder-
ation in East Asian inflation, as the surge in
commodity prices passes out of calculation,
will help to restore purchasing power to
households and support a renewal in spend-
ing. Inflation as measured by the median GDP
deflator for the region is expected to decline
from 7.5 percent in 2008 to 4.9 percent by
2010.


Under these conditions, aggregate GDP for
the region is anticipated to grow 7.8 percent in
2010, underpinned by 8.5 percent growth in
China. For East Asia excluding China, GDP is
expected to grow 5.3 percent in 2010, up from
4 percent. Current account positions are pro-
jected to vary across countries, easing to
8.8 percent of GDP in China, to 4.4 percent in
the larger ASEAN members to minus 5.7 per-
cent among the smaller countries of the region.


Risks
The favorable external environment that came
to benefit the region in the past five years
has shifted dramatically to the downside. Given


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the sensitivity of regional GDP growth to
trade, the possibility of a more extended pe-
riod of recession, or only sluggish activity
among the OECD countries, represents one of
the primary risks to growth in East Asia. Such
a scenario would be predicated on a more pro-
longed period than projected for the financial
sector in the high-income countries to redress
their balance sheets and for lending to resume.
A second area of risk relates to continued


adverse developments in financial markets.
Should sovereign and especially corporate
spreads not retreat from current levels, the
region could face difficulty financing new in-
vestment and sustaining current projects. As a
result, investment activity would continue to
be depressed and the recession deeper; in that
case, the risk that a country in the region could
suffer significant exchange rate pressure or a
balance of payments crisis cannot be ruled out.


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146


Table A2 East Asia and Pacific country forecasts
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Cambodia
GDP at market prices (2000 US$)b — 13.5 10.8 10.2 6.7 4.9 6.0
Current account balance/GDP (%) — 5.7 4.7 6.0 15.3 11.2 8.0
China
GDP at market prices (2000 US$)b 10.4 10.4 11.6 11.9 9.4 7.5 8.5
Current account bal/GDP (%) 1.5 7.2 9.9 12.2 10.7 10.2 8.8
Fiji
GDP at market prices (2000 US$)b 2.1 0.7 3.6 6.6 1.7 1.0 3.0
Current account bal/GDP (%) 3.7 13.3 24.1 15.6 22.6 23.6 22.5
Indonesia
GDP at market prices (2000 US$)b 4.2 5.7 5.5 6.3 6.0 4.4 6.0
Current account bal/GDP (%) 0.4 0.1 2.9 2.6 0.8 0.1 0.4
Lao PDR
GDP at market prices (2000 US$)b 6.3 7.1 8.1 7.9 6.8 4.5 7.5
Current account bal/GDP (%) 12.5 19.3 9.7 16.4 16.0 17.2 16.8
Malaysia
GDP at market prices (2000 US$)b 7.1 5.0 5.8 6.4 5.5 3.7 4.6
Current account bal/GDP (%) 0.4 14.6 17.2 16.7 22.0 17.5 16.4
Papua New Guinea
GDP at market prices (2000 US$)b 4.8 3.3 2.6 6.2 5.5 4.5 5.5
Current account bal/GDP (%) 2.4 8.5 17.5 21.6 24.1 9.8 7.7
Philippines
GDP at market prices (2000 US$)b 3.0 4.9 5.4 7.2 4.0 3.0 4.1
Current account bal/GDP (%) 3.1 2.0 4.0 4.1 0.4 3.6 3.5
Thailand
GDP at market prices (2000 US$)b 4.5 4.5 5.1 4.8 4.6 3.6 5.0
Current account bal/GDP (%) 1.2 4.3 1.1 6.3 2.2 5.2 5.0
Vanuatu
GDP at market prices (2000 US$)b 4.1 6.5 7.2 5.0 4.5 3.0 5.2
Current account bal/GDP (%) 8.2 14.3 8.1 9.8 14.4 7.1 5.3
Vietnam
GDP at market prices (2000 US$)b 7.6 8.4 8.2 8.5 6.5 6.5 7.5
Current account bal/GDP (%) 5.1 0.2 1.2 0.2 8.5 3.4 2.6


Source: World Bank.


Note: — not available. Growth and current account figures presented here are World Bank projections and may differ from
targets contained in other World Bank documents. American Samoa; Micronesia; Federated States of Kiribati; Marshall Islands;
Myanmar; Mongolia; N. Mariana Islands; Palau; Korea, Dem. Rep. Of; Solomon Islands; Timor-Leste; and Tonga are not
forecast because of data limitations.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.


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147


Europe and Central Asia
Recent developments


The rapid GDP growth in Europe and Cen-tral Asia of the past 20 years, which largely
reflected the enormous reform efforts under-
taken by countries in the region (including
those associated with accession to the Euro-
pean Union), eased in 2008 and is expected to
give way to a sharp slowdown in 2009. The
global financial crisis is expected to cut heavily
into capital inflows and investment in the re-
gion. Moreover, a number of countries are par-
ticularly vulnerable because of high current ac-
count deficits that in many instances have been
reliant on short-term capital inflows for their
financing.


Regional GDP growth fell almost 2 per-
centage points to 5.3 percent in 2008, moder-
ating from 7.1 percent in 2007, tied largely to
a sharp falloff in growth during the second
half of the year. The financial crisis and asso-
ciated growth slowdown outside of the region
is eroding macroeconomic buffers, including
international reserves, and is placing banking
sectors in several countries (notably, Hungary,
the Russian Federation, and Ukraine) under
severe stress. Even economies with little direct
exposure to troubled U.S. financial assets are
likely to be hit hard by direct and indirect
spillover effects from the financial crisis.


The region exhibits diverse performance
GDP growth slowed across the region during
2008. The group of Central and Eastern
European countries (CEE), (including Bulgaria,
Poland, Romania, and the middle-income
Baltic states but excluding Turkey), saw
growth ease from 6.6 percent to 5.5 percent in
the year. Slowing demand in the Euro Area
dampened export performance, while over-
heating in several countries required a mix of
fiscal and monetary tightening to stem infla-
tionary pressures. Growth in the Baltic states
has come close to a standstill, with Estonia
and Latvia falling into recession and Lithuania
faring little better. The global financial crisis


disrupted Hungary’s slow recovery of domestic
demand and led the country to accept an emer-
gency €15 billion Standby Arrangement with
the International Monetary Fund. Growth in
Turkey eased from 4.6 percent to 3 percent in
2008, as financial and exchange rate pressures
picked up in the second half of the year
(table A3).


GDP among the Commonwealth of Inde-
pendent States (CIS) slid from the robust 8.6
percent registered in 2007—grounded in a surge
in activity across hydrocarbon exporters—to
6.4 percent in 2008, reflecting reduced in-
comes as oil prices declined, and the effects of
the banking crisis in Russia (growth in Russia
eased from 8.1 percent to 6.0 percent). Exclud-
ing Russia and Kazakhstan (where growth
slowed sharply from 8.5 to 4 percent), GDP
declined less dramatically in the remaining
CIS states, falling from 10.4 to 8.5 percent in
the year.


The commodity price surge of 2006
through mid-2008 contributed directly to
high inflation across almost all countries of
the region. Most countries tightened mone-
tary policy to stem second-round effects
from the initial price hikes, while substantial
currency appreciation (against the dollar)
helped to mitigate inflation pressures to a
degree. Romania posted the highest interest
rates in the European Union, while Turkey
scored the highest across all developing and
advanced economies in Europe. The global
food crisis had not caused the serious social
tensions witnessed in other regions, because
almost all countries in Europe and Central
Asia have more or less adequate social safety
nets in place. The World Bank is currently
helping to finance seed purchases and nutri-
tional programs for the Kyrgyz Republic,
Moldova, and Tajikistan. And with three
major grain exporters (Kazakhstan, Russia,
and Ukraine) relaxing previously imposed
export bans amid the region’s best harvest in
a decade, food prices are expected to moder-
ate, helping to ease the earlier jump in head-
line inflation.


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Intensification of global crisis begins
to exact toll
The sudden deepening of the financial crisis in
the United States during September and
October, and the accompanying start of
deleveraging across financial institutions world-
wide, triggered a wave of sell-offs in emerging
market assets across the globe. Widening sov-
ereign spreads, sharp currency depreciation,
and a halving of domestic equity prices have
been witnessed across emerging markets. The
magnitude and extent of these developments
in Europe and Central Asia are of concern
(figure A5).


Recent spikes in sovereign spreads for a
number of countries in the region have
dwarfed those witnessed in earlier periods of
flare-up since the start of financial turmoil in
2007. Except for Kazakhstan and Russia,
where massive central bank intervention has
taken place, other regional currencies have


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


148


260


Ru
ss


ian


Fe
de


ra
tio


n
Po


lan
d


250


240


230


220


210


20 0


60


120


180


240


300


360


Percent Basis points (inverted scale)


Figure A5 Deepening global financial crisis
affects Europe and Central Asia


Source: World Bank.


Uk
ra


ine
Tu


rke
y


Ka
za


kh
sta


n


Bu
lga


ria


Lit
hu


an
ia


La
tvia


Ro
m


an
ia


% change in stock market in
Sept. and Oct., 2008, local currency
% change in exchange rate versus
US$ in Sept. and Oct., 2008, (-) depreciation
% change in capital flows, Jan.–Aug. 2008
vs. Jan.–Aug. 2007
increase in JPMorgan sovereign
bond spread in Sept. and Oct., 2008 (right axis)


Table A3 Europe and Central Asia forecast summary
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


GDP at market prices (2000 US$)b 1.1 6.4 7.5 7.1 5.3 2.7 5.0
GDP per capita (units in US$) 1.3 6.3 7.4 7.0 5.3 2.7 5.0
PPP GDPc 1.2 6.3 7.7 7.4 5.7 2.6 5.1


Private consumption 0.6 7.0 8.2 8.5 8.4 5.3 6.2
Public consumption 0.0 3.6 5.2 5.5 4.9 3.3 4.0
Fixed investment 7.0 11.0 14.9 15.4 10.0 0.7 7.2
Exports, GNFSd 0.3 5.6 8.0 7.8 9.4 5.4 10.1
Imports, GNFSd 2.8 10.6 15.5 18.8 14.7 6.3 11.0


Net exports, contribution to growth 1.1 2.0 3.4 5.5 3.6 1.2 1.8
Current account balance/GDP (%) 0.7 2.6 1.5 0.6 0.8 4.1 4.5
GDP deflator (median, LCU) — 6.8 5.8 7.5 10.9 8.9 6.8
Fiscal balance/GDP (%) 5.0 2.6 2.9 2.4 1.9 1.1 1.1


Memo items: GDP
Transition countries 2.3 6.1 6.7 5.7 4.4 2.6 4.8
Central and Eastern Europe 1.4 4.3 6.6 6.6 5.5 3.2 4.7
Commonwealth of Independent States 4.3 6.8 8.4 8.6 6.4 2.9 5.2


Russian Federation 3.9 6.4 7.4 8.1 6.0 3.0 5.0
Turkey 3.7 8.4 6.9 4.6 3.0 1.7 4.9
Poland 3.8 3.6 6.2 6.6 5.4 4.0 4.7


Source: World Bank.
Note: — not available.
a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.


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depreciated quite sharply, reversing almost all
the gains of the last two years. Moreover,
gross capital inflows to the region (equity
IPOs, bond issuance, and bank lending) de-
clined to $123 billion from January through
August 2008, from $187 billion in the like
period of 2007, a drop of some 34 percent.
These developments underscore the swift
spread of effects from the deterioration in
international financial markets and point to
more difficult financing conditions ahead,
with funding for fixed investment in the
region—a primary driver for growth—under
particular uncertainty.


Activity in Russia already showed signs of
slowing before fall 2008, when the financial
crisis entered a more intense phase. Industrial
production over the first eight months of
2008 declined by 2.3 points to 4.9 percent,
compared with the same period in 2007, and
growth in fixed capital investment almost
halved. Gross capital inflows did halve to
$74 billion in the January–August period,
compared with $150 billion for all of 2007.
Moreover, the credit crunch appeared to be
draining domestic liquidity from the economy
either directly (given that Russia is Europe’s
third largest bank borrower) or indirectly
through the interbank and corporate sectors.


The Russian stock market crisis forced
multiple suspensions of trading, and the gov-
ernment has taken all possible measures to
mitigate growing financial and economic dif-
ficulties. These include but are not limited to
cutting banks’ reserve requirements and oil
companies’ export duties several times; inject-
ing liquidity (more than $200 billion in fed-
eral budget fund deposits, subordinated
loans, and the like), increasing coverage of re-
tail bank deposit insurance by 75 percent; in-
tervening in the foreign exchange market, ev-
idenced in a decline of more than $100 billion
in reserves between August and October;
committing an additional $50 billion of re-
serves to solve refinancing difficulties in
banks and companies (estimated to hold $80
billion-90 billion in debt service due in 2009);
and using another $20 billion from its


national wealth fund to boost domestic stock
markets directly.


As in Russia, Ukraine’s banks have relied
on foreign bank- and other loans to fund do-
mestic lending. And about $1 billion to ser-
vice foreign debts is due during the final
months of 2008. Facing rating agencies’
downgrades, and massive withdrawals from
the banking system during the first three
weeks of October (amounting to $3 billion or
about 4 percent of total deposits), the central
bank banned preterm withdrawals, injected
further liquidity, and imposed exchange
controls. On the real side of the economy,
Ukraine is starting to see decline in the metal-
lurgy industry and in exports of these prod-
ucts (which provide 40 percent of export
revenues), as global production and metal
prices cool. These negative developments have
prompted Ukraine to seek an IMF loan of
$16.4 billion. Turkey’s second-quarter GDP
deteriorated sharply to 1.9 percent year-over-
year from 6.7 percent a quarter earlier. And
given Turkey’s traditional reliance on short-
term debt and external financing, the debt
rollover situation is no better for Turkey than
for Russia and Ukraine; Turkey holds more
than $280 billion of foreign debt, of which
one-sixth is short term.


Based on credit-default swap prices,
Kazakhstan stands second in the global
league of economies as riskiest for severe
banking disruptions—after Iceland. The gov-
ernment has $15 billion dollars ($10 billion
of which from its oil fund) available to stabi-
lize the banking situation. Many other coun-
tries in Central and Eastern Europe carry
similar vulnerabilities in terms of banking
exposures, external deficits, and reliance on
foreign capital flows, and governments have
reacted to address them while trying to reas-
sure investors and depositors. In Bulgaria,
Poland, and Romania, guarantees on individ-
ual bank deposits have been raised in line
with EU levels; Hungary, the Slovak Repub-
lic, and Slovenia have all enacted unlimited
government guarantees on private bank
deposits.


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149


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Medium-term outlook
The outlook for 2009 appears fairly sobering
at this juncture. Slower growth in the region’s
main trading partners, the EU, (and for the
CIS countries) Russia and China, will limit ex-
port opportunities. For example, the auto fab-
rication and export–industry, which had been
performing well in Turkey and some CEE
countries, will be put to a difficult test. De-
clines in equity markets will tend to raise the
cost of capital for domestic firms and could
delay privatization plans. Moreover, in coun-
tries where foreign banks have a dominant
presence, local subsidiaries may feel the pinch
from headquarters in the high-income coun-
tries, further escalating difficulties in domestic
credit markets and contributing to a slow-
down in economic activity.


Table A3 shows that still-robust gains in in-
vestment continued during 2008—an advance
of 10 percent for the region; Russia gained
16 percent, other CIS countries grew capital
spending 14 percent, with the CEE countries up
10.5 percent. But a flattening in domestic and
foreign demand and much more difficult fi-
nancing conditions are expected to cause real
investment to stagnate in 2009, with related de-
clines in orders, production, and employment.


Signs of the slowdown have already begun
to emerge. In Russia, for example, Sberbank
and Gazprom, the leading state bank and state
company, both plan to cut back on workforce
and investment; the third-largest steelmaker,
Magnitogorsk, is reducing workforce levels by
3,000; truck manufacturer KamAZ plans to
curtail production by 20 percent; and car-
maker GAZ also foresees substantially less do-
mestic and export demand. Russia’s GDP is
anticipated to drop to 3 percent in 2009, from
the 6 percent pace of 2008 (table A4). How-
ever, financial support policies enacted to date,
plus the substantial amount of international
reserves held by the country, should help Rus-
sia weather the depth of global crisis in 2009
and rebound to growth of 5 percent by 2010.2


Deterioration in the external environment—
and the fragile set of current conditions in a
large number of European and Central Asian


countries suggests the potential for a sharp
slowdown in regional GDP growth to 2.7 per-
cent in 2009 from the 5.3 percent advance of
2008. But under assumptions that global credit
markets begin to function once more by early
to mid-2009, and that growth in OECD centers
starts to pull-up at the same time, regional
growth is anticipated to firm to 5 percent by
2010. CIS countries outside of Russia are ex-
pected to realize a rebound in exports and a
pick-up in consumer spending, as growth re-
covers from 2.8 percent in 2009 to 5.7 percent.
And gradual revival in Euro Area demand helps
CEE exports pick-up from 2.5 percent gains in
2009 to 7.6 percent by 2010, supporting a
move in GDP from 3.2 percent to 4.7 percent.
Lower oil prices will help alleviate a portion of
the current account burden in oil importing
countries, especially Turkey, and a large num-
ber of Central European countries.


Risks
In the short term, the financial system will be
tested. In Russia, for example, the largest
banks have enjoyed generous government sup-
port, but private and smaller banks may face
liquidity shortages and possibly large-scale
withdrawals should the situation worsen.
Russia currently is home to 1,100 banks, of
which the 20 largest account for 70 percent of
household deposits and corporate loans. Out-
side Russia, the financial sector in a number of
countries is dominated by banks fromWestern
Europe, carrying the potential risk of conta-
gion from difficulties being experienced by
their home-country institutions.


In the medium-term, divergent perfor-
mance in 2008 should not belie either the
common factors underlying growth in Europe
and Central Asia or the associated common
risks. Recent growth has been supported by
domestic demand and enabled by easy access
to external financing in bank lending, bond
issuance, and FDI, while net exports continue
to offer a substantial drag on growth. Rapid
credit expansion and accommodative wage
policies have been widespread, while domestic
saving is insufficient, while pro-cyclical fiscal


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151


Table A4 Europe and Central Asia country forecasts
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Albania
GDP at market prices (2000 US$)b 1.4 5.5 5.0 6.0 6.0 5.0 5.5
Current account balance/GDP (%) 5.6 6.8 7.3 10.0 11.2 5.3 4.7
Armenia
GDP at market prices (2000 US$)b 3.8 13.9 13.3 13.7 9.0 6.4 6.7
Current account balance/GDP (%) 12.0 1.1 1.8 6.2 7.6 4.3 4.3
Azerbaijan
GDP at market prices (2000 US$)b 5.2 26.2 34.5 25.0 17.7 10.4 7.8
Current account balance/GDP (%) 15.8 1.3 17.7 30.7 41.6 30.7 28.4
Belarus
GDP at market prices (2000 US$)b 1.2 9.4 9.9 8.2 9.2 5.0 5.8
Current account balance/GDP (%) — 1.4 4.1 6.4 5.5 6.2 6.4
Bulgaria
GDP at market prices (2000 US$)b 1.7 6.2 6.3 6.2 6.0 2.4 6.0
Current account balance/GDP (%) 2.3 12.3 15.7 21.6 24.3 15.6 13.6
Croatia
GDP at market prices (2000 US$)b 1.5 4.3 4.8 5.6 3.5 2.3 5.1
Current account balance/GDP (%) 1.0 6.6 7.6 8.6 9.9 4.2 3.2
Georgia
GDP at market prices (2000 US$)b 9.3 9.6 9.4 12.4 3.5 4.0 6.0
Current account balance/GDP (%) — 11.9 16.2 21.5 21.9 20.7 22.0
Kazakhstan
GDP at market prices (2000 US$)b 3.6 9.7 10.7 8.5 4.0 1.9 6.2
Current account balance/GDP (%) 2.1 1.9 2.2 6.9 0.1 7.0 7.2
Kyrgyz Republic
GDP at market prices (2000 US$)b 4.0 0.2 2.7 8.2 6.6 4.2 5.6
Current account balance/GDP (%) 10.6 2.4 10.6 7.2 10.6 5.6 2.4
Lithuania
GDP at market prices (2000 US$)b 3.3 7.9 7.7 8.8 4.0 0.3 2.0
Current account balance/GDP (%) 5.8 7.1 10.7 13.6 13.9 12.2 10.9
Latvia
GDP at market prices (2000 US$)b 2.8 10.6 12.2 10.3 0.8 3.5 0.7
Current account balance/GDP (%) 1.6 12.4 22.7 22.8 15.2 10.5 8.2
Moldova
GDP at market prices (2000 US$)b 9.8 7.5 4.0 3.0 6.5 4.0 4.0
Current account balance/GDP (%) — 8.3 11.5 15.8 17.7 4.4 5.8
Macedonia, FYR
GDP at market prices (2000 US$)b 0.9 4.1 3.0 5.1 5.5 4.8 5.6
Current account balance/GDP (%) — 1.4 0.4 3.4 9.8 4.4 3.5
Poland
GDP at market prices (2000 US$)b 3.8 3.6 6.2 6.6 5.4 4.0 4.7
Current account balance/GDP (%) 3.5 1.2 2.7 3.8 5.4 6.2 5.6
Romania
GDP at market prices (2000 US$)b 1.7 4.1 7.9 6.0 8.6 3.2 5.8
Current account balance/GDP (%) 4.8 8.7 10.5 13.7 15.5 8.6 7.4
Russian Federation
GDP at market prices (2000 US$)b 3.9 6.4 7.4 8.1 6.0 3.0 5.0
Current account balance/GDP (%) — 11.1 9.6 6.1 6.0 3.4 5.0
Turkey
GDP at market prices (2000 US$)b 3.7 8.4 6.9 4.6 3.0 1.7 4.9
Current account balance/GDP (%) 1.1 4.7 6.0 5.7 8.4 3.9 3.1


(continued)


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policy is underway in a number of countries,
such as Belarus, Romania, Russia and Ukraine.


The potential for second-round inflation
effects remains a problem in the region. The
reversal in commodity prices since mid-2008
has been reflected in a flattening or decline in
inflation trends in at least 12 countries amid
some indications of a falloff in core inflation
(figure A6).3 However, because domestic fac-
tors such as government spending and strong
wage growth also drive prices, inflation ex-
pectations remain high, and the potential for
a wage spiral is notable. Moreover, recent
sharp currency declines and loosening of
monetary policy, together with other aggres-
sive measures to resist the economic down-
turn, may drive up inflation and endanger
fiscal positions, causing problems in the
longer run.


For many small and poorer countries that
rely on remittances as an important source of
financing, a downturn in neighboring coun-
tries in Western Europe and the CIS implies
less in remittance flows from migrants
abroad, raising the need for financing from
other sources and potentially exacerbating
poverty. This said, historical evidence shows
remittances tend to be relatively resilient dur-
ing a downturn, and should help cushion the
slowdown.


Beyond the set of immediate challenges, a
longer-term concern is the set of substantial
bottlenecks to growth that have been reached
in infrastructure and labor markets in devel-
oping countries in general, and in a large num-
ber of European and Central Asian countries
in particular. Faster GDP growth in the future
is likely only if countries can take the neces-
sary steps to improve the supply of essential


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152


Table A4 (continued )
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Ukraine
GDP at market prices (2000 US$)b 8.0 2.7 7.9 7.7 6.0 3.0 4.4
Current account balance/GDP (%) — 2.9 1.5 4.2 6.5 2.2 1.3
Uzbekistan
GDP at market prices (2000 US$)b 0.2 7.0 7.3 9.5 8.0 7.0 6.5
Current account balance/GDP (%) 0.9 13.1 14.3 18.8 20.6 14.7 13.1


Source: World Bank.


Note: — not available.
Growth and Current Account figures presented here are World Bank projections and may differ from targets contained in other
Bank documents. Bosnia and Herzegovina, Montenegro, Serbia, Tajikistan, Turkmenistan, and Yugoslavia are not forecast
because of data limitations.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.


May
2006


Sep.
2006


Jan.
2007


May
2007


Sep.
2007


Jan.
2008


May
2008


Sep.
2008


0


4


8


12


16
CPI inflation (percentage change, year-on-year)


Figure A6 Core inflation is rising in several
countries of Europe and Central Asia


Source: World Bank.


Jan.
2006


Croatia Kazakhstan
Lithuania
Belarus


Poland Turkey
Latvia


Russian
Federation


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utilities and upgrade transport, communica-
tions, and other key infrastructure. Such im-
provement, together with a diminishing of in-
stitutional and structural inefficiencies could
help alleviate current constraints on growth in
the longer run.


Latin America and
the Caribbean
Recent developments


The global financial crisis has come to affectLatin America and the Caribbean after a
period of exceptional GDP growth. The region
grew at an annual rate of 5.3 percent over
2004–08, the strongest pace in the last three
decades. GDP gains were led by República
Bolivariana de Venezuela, which advanced at a
10.5 percent clip; Argentina at 8.4 percent;
and Peru at 7.4 percent. Growth was also
broad-based during this period, with the
Caribbean countries gaining 5.9 percent annu-
ally and Central American countries growing
3.7 percent. The oil-exporting economies of
the region saw GDP pick up at a 5.7 percent
rate, and oil importers also grew briskly at
5.3 percent. Only two countries grew slower
than 3 percent per year over the period—
Jamaica at 1.6 percent and Haiti at 1.4 per-
cent. The last period of strong region-wide
growth occurred in 1991–94 when GDP ad-
vanced 4.2 percent annually (figure A7).


A favorable external environment of high
commodity prices and strong import demand
in high-income countries supported the re-
gion’s recent growth performance. The role of
the external environment is emphasized in
Izquierdo and others 2008; Calvo and Talvi
2007; and Österholm and Zettelmeyer 2007.
However, the region has also made genuine
progress in maintaining independent mone-
tary policy and increasing the credibility of
central banks, introducing exchange rate flex-
ibility, deepening local currency debt markets,
and providing supportive fiscal policy (World
Bank 2008c). Because of the improvements in
policy and in the external environment, the re-
gion is in better macroeconomic and fiscal


health than it was five years ago, or at the end
of the previous growth spurt. But this healthy
starting position will be seriously tested by the
global crisis, which has already led to a with-
drawal of funds from regional equity markets
by international investors, sharply depreciat-
ing currencies and soaring sovereign- and cor-
porate bond spreads. The U.S. and European
recessions and the turnaround to decline in
global commodity prices further darken the
external environment for the region.


During 2008, Latin American GDP ad-
vanced 4.4 percent, still robust, albeit down
from the strong 5.7 percent pace of the previ-
ous year. Buffers in the form of large levels of
reserves and current account surpluses miti-
gated the impact of slowing exports to the
United States to a degree. Latin America’s ex-
ports lost momentum, however, growing only
1.7 percent in 2008 compared with 5 percent in
2007, while the region’s current account posi-
tion dropped from a surplus of 0.5 percent of
GDP to a deficit of the same magnitude.


Output gains were quite differentiated
across key countries and sub regions in Latin
America and the Caribbean. The outright
decline in U.S. imports adversely affected


R E G I O N A L E C O N O M I C P R O S P E C T S


153


24


22


0


2


4


6


8
Percentage points


Figure A7 Contributions to GDP growth in
Latin America and the Caribbean


Source: World Bank.


GDP


Investments
Net exports


Government consumption
Private consumption


19
92


19
93


19
94


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


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Mexico’s exports, sending them from growth
of 3.3 percent in 2007 to contraction of
0.9 percent in 2008, and contributing to a
slowdown in GDP growth from 3.2 percent to
2 percent over the period. Argentina’s growth
performance also slipped, from 8.7 percent in
2007 to 6.6 percent in 2008, on the back of
slowing consumer spending and exports. In
contrast, Brazil maintained GDP gains at a
still-robust 5.2 percent pace, with its economy
grounded in stronger consumer outlays and
investment, further supported by favorable
terms-of-trade developments during the first
half of the year.


GDP growth eased in the Caribbean, de-
clining from 6 percent in 2007 to 4.6 percent
in 2008. The falloff was linked in part to
hurricane damage but also to weaker exports
and a negative contribution of trade to GDP.
And Central American GDP slowed by more
than a percentage point to 2.2 percent from


3.6 percent, largely because of a downshift in
exports tied to the slowdown in U.S. demand
(table A5).


Although not yet visible in GDP figures, a
large number of countries in the region are al-
ready subject to adverse spillover effects of the
financial crisis. Between September 15, when
Lehman Brothers announced bankruptcy, and
the end of October, equity markets lost half of
their dollar values; currencies, especially those
of Brazil, Chile, and Mexico depreciated pre-
cipitously against the dollar; the cost of cor-
porate and government borrowing on interna-
tional bond markets surged; investment
spending appeared to be slowing, and the
availability of trade finance tightened. These
developments have added to the region’s con-
cerns regarding falling commodity prices (on
the upside of which food and oil exporters
benefited greatly), slowing remittance inflows
and rising inflation.


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


154


Table A5 Latin America and the Caribbean forecast summary
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


GDP at market prices (2000 US$)b 3.3 4.6 5.6 5.7 4.4 2.1 4.0
GDP per capita (units in US$) 1.6 3.3 4.2 4.4 3.1 0.9 2.8
PPP GDPc 4.2 4.6 5.5 5.7 4.4 2.2 4.1


Private consumption — 5.8 6.3 6.9 5.4 3.1 4.6
Public consumption — 3.0 4.6 4.0 4.5 2.4 2.6
Fixed investment 4.7 11.3 14.6 12.2 14.6 4.1 8.8
Exports, GNFSd 8.1 8.1 7.7 5.0 1.7 2.1 2.4
Imports, GNFSd 10.9 11.9 14.3 11.9 12.3 3.9 6.9


Net exports, contribution to growth 0.4 0.8 1.6 1.9 2.9 0.6 1.4
Current account balance/GDP (%) 2.8 1.4 1.6 0.5 0.6 0.3 0.0
GDP deflator (median, LCU) 11.3 5.7 8.0 7.5 10.2 6.7 5.5
Fiscal balance/GDP (%) — 1.2 1.4 1.3 0.9 0.6 0.4


Memo items: GDP
Latin America excluding Argentina 3.1 3.9 5.1 5.2 4.1 2.2 4.1
Central America 3.6 3.0 5.1 3.6 2.2 1.4 3.3
Caribbean 3.6 6.7 8.7 6.0 4.6 3.3 4.7


Brazil 2.5 2.9 3.8 5.4 5.2 2.8 4.6
Mexico 3.5 2.8 4.9 3.2 2.0 1.1 3.1
Argentina 4.5 9.2 8.5 8.7 6.6 1.5 4.0


Source: World Bank.


Note: — not available.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.


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Credit conditions tighten, capital flows
plummet
Sovereign spreads, as measured by JPMorgan-
Chase Emerging Market Price Index (EMBI),
have increased rapidly since mid-September
throughout the region, with the largest rise
(over 1,000 basis points) for Argentina and
República Bolivariana de Venezuela (figure
A8). The corporate bond market is seeing a
similar trend, with soaring corporate spreads.
Moreover, gross capital inflows to the region
halved over January–August 2008 compared
with the like period in 2007. Bond issuance
dropped 46 percent to $18.5 billion; equity
IPO issues virtually vanished in the hostile cli-
mate of 2008 (down 75 percent); and bank
borrowing dropped one-third to $36 billion
over the year to date.


Tighter financing conditions and expecta-
tions of weaker demand growth have led cor-
porations and governments alike to review
investment plans. The Republic of Korea’s
Hyundai, India’s Reliance, and Brazil’s Petro-
bras have either announced or postponed
decisions on investment plans in Brazil.
Petroleos de Venezuela has postponed several
refining projects across the Caribbean and
Central America. The Mexican airline Aladia


R E G I O N A L E C O N O M I C P R O S P E C T S


155


filed for bankruptcy protection in October
because of financing difficulties. And Contro-
ladora Comercial Mexicana, a large super-
market chain, also filed for bankruptcy after
sustaining losses from derivatives trading.


As a result of falling equity markets and
repatriation of foreign funds to home curren-
cies, many of the region’s currencies have
experienced sharp depreciation since mid-
September, a situation that runs the risk of
reigniting inflation, even as commodity prices
decline. After several years of appreciation, the
Brazilian real started to decline in early July
(figure A9). The central banks of Argentina,
Brazil, Chile, and Mexico sold dollars on the
spot market during October to prevent their
currencies from sliding further. Mexico offered
direct financing to commercial banks. Brazil
relaxed reserve requirements, eliminated taxes
on foreign investment, authorized state-owned
banks to buy stakes in financial institutions,
and allowed the central bank to enter into
currency swaps with other central banks.


Another consequence of tightened credit
conditions has been vanishing export credit


0


100


200


300


400


500


700


600


Spreads in basis points


Figure A8 Bond spreads have increased
sharply for many Latin American countries


Source: JPMorgan-Chase.


Jan. 1, 2008 Nov. 10, 2008


Bra
zil


Ch
ile


Co
lom


bia


Me
xic


o
Pe


ru


Arg
en


tin
a


Ve
ne


zu
ela


,


R.
B.


de


14751710


80


90


100


110


120


130
Local currency unit/US$ index (Jan. 1, 2008 5 100)


Figure A9 Exchange rates in Latin America
and the Caribbean fell sharply against the
dollar in late 2008


Source: Thomson/Datastream.


Note: Increase = weaker local currency.


Jan. 1
2008


Feb. 20
2008


Apr. 10
2008


May 30
2008


Jul. 19
2008


Sep. 07
2008


Argentina
Chile
Mexico
Venezuela, R. B. de


Brazil
Colombia
Peru


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 155




lines, which allow exporters to purchase
goods and services they need to support their
export sales. Exporters now face a double hit,
with slowing import demand in high-income
countries on the one hand, and more expen-
sive credit to support export operations on the
other. Anecdotal evidence from Brazil suggests
that the fall of Lehman Brothers precipitated
a collapse in export credit in Brazil, leading
foreign investors and companies to repatriate
billions of dollars from Brazil. Shrinking ex-
port credit could lead to difficult conditions
for businesses that supply inputs to exporters,
with ripple effects to the rest of the economy.


Remittance inflows are slowing
Worker remittances are an important source of
income for many Latin American countries. The
region has sent 28.3 million workers abroad—
5.1 percent of the region’s population—who
send back $60 billion, on average, to their home
countries (World Bank 2008a). The United
States is the primary recipient of the region’s
emigrants, followed by Spain and Italy. In eight
Latin American countries, remittances account
for more than 10 percent of GDP. Mexico is the
largest recipient with $25 billion in receipts. But
the slowdown in the U.S. housing market and
the resulting loss of construction jobs led to a
4.2 percent decline in remittances to Mexico
over January–August 2008, compared with the
same period of 2007. No evidence of similar
large-scale decline has yet come to light in other
regional economies.


Inflation remains high, notably in food
Rapid economic growth in Latin America also
brought with it a ramp-up in inflation, which
in 2008—abetted by the price surge for oil and
food traded internationally—was at its highest
level in a decade. Food prices rose substan-
tially faster than the overall consumer price
index for most countries (World Bank 2008b),
and fundamental changes in global food dy-
namics appear to be under way. High energy
prices, climate change, and rising biofuel
production have driven the rise in food price


inflation. Although Latin America has the
largest surplus in food trade of all developing
regions, food price inflation adversely affects
most of the population, because households
are net buyers of food. Poor people are also
affected disproportionately because they
spend a larger share of their income on food.


Two developments have occurred in recent
months that are likely to help ease the pressure
of food inflation. Central governments across
the region raised interest rates in the first half
of 2008 to stem inflationary pressures. More
importantly, commodity prices began to
plummet after reaching historically high levels
in mid-2008. The latest inflation numbers
(September 2008) for the region were gener-
ally lower than their peak levels in the preced-
ing months (figure A10).


Medium-term outlook
GDP growth in the region is expected to fall
off sharply to 2.1 percent in 2009 from
4.4 percent in 2008, driven by a sharp decline
in capital spending—from robust growth of


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


156


0


3


6


9


12


Consumer price inflation (percentage change year-on-year)


Figure A10 Inflation still high in Latin
America and the Caribbean despite sharp
falloff in food and fuel prices


Source: World Bank.


Jan.
2006


May
2006


Sep.
2006


Jan.
2007


May
2007


Sep.
2007


Jan.
2008


May
2008


Sep.
2008


Argentina
Mexico
Latin America
& Caribbean Chile


Brazil
Colombia
Peru


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 156




R E G I O N A L E C O N O M I C P R O S P E C T S


157


14.6 percent in 2008 to a decline of 4 percent.
Increasing cost of capital for business, chan-
neled through falling domestic equity markets,
widening spreads on international corporate
bonds, and depreciating exchange rates is an-
ticipated to combine with expectations for a
sharp falloff in both domestic and overseas
sales growth, leading to a retrenchment in pri-
vate capital outlays (see table A5, earlier).


Falling investment is expected to lead to
similar declines in regional imports, because
the import content of investment tends to be
quite high in Latin America. With imports de-
clining almost 4 percent in 2009 and exports
falling 2 percent, the contribution of trade to
growth will shift to positive 0.6 points of
growth for the first time in 20 years. But the
drop in investment and in export revenues
also carry multiplier effects through the re-
gional economy, with real household spending
easing to a 3.1 pace from 5.4 percent in 2008,
and GDP growth slowing to 2.1 percent. GDP
could rebound fairly quickly to 4 percent
gains by 2010, should global credit markets
thaw, risk aversion subside, and OECD coun-
tries revive on the back of renewed vigor in
consumer spending—in step with the antici-
pated remission of inflation pressures. These
developments represent a substantial change
from recent global forecasts prepared in June
2008, when the region was expected to grow
4.3 percent in 2009 and 4.2 percent in 2010
(see Global Development Finance 2008,
World Bank 2007d).


Growth in Brazil is expected to slow from
5.2 percent in 2008 to 2.8 percent in 2009. In-
flation has already started to level off, in part
as a result of the Central Bank of Brazil’s rais-
ing policy interest rates, amid falling com-
modity prices. Consumer price inflation is ex-
pected to diminish from 6.3 percent in 2008 to
4.8 percent in 2009. Brazil is likely to witness
its first current account deficit since 2002, tied
to developments in the income accounts, as
repatriation of profits by foreign companies is
under way. However, a decline in the imports
of capital goods is expected to help improve


the current account in 2009 and 2010
(table A6).


Mexico’s close economic ties to the U.S.
economy are expected to slow its growth
sharply in 2009. Export volume growth—
which was already in negative territory in
2008—is projected to drop by 5 percent in
2009. Argentina will perhaps see the sharpest
growth falloff in the region as it experiences
declines in export market demand, commod-
ity prices, and investment. Peru, Panama, and
the Dominican Republic will also slow after
very high growth averaging 8 percent for the
last four years.


Risks
With the onset of the financial crisis, skyrock-
eting costs of capital, or an outright shutdown
in credit flows, are the primary risks faced by
the region. Should sovereign and corporate
spreads not retreat from current levels, Latin
America could have difficulty financing new
investment projects and sustaining current
projects. Although central banks worldwide
have undertaken steps to inject liquidity into
banking systems, a marked thawing of inter-
bank rates and revival of credit flows has yet
to be seen.


The favorable external environment that
benefited the region in the past five years has
almost vanished. Both high-income and
developing-country GDP growth is slowing,
diminishing demand for Latin America’s com-
modities, manufactures, and services exports.
Although inflation is still much higher than
in early 2007, increases in headline inflation
appear to have peaked in July or August
2008 in the seven largest economies in the re-
gion. Although inflation will likely continue
to ease given declining commodity prices, a
potential revival of inflation remains a con-
cern, given depreciating currencies, a move
toward monetary accommodation (mitigat-
ing a portion of the economic downturn),
and the potential for second-round inflation
effects.


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158


Table A6 Latin America and the Caribbean country forecasts
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Argentina
GDP at market prices (2000 US$)b 4.5 9.2 8.5 8.7 6.6 1.5 4.0
Current account balance/GDP (%) 3.1 2.8 3.7 3.0 0.4 3.2 2.3
Belize
GDP at market prices (2000 US$)b 5.9 3.1 5.6 3.0 2.8 2.1 2.9
Current account balance/GDP (%) 7.3 13.6 1.2 3.0 3.7 3.7 1.6
Bolivia
GDP at market prices (2000 US$)b 3.8 4.4 4.8 4.6 4.1 3.6 4.3
Current account balance/GDP (%) 6.1 6.5 11.5 13.4 13.3 9.9 8.3
Brazil
GDP at market prices (2000 US$)b 2.5 2.9 3.8 5.4 5.2 2.8 4.6
Current account balance/GDP (%) 2.0 1.7 1.3 0.1 1.3 0.6 1.1
Chile
GDP at market prices (2000 US$)b 6.4 5.7 4.3 5.1 4.2 3.4 4.7
Current account balance/GDP (%) 2.7 1.2 5.0 4.3 0.8 0.8 0.0
Colombia
GDP at market prices (2000 US$)b 2.5 4.7 6.8 8.2 3.7 2.6 4.7
Current account balance/GDP (%) 1.9 1.6 2.9 2.6 3.0 1.5 0.6
Costa Rica
GDP at market prices (2000 US$)b 5.2 5.9 8.8 6.8 4.0 3.9 4.9
Current account balance/GDP (%) 3.6 4.9 1.9 8.7 2.2 3.3 6.9
Dominica
GDP at market prices (2000 US$)b 1.8 3.1 4.0 3.2 3.1 1.5 3.3
Current account balance/GDP (%) 16.9 32.6 0.3 0.4 0.4 6.2 6.9
Dominican Republic
GDP at market prices (2000 US$)b 6.0 9.3 10.7 8.5 5.2 2.6 4.5
Current account balance/GDP (%) 3.2 1.9 3.7 5.7 9.5 8.0 3.8
Ecuador
GDP at market prices (2000 US$)b 1.8 6.0 3.9 1.9 2.5 0.8 2.1
Current account balance/GDP (%) 2.3 0.8 3.5 2.3 5.2 5.4 4.0
El Salvador
GDP at market prices (2000 US$)b 4.6 3.1 4.2 4.2 2.0 2.6 2.9
Current account balance/GDP (%) 2.0 5.3 4.7 6.0 8.4 5.5 5.2
Guatemala
GDP at market prices (2000 US$)b 4.1 3.2 4.5 5.7 2.8 3.1 3.3
Current account balance/GDP (%) 4.6 4.5 4.4 5.1 7.5 5.3 4.3
Guyana
GDP at market prices (2000 US$)b 4.9 2.2 4.8 5.5 4.8 4.0 3.1
Current account balance/GDP (%) 15.4 12.1 19.7 15.4 18.2 16.6 15.1
Honduras
GDP at market prices (2000 US$)b 3.3 6.1 6.3 6.3 3.1 4.0 4.8
Current account balance/GDP (%) 7.7 3.0 4.7 10.6 14.7 9.6 8.3
Haiti
GDP at market prices (2000 US$)b 1.3 1.8 2.3 3.5 3.0 3.8 3.9
Current account balance/GDP (%) 1.7 6.4 7.6 1.8 11.9 12.1 13.1
Jamaica
GDP at market prices (2000 US$)b 1.9 1.8 2.5 1.2 0.9 0.8 2.3
Current account balance/GDP (%) 2.7 11.4 10.9 11.7 17.0 12.8 10.8
Mexico
GDP at market prices (2000 US$)b 3.5 2.8 4.9 3.2 2.0 1.1 3.1
Current account balance/GDP (%) 3.7 0.7 0.3 0.6 1.0 1.7 1.7
Nicaragua
GDP at market prices (2000 US$)b 3.4 4.3 3.7 3.5 2.2 1.5 2.9
Current account balance/GDP (%) 28.7 15.3 16.4 17.7 20.9 19.0 15.4


(continued)


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Middle East and North Africa
Recent developments


The Middle East and North Africa regionhas been affected dramatically by develop-
ments in global commodity markets over the
last three years, notably in 2008.4 As a result
there have been substantial up- and downshifts
in terms of trade, current account positions,
and external financing requirements. These
shifts have occurred at the same time as the ex-
ternal environment for growth and for interna-
tional finance deteriorated markedly. Still, re-
gional GDP held up well through 2008, with
domestic demand, notably investment financed
in large part by FDI, providing impetus for
growth. The pace of GDP growth for the de-
veloping countries of the region was un-
changed in 2008 from the strong 5.8 percent
registered in 2007. A falloff in the Islamic Re-
public of Iran’s hydrocarbon sector eased GDP
growth among oil-dominant economies from
6.4 percent in 2007 to 5.8 percent. And growth


among the more diversified economies picked
up from 3.8 percent in 2007 to 5.7 percent, led
by a strong recovery from drought in Morocco
(table A7).


Commodity price changes carry extreme
effects across the region
The region has undergone tortuous change
linked to global commodity prices through the
last years—from gradual increases to a surge in
crude oil, food (especially grains), and raw ma-
terials prices from 2005 through mid-2008—to
a sudden and forceful unwinding of the bubble
during the second half of 2008. On the upside
of the commodity run, the developing oil ex-
porters—Algeria, the Arab Republic of Egypt
(though a more diversified economy), the Is-
lamic Republic of Iran, the Syrian Arab Repub-
lic, and the Republic of Yemen—accumulated
$82 billion in additional revenues over
2003–07, with receipts coming to stand at
$130 billion in the latter year. During the first


R E G I O N A L E C O N O M I C P R O S P E C T S


159


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Panama
GDP at market prices (2000 US$)b 5.1 7.2 8.5 11.5 7.8 3.3 6.2
Current account balance/GDP (%) 4.8 3.1 7.2 5.4 7.6 9.4 9.1
Peru
GDP at market prices (2000 US$)b 4.0 6.4 7.6 9.0 8.5 5.2 6.6
Current account balance/GDP (%) 5.5 1.6 3.0 1.3 2.2 1.6 1.6
Paraguay
GDP at market prices (2000 US$)b 1.8 2.9 6.0 6.8 4.2 3.0 3.8
Current account balance/GDP (%) 2.2 0.5 2.0 0.8 0.0 1.0 0.8
St. Lucia
GDP at market prices (2000 US$)b 3.1 7.3 4.5 4.0 4.4 4.8 5.0
Current account balance/GDP (%) 11.6 17.4 23.4 21.4 21.8 20.7 19.8
St. Vincent and the Grenadines
GDP at market prices (2000 US$)b 3.1 1.5 4.5 5.5 6.3 0.6 5.6
Current account balance/GDP (%) 18.8 26.3 25.9 24.5 24.7 24.2 20.0
Uruguay
GDP at market prices (2000 US$)b 3.0 6.6 7.0 7.4 4.7 2.8 3.0
Current account balance/GDP (%) 1.5 0.1 2.3 0.7 1.7 1.4 0.9
Venezuela, R. B. de
GDP at market prices (2000 US$)b 2.1 10.3 10.3 8.4 5.3 1.0 3.2
Current account balance/GDP (%) 2.6 17.5 14.8 8.8 8.7 9.0 8.0


Source: World Bank.


Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in
other World Bank documents. Barbados, Cuba, Grenada, and Suriname are not forecast because of data limitations.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 159




half of 2008, revenues jumped a further
50 percent to nearly $200 billion. Since then,
however, the financial crisis and expectations
of much lower global growth have caused oil
prices to plunge from peaks of nearly
$150/bbl in early July to near $65/bbl by
end-October 2008. As a result, regional oil
exporters are now experiencing a substantial
downshift in hydrocarbon receipts, terms of
trade, and current account surplus posi-
tions that will manifest more clearly in 2009
(figure A11).


The oil exporters’ current account surplus
increased from 17.2 percent of GDP in 2007
only moderately to 18.7 percent in 2008, but
global economic recession in 2009 will pres-
sure oil prices lower and yield a sizable addi-
tional falloff in world oil demand. The group’s


current surplus position is projected to drop
steeply to 8 percent of GDP during 2009 and
to 5.4 percent by 2010. Real-side growth will
be affected as revenue declines are likely to re-
sult in downsizing of ambitious investment
projects or postponement of planned pro-
grams. At the same time, the Organization of
Petroleum Exporting Countries (OPEC) will
likely attempt to set limits on the decline in oil
prices by constraining oil production, which
will depress the oil sector in many economies,
with ripple effects to the non-oil economy and
the private sector.


The diversified economies of the region,
including Jordan, Lebanon, Morocco, and
Tunisia, are to varying degrees highly depen-
dent on imports of oil and refined petroleum
products, as well as on food and feedstuffs,


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160


Table A7 Middle East and North Africa forecast summary
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008* 2009† 2010†


GDP at market prices (2000 US$)b 3.7 4.2 5.3 5.8 5.8 3.9 5.2
GDP per capita (units in US$) 1.6 2.5 3.6 4.0 4.0 2.2 3.5
PPP GDPc 4.8 4.3 5.4 6.3 5.7 3.8 5.0


Private consumption 3.9 5.0 6.2 6.1 7.0 4.2 6.0
Public consumption 4.2 5.6 4.2 1.8 8.7 5.4 5.4
Fixed investment 3.9 7.8 4.8 16.8 18.9 7.0 10.5
Exports, GNFSd 3.1 9.5 6.7 6.0 10.1 2.1 4.9
Imports, GNFSd 1.4 14.0 7.6 14.3 19.8 1.7 8.8


Net exports, contribution to growth 0.4 1.7 0.6 3.1 4.3 1.3 2.2
Current account balance/GDP (%) 0.3 10.9 14.9 12.8 13.5 6.0 4.1
GDP deflator (median, LCU) 9.1 6.3 8.0 5.3 14.1 6.6 7.2
Fiscal balance/GDP (%) 4.0 5.5 0.7 1.3 2.0 0.0 1.0


Memo items: GDP
Middle East and North Africae 3.4 5.1 4.9 5.1 5.9 4.1 5.5
Resource poor and labor abundantf 4.2 3.8 6.3 5.6 6.5 4.3 5.9
Resource rich and labor abundantg 3.3 4.6 4.5 6.1 5.1 3.6 4.5
Resource rich and labor importingh 3.0 6.5 4.2 4.1 6.0 4.3 6.0


Egypt, Arab Rep. 4.3 4.4 6.8 7.1 7.2 4.5 6.0
Iran, Islamic Rep. 3.7 4.3 5.9 7.8 5.6 3.5 4.2
Algeria 1.7 5.3 1.8 3.1 4.9 3.8 5.4


Source: World Bank.
* Estimate.
† Forecast.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Geographic region includes these high-income countries: Bahrain, Kuwait, and Saudi Arabia.
f. Arab Rep. of Egypt, Jordan, Lebanon, Morocco, and Tunisia.
g. Algeria, Islamic Rep. of Iran, Syrian Arab Rep., and Republic of Yemen.
h. Bahrain, Kuwait, Oman, and Saudi Arabia.


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notably wheat and coarse grains. Their terms
of trade worsened by 4.2 percent in 2008,
pushing the group’s current account deficit to
7.3 percent of GDP (not witnessed since the
Asia crisis of 1997) from 3.6 percent in 2007
(see figure A11). Looking forward, these
economies will benefit from lower commodity
prices through 2010, and current account
deficits are projected to decline to 0.7 and 0
percent of GDP in 2009 and 2010 respectively.


Effects of financial crisis are fairly muted,
but several countries are vulnerable
To date, the direct effects of the financial cri-
sis experienced by most developing economies
in the region have been relatively mild. Banks
and investment companies in the Middle East
and North Africa were not large holders of
subprime mortgage-backed securities, or
“toxic assets” (though there may be questions
concerning portfolios of sovereign wealth
funds in the Gulf States). Indirect effects, how-
ever, have become evident. Following the an-
nouncement of the U.S. financial rescue plan
in early October 2008, spreads on sovereign
debt increased 170 basis points for Lebanon
and 100 points for Egypt; but these increases
contrasted well with the average rise of 250
basis points for all developing economies at
that time. With country-specific developments


set against the background of subsequent con-
certed policy rate reductions across the OECD
countries, a step-up in economic stimulus
plans and the beginnings of a thaw in credit
markets, spreads in Egypt eased to 350 points,
but those in Lebanon escalated to 730 basis
points by early November.


Equity markets across the region echoed
the sharp declines seen by emerging markets
generally, as international (and domestic) in-
vestors withdrew funds from the asset class.
From peak levels in the spring through early-
November 2008, the Egyptian bourse dropped
54 percent, Morocco’s exchange fell 33 per-
cent, and the Gulf Cooperation Council (GCC)
markets in aggregate declined 50 percent. This
contrasts with a 54 percent decline in the
MSCI index which covers all emerging mar-
kets (figure A12).


Gross capital flows to countries in the re-
gion have also declined, and may be expected
to weaken further. Bond issuance dropped by
two-thirds from $4.6 billion to $1.5 billion
between January and August 2007 and the
like period of 2008. Equity issuance declined
from $2.1 billion to $750 million or 65 per-
cent in the period as well. But a surge in bank
borrowing from $4 billion to $14 billion in
the period offset the downturn in other


R E G I O N A L E C O N O M I C P R O S P E C T S


161


50


75


100


125


200


175


150


MSCI equity market price indexes (percentage change, US$)


Figure A12 Markets in the Middle East and
North Africa are hard hit by financial crisis


Source: Morgan-Stanley.


Jan. 1
2007


May 1
2007


Sep. 1
2007


Jan. 1
2008


May 1
2008


Sep. 1
2008


Morocco


GCC market average


MSCI total


Egypt,
Arab
Rep. of


Note: Gulf Cooperation Council (GCC).


Middle East &
North Africa


Oil
exporters


Diversified
economies


25


210


0


5


20


15


10


Figure A11 Current account positions in the
Middle East and North Africa set to shift
dramatically


Source: World Bank.


Current account balance as a share of GDP (%)


2006 2007 2008
2009 2010


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finance components. Moreover, preliminary
data for September show declines across all
segments of flows to the region. The process
of deleveraging across high-income financial
institutions appears to have raised the possi-
bility for a potentially sharp reduction in cap-
ital flows, particularly syndicated bank lend-
ing and to a lesser degree bond issuance, for
the region. This is likely to carry adverse ef-
fects across countries, but with highly differ-
entiated outcomes.5


Several countries stand exposed to the risk
of adverse developments in international fi-
nancial markets, which could negatively af-
fect investment spending and growth. These
countries may suffer from fragilities in macro-
economic structure (for example, a string of
substantial current account- or fiscal deficits)
or from the presence of stress points made
clearer by the heightening of investor risk
aversion.


The vulnerability index presented in chap-
ter 1 (a weighted measure of the exposure of a
country to developments in sovereign spreads,
equity markets, and exchange rates, as well as
in gross capital inflows) suggests that Lebanon,
Syria, Jordan, and Egypt have been among the
more affected countries in the region, though
the vulnerability of these economies is low in
contrast with the average exposure for other
regions. Under a global scenario in which fi-
nancial markets require a prolonged period to
return to balance, these countries might find
themselves at risk of adverse capital move-
ments, pressures on equity markets, exchange
rates, and eventually investment and growth.


Production is mixed; inflation ramps
higher, denting budgets across the region
Industrial production for the diversified
economies of the region tailed off in late 2008,
shifting from gains of 8 percent (on a GDP-
weighted basis) during the first quarter to 4.5
percent by the third quarter (year-over-year).
This decline reflects the increasingly sluggish
performance of exports to key European and
U.S. markets as well as emerging softness in do-
mestic demand. In contrast, production among


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


162


the developing oil exporters picked up from
negative ground in the first quarter to 3 per-
cent in the third, as growth in the non-oil sec-
tors in both Algeria and the Islamic Republic
of Iran well outpaced sluggish conditions in
hydrocarbons. Output among the high-income
GCC economies continued to grow quickly,
underpinned by a continued rapid pace of
commercial and residential real estate develop-
ment in Bahrain, Qatar, Saudi Arabia, and the
United Arab Emirates (UAE). Production gains
for the group jumped from 3 percent to 10 per-
cent by the third quarter, with Qatar up 12 per-
cent, Saudi Arabia climbing 11 percent, and
the UAE moving to 20 percent growth in the
period.


The surge in global prices for crude oil,
food, and feed grains (50 percent or more
during the first half of 2008), together with
overheated domestic demand in several
economies in the region (notably Egypt, the
Islamic Republic of Iran, and a number of
GCC countries), led to a sharp rise in con-
sumer price inflation across the Middle East
and North Africa (figure A13). Consumer
prices for the diversified economies (GDP-
weighted) accelerated to 7 percent in August
2008 from a trough nearer 1.5 percent in
mid-2007; much of the increase was centered


0


4


8


24


20


16


12


Figure A13 Inflation rises across the Middle
East and North Africa


Source: World Bank data.


Note: Gulf Cooperation Council (GCC).


Jan.
2006


Jul.
2006


Jan.
2007


Jul.
2007


Jan.
2008


Jul.
2008


Consumer price inflation (percentage change, year-over-year)


GCC


Diversified


Egypt, Arab Rep. of


Developing
oil exporters


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in Jordan, where inflation reached 20 percent.
Aggregate inflation for developing oil exporters
also breached 20 percent, mainly reflecting de-
velopments in the Islamic Republic of Iran,
where substantial monetary stimulus led to
overheating, pushing inflation to 27 percent;
consumer prices in Egypt rose to a 24 percent
pace, pushed up primarily by rising food
prices and expanding domestic demand fueled
by monetary growth.


Inflation remains a key challenge for the re-
gion. Although extensive reliance on fuel and
food subsidies helps limit inflationary pres-
sures, it comes at a very high fiscal cost. Not
only do such steps reduce fiscal space to ad-
dress other priorities, as discussed in chapter 3,
they tend to be very inefficient mechanisms for
alleviating poverty. Iranian energy subsidies ex-
ceeded 20 percent of GDP in 2007—08. Food
and energy subsidies in Egypt increased to 1.9
and 6.9 percent of GDP in fiscal 2008, up from
1.3 and 5.5 percent, respectively, in fiscal 2007.
Second-round inflationary effects have been
boosted in several countries that responded to
high food prices by increasing wages of select
groups to help mitigate the worst of the impact
on living standards.


Domestic demand, underpinned
by substantial FDI, drives growth
in the region
Strong gains in consumer spending, and espe-
cially in fixed investment, have been the key
factors supporting growth across the region in
2008—all the more so as exports of the oil-
dominant economies have been restrained in an
effort to prop up crude oil prices, and those of
the diversified economies have been increas-
ingly affected by the slowdown in export mar-
ket demand. Investment in the region grew al-
most 20 percent in 2008, accounting for 3.4
points of the region’s 5.8 percent growth in the
year, while consumer spending grew 7 percent
(see table A7, earlier). Large infrastructure in-
vestment projects, such as the Programme
Complémentaire de Soutien à la Croissance
(PCSC) in Algeria, find counterparts in new real
estate, commercial, and industrial developments


in countries such as Egypt, Jordan, Morocco,
and Tunisia, funded in large part by direct in-
vestment flows from the GCC.


Sectors benefiting from FDI have diversi-
fied from real estate and tourism-related prop-
erties toward industrial and infrastructure
projects in the past few years. FDI to the de-
veloping countries of the region increased
more than five-fold from $4.7 billion in 2000
to $26.4 billion in 2006; preliminary estimates
for 2007 suggest a moderate downshift to
$21.5 billion, reflecting diminishing levels of
flows to Egypt, Jordan, and Tunisia.


Recent examples of FDI-driven develop-
ments include the Mediterranean Gate pro-
ject, which aims to turn Tunis into a regional
hub for finance, business, and technology.
Work has begun on the first $1 billion of the
$25 billion project, which is slated to house
2,500 international firms and provide
350,000 jobs over a 20-year period. In Jordan,
Aqaba Development signed a $100 million
agreement to develop an industrial port at
Aqaba to handle potash exports. And in
Morocco, construction is under way on a new
Renault/Nissan production site—the plant will
sponsor about 6,000 direct jobs, with 90 per-
cent of production exported.


Among the region’s oil exporters, Algeria
experienced a fillip to growth in 2008, to 4.9
percent from 3.1 in 2007, as gains continued at
a rapid 6 percent clip in the non-oil sector, no-
tably in construction and services linked to in-
frastructure projects (table A8). Algeria stands
in fair stead to weather financial spillovers from
the global crisis; at end-September 2008, reserves
stood at $140 billion, up $30 billion from end-
2007. A falloff in the oil sector to 2 percent pres-
sured growth in the Islamic Republic of Iran
from 7.8 percent in 2007 to 5.6 percent. Over-
all GDP was supported by industry, which
advanced 7.4 percent, services (6.8 percent),
and agriculture (6.2 percent). Growth is being
powered by a highly expansionary fiscal policy,
which has pushed inflation toward 30 percent;
and public spending is anticipated to move
higher still ahead of presidential elections slated
for 2009.


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163


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Growth in Egypt continued its strong mo-
mentum into 2008, moving from GDP gains of
7.1 percent in 2007 to 7.2 percent, as invest-
ment advanced by more than 30 percent
funded in large part by FDI. Egypt has been the
largest recipient of FDI in the region, attracting
$13 billion (8.4 percent of GDP) in fiscal 2008,
up from $11 billion in the previous fiscal year.
But the country’s equity markets have been
hard hit by recent financial turmoil, with the
CASE index off more than 50 percent since
May 2008. Moody’s and Fitch had earlier low-
ered the outlook on the country’s Ba1 rating to
negative from stable, citing inflation and the
fiscal deficit as primary concerns. Egypt ap-
pears among the more exposed economies in


the Middle East and North Africa to potential
repercussions from developments in interna-
tional financial markets.


In Syria, domestic demand, supported by
strong output gains in transport, communica-
tions, finance and real estate, and public ad-
ministration, drove growth of 3.7 percent dur-
ing 2008. Declining oil production is the key
challenge facing the economy. Oil output
dropped 23 percent between 2003 and 2007,
increasing pressure to expand the scope for
private non-oil activities. Similar falloffs in oil
production in the Republic of Yemen continue
to plague the economy, restraining GDP
growth there to 2.7 percent in 2008; though a
coming online of large natural gas facilities in


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


164


Table A8 Middle East and North Africa country forecasts
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Algeria
GDP at market prices (2000 US$)b 1.7 5.3 1.8 3.1 4.9 3.8 5.4
Current account balance/GDP (%) 3.2 21.6 24.7 21.2 23.3 12.2 9.8
Egypt, Arab Rep.
GDP at market prices (2000 US$)b 4.3 4.4 6.8 7.1 7.2 4.5 6.0
Current account balance/GDP (%) 0.9 2.3 2.4 0.3 5.1 2.7 1.3
Iran, Islamic Rep.
GDP at market prices (2000 US$)b 3.7 4.3 5.9 7.8 5.6 3.5 4.2
Current account balance/GDP (%) 1.2 20.4 27.6 28.5 36.3 17.9 12.1
Jordan
GDP at market prices (2000 US$)b 5.1 7.3 6.3 6.0 5.5 4.2 6.0
Current account balance/GDP (%) 4.3 17.7 8.1 13.9 14.9 0.8 0.0
Lebanon
GDP at market prices (2000 US$)b 7.2 1.0 0.0 2.0 5.5 4.0 4.5
Current account balance/GDP (%) — 12.8 5.3 8.7 16.4 6.5 5.9
Morocco
GDP at market prices (2000 US$)b 2.4 2.4 7.8 2.7 6.2 4.0 6.0
Current account balance/GDP (%) 1.4 1.7 2.0 0.3 4.5 1.0 1.7
Syrian Arab Rep.
GDP at market prices (2000 US$)b 5.1 4.5 5.1 6.6 3.7 2.5 4.2
Current account balance/GDP (%) 1.0 1.0 2.7 1.2 2.4 2.0 3.3
Tunisia
GDP at market prices (2000 US$)b 4.7 4.2 5.7 6.3 5.1 3.7 5.8
Current account balance/GDP (%) 4.3 1.1 2.0 2.6 3.9 0.0 0.8
Yemen, Rep.
GDP at market prices (2000 US$)b 5.5 4.6 3.2 2.8 2.7 5.7 4.0
Current account balance/GDP (%) 4.3 3.7 8.1 0.5 1.3 1.3 2.5


Source: World Bank.


Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in
other World Bank documents. Djibouti, Iraq, Libya, and West Bank and Gaza are not forecast because of data limitations.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.


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2009 should yield a fillip to growth by more
than 3 percentage points at that time.


Among the more-diversified economies,
growth in Morocco recouped sharply to 6.2
percent in 2008 from the drought-inflicted 2.7
percent outturn of 2007. Vigor in non-
agricultural sectors, especially in telecommu-
nications, financial services, and construction,
has driven growth. Policies to control domes-
tic prices––food and fuel subsidies, temporary
waivers on customs duties for cereals, and ac-
tions to fight price speculation––have helped
maintain overall inflation at relatively low lev-
els compared with many countries in the re-
gion. But subsidies have tripled in two years,
reaching close to 6 percent of GDP in 2008. In
Tunisia, GDP eased to 5.1 percent growth in
2008, from 6.3 percent in 2007, largely be-
cause of deterioration in the external environ-
ment, in particular the economic slowdown in
the EU. Remaining import tariffs on EU goods
were dismantled in January within the frame-
work of the EU-Tunisia Association Agree-
ment, and steps have been taken in the financial
sector to reduce unsound and nonperforming
loans by improving credit risk appraisals.
Over the first seven months of 2008, foreign
investment in industry increased 47.2 percent,
widening from the earlier focus of FDI in
tourism.


Jordan’s growth slipped to 5.5 percent
from 6 percent in 2007, on the back of still-
buoyant domestic demand, financed in part by
large capital inflows. Heavy public sector out-
lays in 2008 (and anticipated in the draft 2009
budget) suggest that fiscal and financing pres-
sures will continue in the short term. The rise
in fuel and food prices, together with expan-
sionary policy, has pushed inflation above 22
percent as of August, and the current account
deficit widened to almost 15 percent of GDP
in the year. These circumstances place Jordan
at some risk of interruption in private capital
flows in the short term, but official develop-
ment assistance and worker remittances may
help the country bridge the potential financing
gap. Finally, in Lebanon, GDP picked up to a
5.5 percent pace in 2008, from 2 percent


during 2007, on a strong rise in consumer
spending. At the same time, inflation lofted
into double digits on the back of food and fuel
prices, as well as high public sector wage
settlements. Lebanon managed to finance its
large trade deficit through stronger exports of
services and higher net inflows from abroad.


The medium-term outlook
The global downturn and financial crisis will
exact a toll on growth in the Middle East and
North Africa, but one that will be less dramatic
than, for example, in Europe and Central Asia
or South Asia, where country exposure and
fragility of initial conditions are considerably
more pronounced. As world oil demand falls
sharply, any decisions by the region’s oil ex-
porters to curtail output to set a “floor” under
oil prices—will play a large role in shaping
growth profiles. And the shift from windfall
revenue gains to current account surplus posi-
tions of less than 6 percent of GDP by 2010,
much weaker oil revenues, tighter credit con-
ditions, and weaker demand for the region’s
exports (including tourism) are expected to
cause investment to decelerate sharply, rising
by 7 percent in 2009 after growing 18.9 per-
cent in 2008.


As a result, the region’s GDP is anticipated
to slow from 5.8 percent in 2008 to 3.9 per-
cent in 2009. Growth among the oil exporters
as well as the diversified economies is antici-
pated to fall to about 4 percent in 2009 (figure
A14). Recovery in 2010, predicated upon a
quick resolution of the financial crisis in high-
income countries and a moderate revival of
OECD growth, would see GDP pick-up to 5.2
percent, led by a return to 5.7 percent growth
among the diversified economies. A very grad-
ual buildup in global oil demand is likely to
restrain GDP gains among the oil-exporting
countries to 5 percent in 2010. Mainly reflect-
ing cuts in oil production, export volumes are
projected to decline 2.1 percent in 2009, while
the regional current account surplus falls to
6 percent of GDP, from 13.5 percent in 2008.


Recovery for the region in 2010 hinges on
a pickup in exports and a moderate upturn in


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165


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investment, but primarily on a 1.8 percentage
point pickup in household outlays to growth
of 6 percent, as the earlier run-up in commod-
ity prices and consumer price inflation moder-
ates, giving way to gradual stabilization and
to a pick-up in consumer purchasing power.
The region’s current account position should
continue to narrow to some 4 percent of GDP,
providing a new set of “initial conditions”
from which developments into the next
decade are likely to spring.


Risks
Uncertainty surrounding the medium-term
path for oil prices is probably the element of
greatest risk confronting the region. Where
the global price of oil settles, grounded in the
fundamentals—as well as by pressures exerted
by OPEC—will determine the potential
growth path for the oil-dominant economies
of the region. The “base case” view posits
world crude oil prices remaining within a $65
to $75/bbl range through 2010, moving to-
ward a real equilibrium price of $60/bbl in
2007 dollars by 2015. But substantial down-
sides to this price forecast can be envisioned
should the slowdown in developing-country
GDP growth fall much below the 4.5 percent
posited for 2009. Although a repeat of
1985–86, when oil prices tumbled to $10/bbl


is unlikely, prices below $50/bbl could be in
the cards, with attendant adjustments required
by the region’s exporters.


A second element of concern for the region
is the potential for unrest among the populace
under the potentially harsh conditions of a
global recession. A slowdown in remittance
inflows would carry direct effects to poor fam-
ilies in need of income to sustain household
consumption. And government budgets will
remain under pressure, in part to maintain
subsidies for basic goods.


South Asia
Recent Developments


GDPgrowth in South Asia slowed markedlyin 2008 to 6.3 percent from 8.4 percent in
2007.6 The onset of the financial crisis in the
United States and Europe in mid-September
2008—which led to severe financial turmoil in
emerging markets, including in many South
Asian countries—ushered in a downshift in ac-
tivity that started to take hold in late-2008.
Growth had already begun to wane in the re-
gion prior to the onset of the global crisis, as
rising inflationary pressures and tight credit
conditions had started to take a toll on domes-
tic activity, while already slowing external de-
mand and high international commodity prices
led to a deterioration in external positions.


The initial effects of the global financial cri-
sis in South Asia were sharp corrections in re-
gional equity markets. Bourses in India, Pak-
istan, and Sri Lanka dropped 57 percent, 39
percent, and 35 percent, respectively, over the
year through mid-November (and 66, 50, and
39 percent, when measured in U.S. dollars).
Notably in Pakistan, curbs on the sale of equi-
ties were imposed in August, effectively pre-
venting the exit of existing investors and dis-
couraging potential new investors.


Equity sell-offs and ‘flight-to-quality’ con-
tributed to significant currency depreciation in
some countries, with local currencies in India,
Pakistan, and Nepal7 falling by 21 percent,
30 percent, and 21 percent, respectively,
against the U.S. dollar, over the year through


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


166


0


1


2


3


4


5


6


7


Figure A14 Notable slowing of growth across
the Middle East and North Africa in 2009


Source: World Bank.


GDP growth (%)


Oil exporters Diversified economies
GCC countries


2007 2008 2009 2010


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mid-November. The Sri Lankan rupee depreci-
ated by nearly 2 percent when the Central
Bank allowed the peg against the U.S. dollar
to adjust at end-October 2008. In contrast, the
Bangladeshi taka appreciated slightly (2 per-
cent) over the same period.


Notably, the region’s banking sectors have
been largely insulated from the crisis, given
very limited exposures to the toxic debt instru-
ments tied to U.S. sub-prime mortgages. With
respect to the associated impacts of the finan-
cial crisis on the real economy—as financing
for corporations, loans for households, and
trade credit for exporters have become signifi-
cantly more difficult to obtain—indications of
a fall-off in external and domestic demand have
begun to trickle in. For example, India’s goods
exports contracted 12 percent in October (year-
over-year). This comes on the heels of a sub-
stantial deceleration in export growth to 10 per-
cent in September from 27 percent in August
despite the marked weakening of the rupee. Sri
Lanka’s exports also declined, falling 9.4 per-
cent in September, contrasted with growth of
16.6 percent and 24.1 percent in August and
July, respectively. Further, consumer confidence
in India has deteriorated, with the index related
to consumer spending down for a fourth con-
secutive month in October.8


Weaker conditions in South Asia were evi-
dent in the region prior to the onset of the
global financial crisis, and were marked by an
increasingly challenging global environment.
In particular, sharply negative terms-of-trade
effects from the rise in oil and global non-
energy commodity prices, which peaked in mid-
2008, acted as a drag on regional growth and
contributed to a doubling of the regional cur-
rent account deficit in the year. Rising interna-
tional prices also contributed to a pronounced
buildup in South Asia’s inflation pressures.
Higher prices, particularly for food and fuel,
undermined real household incomes—with
the poorest households generally affected the
most—thus crimping household expenditures.
Several governments attempted to offset the
international price hikes with domestic subsi-
dies, placing strains on fiscal balances. But


with substantial and sustained increases
through the middle of 2008, a greater degree
of feed-through of higher food and fuel prices
to households in these countries became in-
evitable. Tighter credit conditions, moderating
demand, higher prices, and diminishing levels
of confidence weighed on consumer and busi-
ness spending alike. And investment growth
decelerated to single digits from the robust
growth witnessed during recent years.


The slowdown in growth during 2008
reflected increasing weakness in the region’s
two largest economies, India and Pakistan
(table A9). In India, growth slowed across all
sectors, with tighter monetary policy, rising in-
flationary pressures, and mounting fiscal and
current account deficits weighing down eco-
nomic activity. The more recent onset of the
global financial crisis resulted in sharp losses
in India’s equity markets and drove down the
value of the rupee. Foreign institutional in-
vestors pulled out of India to cover losses in
high-income countries and as risk aversion
heightened across the globe.


In Pakistan, the economy deteriorated
sharply over the course of 2008, as headline in-
flation surged, and the current account and fis-
cal deficits jumped on the back of rising oil and
food prices. Political turmoil and ongoing
security concerns have also taken a toll on
Pakistan’s economy, while the global financial
crisis added substantial downward pressures
on its financial markets. Prior to reaching an
agreement with the IMF for standby credit in
mid-November, Pakistan came close to a full-
blown balance of payments crisis. In neigh-
boring Afghanistan, the economy has been
hurt by a decline in agricultural output caused
by poor precipitation, a sharp rise in interna-
tional food prices, and the wheat export re-
strictions imposed by Pakistan, in addition to
the disruptive effects of the spreading insur-
gency. And while GDP growth in Bhutan re-
mained vibrant at 14.4 percent in 2008, it
moderated from the 17 percent expansion of
2007, stemming from the initial boost from the
first full year of operation of the immense Tala
hydropower project.


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In contrast with broadly declining activity
in the region, growth in Bangladesh held
steady, with domestic demand buoyed by a
sharp increase in remittance inflows and by ro-
bust garment exports recorded in the first half
of 2008. With relatively thin capital markets,
Bangladesh’s equities experienced much more
muted declines than those experienced in other
regional markets. Growth in Sri Lanka has
also proven resilient in 2008, primarily be-
cause of a marked rise in agricultural produc-
tion and a boom in tea exports, which helped
to offset slower growth in garment exports.
While its equity markets also suffered sharp
corrections with the global financial crisis, the
Sri Lankan rupee, which was pegged to the
U.S. dollar early in 2008, remained stable
against that currency. Partially in consequence,
real appreciation of the Sri Lankan rupee has
contributed to substantial widening of the cur-
rent account deficit. In Nepal, growth firmed
in 2008, helped by higher agricultural output


and rising remittance inflows. These factors
supported an increase in household incomes
and private consumption, despite a buildup in
inflation pressures.


The general deterioration in regional trade
balances has been offset by large remittance
inflows, which represent a sizable, and gener-
ally increasing share of GDP: during 2007,
14 percent in Nepal, 8 percent in Bangladesh
and Sri Lanka, 4 percent in Pakistan, and 3
percent in India. FDI inflows remained strong
through the first half of 2008, helping to ease
external financing requirements. In India, FDI
surged to 3 percent of GDP in 2008, up from
1.4 percent in 2007. FDI inflows to Pakistan
remained relatively steady through the sum-
mer of 2008—on course to match the 3.7 per-
cent of GDP recorded in 2007—but the ex-
treme financial and economic difficulties
encountered during the second half of the year
were likely to have changed that for the worse.
In 2007, FDI inflows to Sri Lanka and


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168


Table A9 South Asia forecast summary
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


GDP at market prices (2000 US$)b 5.2 8.7 9.0 8.4 6.3 5.4 7.2
GDP per capita (units in US$) 3.1 6.9 7.2 6.9 4.8 4.0 5.8
PPP GDPc 6.3 8.7 9.0 8.4 6.3 5.4 7.2


Private consumption 3.9 7.0 6.0 7.5 5.7 4.7 5.7
Public consumption 4.7 8.8 10.0 4.9 8.8 9.2 6.7
Fixed investment 5.5 14.6 16.5 13.5 7.1 4.8 10.7
Exports, GNFSd 10.6 7.0 17.3 7.3 4.3 3.7 8.3
Imports, GNFSd 9.8 12.9 21.9 7.0 6.5 2.7 7.8


Net exports, contribution to growth 0.1 1.0 0.8 0.0 0.5 0.2 0.0
Current account balance/GDP (%) 1.6 1.2 1.5 1.6 3.5 2.0 1.9
GDP deflator (median, LCU) 8.2 6.5 9.2 8.4 9.7 8.0 6.0
Fiscal balance/GDP (%) 7.7 5.9 6.1 6.4 8.1 8.6 8.0


Memo items: GDP
South Asia excluding India 4.4 6.7 6.4 6.1 6.1 4.0 5.2
India 5.5 9.2 9.7 9.0 6.3 5.8 7.7
Pakistan 3.9 7.7 6.2 6.0 6.0 3.0 4.5
Bangladesh 4.8 6.0 6.6 6.4 6.2 5.7 6.2


Source: World Bank.


Note: To simplify presentation across countries and with other regions, annual national income and product account data for
South Asia are reported in calendar years, although official country data are originally reported by fiscal year for Bangladesh,
India, Pakistan, and Nepal.


a. Growth rates over intervals are compound average; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.


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Bangladesh reached 1.7 and 1 percent of GDP
respectively (figure A15).


In contrast, net portfolio flows to the region
turned sharply negative during the first half of
2008, shifting from vibrant inflows of recent
years. In India, where portfolio inflows surged
to 3 percent of GDP in 2007, outflows are
projected to exceed 1 percent of GDP in 2008.
With the increase in global risk aversion and
rebalancing of portfolio holdings in the high-
income countries, gross capital flows deceler-
ated in 2008, with an especially sharp falloff in
equity and bond issuance and a somewhat less
pronounced decline in bank borrowing. Falter-
ing investor confidence led to higher interna-
tional bond spreads, with those for Pakistan
and Sri Lanka spiking to prohibitive levels in
September and October. Hard currency re-
serves were drawn down to varying degrees, as
investors pulled out of regional markets and as
central banks sought to shore up currencies.


Fiscal policy across South Asia is broadly
expansionary, with deficits generally exceed-
ing 4.5 percent of GDP—they are projected to
reach 8.5 percent in India, 7.5 percent in Pak-
istan and Sri Lanka, and 4.7 percent in
Bangladesh in 2008. Nepal is an exception,
where the 2008 deficit is projected at 2.8 per-
cent of GDP, although that would be double
the 2007 deficit. In 2008, budget deficits rose
across the region—or remained high—as


price subsidies for food, fuel, and fertilizer
contributed to higher fiscal outlays. In some
cases (India, Bangladesh, Pakistan), the subsi-
dies contributed to a reversal in the general
trend toward fiscal consolidation in recent
years. Downward pressure on the revenue
stream, resulting from the deceleration in
growth, also played a role. As a consequence,
a number of regional governments had begun
to cut development spending.


With low, or in many cases, negative real in-
terest rates, monetary policy is also broadly ex-
pansionary in South Asia. Prior to the onset of
the global financial market crash in September
2008, some countries had tightened monetary
conditions through interest rate hikes (India)
or slower credit growth (Sri Lanka) in an effort
to curtail rising inflationary pressures. Later in
the year, however, as the credit crunch became
manifest, regional monetary authorities
quickly responded by injecting liquidity into
banking systems through various measures, in-
cluding lowering required reserve ratios and
reducing policy interest rates.


Medium-term outlook
The outlook for regional growth is highly un-
certain, because of the sustained degree of
volatility and synchronized nature of the slow-
down across countries—and because the full
extent of financial disruption on both the re-
gional and global economies remains unclear.
South Asian GDP growth is projected to step
down to 5.4 percent in 2009 from 6.3 percent
in 2008. Continued financial sector volatility
and balance sheet weakness will translate into
ongoing risk aversion. That is expected to lead
to a further contraction in portfolio inflows
and mute the prospects for FDI, primarily af-
fecting India and Pakistan, which receive the
lion’s share of the region’s inflows. In turn,
these factors are projected to lead to a sharp
falloff in private investment growth. Equity
price declines are expected to generate negative
wealth effects, especially in the case of India,
where market capitalization reached 160 per-
cent of GDP in 2007, up from 90 percent in


R E G I O N A L E C O N O M I C P R O S P E C T S


169


India Pakistan Sri Lanka Bangladesh


3


0


6


9


Figure A15 Key international finance links in
South Asia, 2007


Source: World Bank.


Share of GDP (%)


Inward
remittances


Portfolio
inflows


FDI
inflows


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 169




2006 and where the housing boom has begun
to lose steam (table A10).


Weakening foreign demand is expected to
lead to a significant slowing in regional export
growth, including services. In particular, the in-
formation technology and communications sec-
tor is considered vulnerable to shifts in financial
sector activity, and clothing and tourism rev-
enues are vulnerable to shifts in discretionary
spending. Potential mitigating factors include
cost-cutting measures by companies in high-
income countries to the benefit of outsourcing
suppliers (such as India) and shifts in spending
to low-priced retailers, such as Wal-Mart, to the
benefit of their suppliers (such as Bangladesh).
Recession in high-income countries and a slow-
down in growth among the Gulf oil exporters
are expected to depress remittances inflows.


However, the set of unfavorable global
conditions are anticipated to lead to lower
commodity prices, which will not only pro-
vide a fillip to real household incomes, but
also provide governments with greater scope
for fiscal stimulus. Falling commodity prices
will reduce the import bill and boost the re-
gion’s terms of trade. At the regional level, the


current account deficit is expected to narrow
substantially. Additionally, the recent sharp
depreciation of local currencies against the
dollar for India, Pakistan, and Nepal will help
boost export competitiveness. This should
help offset partially the negative effects of the
coming contraction in world trade.


To help cushion the downturn related to the
financial crisis, South Asian governments are
seen to pursue countercyclical measures, al-
though fiscal space is limited. Thus, monetary
policy measures will often be the key mecha-
nism for response to the crisis, although reduc-
tions in policy rates should be undertaken with
care where there is pressure on the exchange
rate. Even with tight budget envelopes, re-
gional governments can improve the efficiency
of public outlays by more directly targeting
safety net programs to the benefit of the poor.
In addition, and particularly where both fiscal
and monetary policy responses are con-
strained, expansion of structural reforms
should be pursued to stimulate growth in the
near term and improve prospects for the
medium and longer terms. Examples include
improving governance and management of


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170


Table A10 South Asia country forecasts
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008c 2009d 2010d


Bangladesh
GDP at market prices (2000 US$)b 4.8 6.0 6.6 6.4 6.2 5.7 6.2
Current account balance/GDP (%) 0.4 0.3 2.0 1.2 0.8 0.7 0.7
India
GDP at market prices (2000 US$)b 5.5 9.2 9.7 9.0 6.3 5.8 7.7
Current account balance/GDP (%) 1.2 1.0 1.0 1.2 3.1 1.7 1.9
Nepal
GDP at market prices (2000 US$)b 5.0 3.1 3.7 2.6 5.5 3.8 4.9
Current account balance/GDP (%) 6.3 0.0 0.1 1.2 1.2 1.0 0.8
Pakistan
GDP at market prices (2000 US$)b 3.9 7.7 6.2 6.0 6.0 3.0 4.5
Current account balance/GDP (%) 3.7 3.3 5.4 5.8 8.1 4.6 3.2
Sri Lanka
GDP at market prices (2000 US$)b 5.2 6.0 7.7 6.8 6.3 4.0 5.5
Current account balance/GDP (%) 4.6 3.2 5.3 4.4 7.5 5.7 5.5


Source: World Bank.


Note: Growth and Current Account figures presented here are World Bank projections and may differ from targets contained in
other World Bank documents. Afghanistan, Bhutan, and Maldives are not forecast because of data limitations.


a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Estimate.
d. Forecast.


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public sector firms, rationalizing government
finances, enhancing openness where it could
improve stability (such as FDI), and improving
the quality of physical and financial infrastruc-
ture. Moving forward with existing planned
investment programs, which often take years
to develop, will support current activity and
build capacity for eventual recovery.


Given strong underlying growth dynamics
in South Asia, the negative feedback effects of
the global financial crisis are expected to be
temporary. A relatively rapid rebound is ex-
pected in 2010, with a projected revival of
GDP growth to 7.2 percent by 2010. Private
consumption and investment growth are fore-
cast to gain steam, supported by strengthening
global demand and a rebound in consumer
and business confidence. Commodity price de-
creases are projected, which will support a re-
duction of inflationary pressures within the
South Asian economies. The region’s median
inflation rate will have peaked in 2008 at 9.7
percent, although sustained pipeline pressures
will prevent a rapid easing, with inflation
moderating incrementally to 8 percent in 2009
and 6 percent by 2010.


Risks
Given the synchronized and widespread nature
of the current crisis, downside risks to the
baseline are pronounced. A more prolonged
and pervasive credit crunch than envisioned in
the baseline would lead to a deeper global re-
cession. That in turn would likely lead to out-
right contraction of South Asia’s private fixed
investment (compared with the sharp slowing
of growth found in the baseline), driven in part
by a crimping of FDI inflows. South Asia’s ex-
ports would also likely contract instead of
slow, and remittances could compress sharply,
especially were destination countries to send
migrants home. With the growth slowdown,
household incomes would decline and unem-
ployment rise. Progress in poverty alleviation
could slow markedly. While the region’s bank-
ing sector has not been exposed to the toxic
debt instruments that have plagued many high-
income countries, in a downside scenario of


protracted sluggish growth and risk aversion,
weaknesses in the region’s financial sector
could emerge.


Whereas India holds sizable foreign ex-
change reserves (despite recent draw-downs)
to help weather more negative than expected
growth dynamics, other countries in the re-
gion have seen widening trade deficits and
capital outflows reduce their reserve holdings,
increasing their vulnerability to sustained
pressure on currencies. Countries holding sub-
stantial short-term debt obligations would be
more vulnerable. In the Maldives, the rapid
buildup of debt obligations with the construc-
tion boom following the tsunami is of con-
cern. Sri Lanka has a large public debt (equiv-
alent to 83 percent of GDP in 2007), with
44 percent of the debt external, albeit primarily
concessional; the country’s fiscal position is
thus vulnerable to higher interest rates and ex-
change rate depreciation. The Sri Lankan cur-
rency peg against the dollar could come under
pressure, because the foreign reserve cover is
relatively low. Bhutan also holds significant
external debt obligations, but these are held
primarily by India for the development of
hydroelectric power, which Bhutan is in turn
exporting to India. Should a deeper crisis lead
to a falloff in foreign assistance, countries sig-
nificantly reliant on aid (such as Afghanistan)
would be more adversely affected.


In contrast, should the current global fi-
nancial crisis be resolved relatively quickly,
and growth dynamics prove more favorable
than projected, policy makers would face very
different challenges. Inflationary pressures
could return to the forefront—as counter-
cyclical measures could become effectively
pro-cyclical—leading to higher internal and ex-
ternal deficits, hindering investment (through
crowding out), and acting as a drag on growth.


Sub-Saharan Africa
Recent Developments


Sub-Saharan Africa’s economy expanded5.4 percent in 2008, the first time in more
than 45 years that growth exceeded 5 percent


R E G I O N A L E C O N O M I C P R O S P E C T S


171


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for five years in succession—this despite sub-
stantial deterioration in the external environ-
ment during the year. GDP gains have been
broad-based and less volatile, even in oil-im-
porting economies, as strong commodity ex-
port revenues and capital inflows underpinned
domestic demand. Another notable and en-
couraging feature of the recent growth spurt is
the sustained contribution of fixed investment
to growth, which carries positive implications
for long-term potential growth.


Strong external demand, high commodity
prices, and relatively robust private capital in-
flows invigorated growth across a large spec-
trum of economies, whether resource rich or
resource poor. Oil-importing economies, out-
side of South Africa, grew 5.2 percent in 2008,
down from 5.8 percent in 2007, while oil-ex-
porting countries grew by more than 7.5 per-
cent for a second consecutive year. However,
several years of above-trend economic expan-
sion have pushed a larger number of African
economies up against capacity constraints


stemming from inadequate investment in en-
ergy, roads, railways, and ports over the past
decades. This constraint along with high food
and fuel prices has contributed to the upturn
in inflation witnessed across the subcontinent
during the year (table A11).


South African growth eases
Growth in the Republic of South Africa
trailed growth in other African economies in
2008, slowing markedly to an estimated 3.4
percent from 5.1 percent in 2007. Power out-
ages plagued output growth in the mining sec-
tor, and household consumption slowed
sharply, undercut by slower growth of credit,
falling asset prices, and higher food and fuel
prices. The region’s largest economy has felt
the repercussions of the intensification of the
financial crisis since September 15. Increased
risk aversion vis-à-vis emerging markets
caused asset prices in South Africa to plum-
met, putting pressure on the rand, which has
depreciated nearly 25 percent in nominal


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


172


Table A11 Sub-Saharan Africa forecast summary
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


GDP at market prices (2000 US$)b 2.3 5.9 5.9 6.3 5.4 4.6 5.8
GDP per capita (units in US$) 0.5 3.4 3.4 4.3 3.4 2.7 3.8
PPP GDPc 3.2 6.2 6.1 6.7 5.7 4.9 6.1


Private consumption 1.3 5.2 6.5 6.5 3.4 3.5 5.2
Public consumption 2.4 6.2 6.0 6.2 5.4 6.0 7.4
Fixed investment 3.6 14.8 19.4 20.3 12.7 7.7 9.9
Exports, GNFSd 4.6 6.2 4.7 5.4 5.9 4.5 7.2
Imports, GNFSd 4.5 12.8 12.8 11.9 7.6 5.6 9.4


Net exports, contribution to growth 0.1 2.3 3.1 2.9 1.2 0.8 1.6
Current account balance/GDP (%) 2.0 2.4 0.7 0.3 1.0 3.5 3.7
GDP deflator (median, LCU) 10.2 7.2 7.3 6.3 8.6 6.5 4.1
Fiscal balance/GDP (%) 4.7 0.2 1.0 1.9 0.6 1.3 1.5


Memo items: GDP
Sub-Saharan Africa excluding South Africa 2.6 6.4 6.2 7.0 6.6 5.7 6.6
Oil exporters 2.0 7.5 6.8 8.2 7.8 6.6 7.3
CFA countries 2.5 4.0 2.4 3.4 4.5 4.3 5.0


South Africa 1.8 5.0 5.4 5.1 3.4 2.8 4.4
Nigeria 2.8 7.2 5.2 6.5 6.3 5.8 6.2
Kenya 1.9 5.7 6.1 7.1 3.3 3.7 5.9


Source: World Bank.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and nonfactor services.
e. Estimate.
f. Forecast.


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effective terms since the beginning of 2008.
Like most emerging markets, South Africa saw
spreads on its sovereign bonds surge, by more
than 450 basis points between the beginning of
September and mid November 2008; equity
prices plummeted 40 percent in dollar terms
over the same period (in local currency the loss
was 21.7 percent) (figure A16).


Helped by higher exports of gold and plat-
inum, South Africa’s current account deficit
retreated to 7.3 percent of GDP in the second
quarter of 2008, from 8.9 percent in the pre-
vious quarter. Lower prices for its main ex-
ports, together with weaker external demand,
will cause the current account deficit to rise to
8 percent of GDP this year from 7.3 percent in
2007. With portfolio inflows financing three-
fourths of South Africa’s current account
deficit in 2007, and with the increased volatil-
ity of these inflows, South Africa may find it
difficult to finance its large current account
deficit, especially if FDI inflows are also
falling. Meanwhile, fiscal financing require-
ments are much more modest; South Africa is
expected to run a small budget deficit in 2009,
after being almost in-balance in 2008. Fur-
thermore, government indebtedness remains
low, with debt at 23.3 percent of GDP as of
March 2008, and foreign debt accounting for
less than 20 percent of total. This means that
the government has room to borrow domesti-
cally to finance countercyclical policies.


Higher fiscal spending, a slowdown in FDI,
and drying up of credit suggests that private
investment growth, which has already been af-
fected by tighter monetary policy, will slow
further. The intensification of political ten-
sions within the ruling African National Con-
gress Party, which led to the resignation of
President Thabo Mbeki several months before
the end of his term, is likely to have a minimal
direct impact on the economy but will add to
uncertainties faced by investors now worried
about a possible shift in economic policy.


Outside of South Africa, large commodity
windfalls have fueled growth in resource-rich
countries. Encouragingly, growth is spilling
over to other sectors outside oil and mining, as
part of the windfall is spent. In Nigeria, the
non-oil economy is booming, despite contin-
ued unrest in the Niger Delta that caused oil
output to drop 11.2 percent in the second
quarter of 2008. Despite underperformance in
the oil sector, second-quarter growth acceler-
ated to 6.7 percent, from 5.5 percent in the
first, as output in non-oil industries picked up
to 8.5 percent, mainly on strong growth in
agriculture, trade, and telecoms, which to-
gether accounted for 95 percent of non-oil
growth. In Angola, GDP growth remained ro-
bust in the first half of the year, and growth in
the non-oil sector will approach 20 percent
this year, marginally down from 21.5 percent
in 2007, as the construction, agriculture, and
communication sectors continue to expand at
an impressive pace.


High energy and agricultural prices and
lower agriculture output caused by unfavor-
able weather conditions have affected indus-
trial output in some countries. Indeed, in many
West African countries the food processing sec-
tor has contracted due to lower agricultural
output and higher input costs. Surges in food
and fuel prices have pushed headline consumer
price inflation into double digits in almost half
of the countries in Sub-Saharan Africa, with
median inflation moving rapidly to nearly 13
percent as of September 2008; median food in-
flation increased to more than 17.7 percent
(figure A17). For example in Ethiopia, headline


R E G I O N A L E C O N O M I C P R O S P E C T S


173


Spreads in basis points


Source: JPMorgan-Chase.


200
Sep. 1
2008


Sep. 21
2008


Sep. 11
2008


Oct. 1
2008


Oct. 11
2008


Oct. 21
2008


Oct. 31
2008


400


600


800


1000


1200


1400


Figure A16 Bond spreads for African
countries jumped after mid-September


Gabon


South Africa


Ghana


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inflation surged as high as 64 percent in 2008,
as food inflation breached 80 percent. In some
cases, core inflation also accelerated, as second-
round inflation effects through wage settle-
ments incorporating expectations of higher in-
flation were concluded. For example, in South
Africa, unit labor costs increased 10.5 percent
in the second quarter of 2008, spurred by av-
erage wage increases of 9.6 percent in the first
nine months of the year.


High import prices in conjunction, in some
cases, with strong investment demand (invest-
ment carries high import content in Africa) led
current account balances to deteriorate in
more than one of every two countries during
2008 relative to 2007. Thirteen of 44 countries
experienced a worsening in excess of 2 percent
of GDP, and 19 of 44 countries registered cur-
rent account deficits in excess of 10 percent of
GDP. In Ghana, for example, the trade deficit
breached 26.2 percent of GDP in the second
quarter of 2008 and is expected to reach more
than 30 percent in 2009. The deficit excluding
official transfers is likely to rise to more than
17 percent of GDP.


Political instability can still derail growth,
as it did in Kenya, where output contracted
0.8 percent in the first quarter of 2008 (year-
over-year). Political tensions caused a sharp
contraction in tourism arrivals and in the
agriculture sector. Other sectors were also af-


fected to varying degrees, with transport con-
tracting 2.2 percent; strong performance in
mining and construction prevented a more
dismal growth outcome. A resumption of
conflict is also threatening growth prospects
in the Democratic Republic of Congo.


Medium-term outlook
The rapid and marked deterioration in the ex-
ternal environment will cause growth in Sub-
Saharan Africa to slow, coming in at 4.6 per-
cent in 2009, a pace below 5 percent for only
the first time in five years (see table A11, ear-
lier). Direct effects of the global financial and
economic crisis are likely to be much more lim-
ited than in other regions, because African
economies are less integrated into the interna-
tional financial system and rely relatively less
on international capital and bond markets to
finance investment.


For Africa, weaker external demand and
lower commodity prices will be the major
mechanisms through which the financial crisis
will be transmitted. Declines in demand in key
external markets will take a toll on exports,
and the contribution of trade to GDP growth
is likely to be negative in 2009. Perhaps more
importantly, export revenues will be affected
by markedly lower commodity prices next
year, eroding government and corporate fi-
nances and affecting farmers’ incomes ad-
versely. Additional adverse factors coming to
affect Sub-Saharan Africa, potentially with
some lag, are a slowing pace of worker remit-
tance receipts, and importantly for many low-
income countries, possible moderation in Of-
ficial Development Assistance (ODA) flows.


More of an issue for commodity-rich coun-
tries, gross portfolio flows to the region are ex-
pected to fall markedly as credit becomes scarce
and more expensive and investors’ risk aversion
intensifies. Official aid may also be squeezed by
reduced fiscal space in donor countries as they
tackle financial crises at home. As a result, frag-
ile countries that rely heavily on aid are faced
with a potential deterioration in growth
prospects. Moreover, recession in high-income
countries will undermine tourism arrivals and


G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 9


174


Median CPI inflation (year-on-year)


Source: World Bank.


4


8


12


20


16


Figure A17 African headline inflation jumps
as food prices skyrocket


Jul.
2005


Jul.
2006


Jul.
2007


Jan.
2005


Jan.
2006


Jul.
2008


Jan.
2007


Jan.
2008


Headline consumer price inflation


Food


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revenues, as well as remittances, which repre-
sent a significant share of GDP for Cape Verde,
the Gambia, Kenya, Liberia, Lesotho, and the
Seychelles, among other countries. However,
for countries where currencies depreciated
heavily with respect to donor country curren-
cies, receipts in local currency terms could still
increase.


Countries with very large current account
deficits, including Burundi, Eritrea, the Gambia,
Ghana, Madagascar, Malawi, Rwanda, Togo,
and the Seychelles will need to adjust domestic
demand to lessen import growth as financing
external deficits becomes more difficult, and
as export revenues and transfers are dimin-
ished by slower global growth. Many of these
economies are especially vulnerable because
they have low levels of international reserves,
in many cases covering less than three months
of imports.


While oil exporters hold sufficient re-
sources to weather the global economic down-
turn, many oil-importing economies have
been hit hard by higher food and fuel prices
and are less well equipped for the coming
downturn. In a number of cases, increased
subsidies have limited fiscal space for counter-
cyclical spending. Over the past year, as food
prices surged, many governments removed or
suspended tariffs on imported foods, which
undercut tariff revenues. In addition, a less-
than-full pass-through of higher international
oil prices led to a large increase in fuel subsi-
dies in some countries, further reducing fiscal
room. While the movement to lower food and
fuel prices will bring some relief, countries re-
main in a weakened state.


Overall, aggregate GDP growth in Sub-
Saharan Africa is projected to decline to 4.6
percent in 2009 from 5.4 percent in 2008, on
the back of weaker investment outlays, falter-
ing export performance, and softer private
consumption. As external demand gradually
recovers over the second half of 2009 and into
2010, growth should firm to 5.8 percent by
the latter year. Excluding South Africa and
Nigeria, growth is projected to ease by a full
percentage point to 5.6 percent in 2009 and to


bounce back to 6.7 percent by 2010. In oil-
exporting economies, growth will slow by
more than a full percentage point to 6.6 per-
cent, but the exporters will remain the fastest-
growing group of countries in the region,
while growth in oil-importing countries out-
side South Africa is projected to ease to 4.6 per-
cent, a rate still above the historical trend
(table A12).


South Africa’s economic growth is likely to
weaken further in 2009, falling below 3 per-
cent for the first time in almost a decade, as
tighter monetary policy and high inflation
causes household consumption to falter. Pri-
vate investment growth will continue to decel-
erate, pushed down by tighter credit markets
and as demand in main export markets con-
tracts (figure A18). Large asset price declines
and associated negative wealth effects, along
with slower credit creation will undermine
household consumption, and together with
weaker external demand will cut into manu-
facturing output. Although investment growth
in South Africa is projected to ease in 2009, it
will still remain one of the engines of growth
for the country, as the South African govern-
ment continues to bring forth large projects in
the energy sector to address the chronic elec-
tricity deficit and in infrastructure ahead of
the 2010 World Football Cup. The falloff in
South Africa’s GDP growth will carry reper-
cussions for neighboring economies that trade
heavily with South Africa and receive remit-
tances from expatriate workers in South
Africa.


Risks
With the world economy at a crossroads, risks
facing Sub-Saharan Africa have intensified. If
the concerted efforts of policy makers around
the globe fail to re-establish trust in the inter-
national financial system, the world economy
risks a deeper and more prolonged recession.
As a result, Sub-Saharan Africa’s growth
would drop more sharply than envisaged in
the base forecast.


Among African countries, South Africa is
probably the country most directly exposed to


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176


Table A12 Sub-Saharan Africa country forecasts
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


Angola
GDP at market prices (2000 US$)b 0.8 20.6 18.6 24.7 15.8 11.1 11.3
Current account balance/GDP (%) 6.1 16.8 20.9 14.1 17.8 8.9 9.2
Benin
GDP at market prices (2000 US$)b 4.8 2.9 3.8 4.7 5.0 5.1 5.7
Current account balance/GDP (%) 6.8 6.3 7.3 7.0 8.6 9.5 9.5
Botswana
GDP at market prices (2000 US$)b 6.2 4.0 2.1 6.0 4.7 4.1 4.5
Current account balance/GDP (%) 8.1 15.3 18.2 19.3 9.5 7.4 5.2
Burkina Faso
GDP at market prices (2000 US$)b 4.0 7.1 5.5 3.6 4.1 4.6 5.5
Current account balance/GDP (%) 5.6 12.4 11.7 13.1 14.2 12.8 12.2
Burundi
GDP at market prices (2000 US$) b 1.7 0.9 5.1 3.4 4.4 4.0 5.1
Current account bal/GDP (%) 3.4 28.4 36.0 37.6 38.9 36.2 36.7
Cape Verde
GDP at market prices (2000 US$)b 5.8 11.9 10.8 6.5 6.7 5.1 6.3
Current account bal/GDP (%) 8.3 3.5 9.6 15.5 13.9 11.9 12.8
Cameroon
GDP at market prices (2000 US$)b 1.4 2.0 3.2 3.4 3.9 4.0 4.4
Current account bal/GDP (%) 2.9 2.4 2.1 2.3 0.5 4.3 4.6
Central African Republic
GDP at market prices (2000 US$)b 1.6 2.2 4.1 3.8 3.4 4.2 4.8
Current account balance/GDP (%) 4.3 7.1 7.4 7.3 7.0 6.7 7.1
Chad
GDP at market prices (2000 US$)b 2.3 7.9 0.5 0.7 1.6 2.8 3.0
Current account balance/GDP (%) 5.5 6.3 7.3 8.2 3.8 7.0 8.8
Comoros
GDP at market prices (2000 US$)b 1.1 4.2 0.5 1.8 0.6 1.2 2.5
Current account balance/GDP (%) 6.8 4.6 5.5 4.8 7.2 6.3 6.8
Congo, Dem. Rep.
GDP at market prices (2000 US$)b 5.6 6.5 5.6 6.3 10.7 8.3 11.9
Current account balance/GDP (%) 2.0 10.0 9.8 12.2 11.9 13.4 10.1
Congo, Rep.
GDP at market prices (2000 US$)b 1.4 7.7 6.2 1.4 9.1 7.4 9.7
Current account balance/GDP (%) 16.5 15.1 3.9 23.0 6.8 2.6 11.6
Côte d’Ivoire
GDP at market prices (2000 US$)b 2.3 1.2 0.9 1.5 2.6 3.1 4.9
Current account balance/GDP (%) 4.0 0.2 3.4 0.2 0.7 3.2 3.8
Eritrea
GDP at market prices (2000 US$)b — 4.8 1.0 1.3 1.2 2.0 4.2
Current account balance/GDP (%) — 26.1 29.5 30.2 32.8 22.1 19.0
Ethiopia
GDP at market prices (2000 US$)b 2.9 10.2 11.5 11.1 8.8 6.0 7.3
Current account balance/GDP (%) 0.8 13.7 12.3 11.8 11.6 8.9 8.6
Gabon
GDP at market prices (2000 US$)b 1.7 3.0 1.3 5.4 3.7 4.2 4.0
Current account balance/GDP (%) 5.6 15.9 15.5 15.4 19.6 10.3 8.1
Gambia, The
GDP at market prices (2000 US$)b 3.3 5.0 6.5 6.4 5.3 4.5 5.4
Current account balance/GDP (%) 1.6 10.9 13.8 16.9 19.8 17.4 16.3
Ghana
GDP at market prices (2000 US$)b 4.3 5.9 6.2 6.5 6.0 5.6 6.0
Current account balance/GDP (%) 6.5 10.3 12.6 14.2 17.1 15.6 16.0


(continued)


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177


Guinea
GDP at market prices (2000 US$)b 4.1 3.3 2.8 1.8 4.3 3.7 4.6
Current account balance/GDP (%) 5.6 4.9 1.7 2.4 4.9 7.1 7.2
Guinea-Bissau
GDP at market prices (2000 US$)b 1.5 3.5 4.2 2.7 2.9 2.8 3.4
Current account balance/GDP (%) 24.0 7.2 19.3 15.9 10.9 12.1 10.8
Kenya
GDP at market prices (2000 US$)b 1.9 5.7 6.1 7.1 3.3 3.7 5.9
Current account balance/GDP (%) 1.6 1.4 2.3 3.7 8.0 6.4 5.5
Lesotho
GDP at market prices (2000 US$)b 3.5 2.9 7.2 4.9 4.1 3.2 4.2
Current account balance/GDP (%) 13.4 6.9 0.7 0.2 1.8 4.6 4.5
Madagascar
GDP at market prices (2000 US$)b 1.7 4.6 4.9 6.3 6.8 6.0 10.4
Current account balance/GDP (%) 7.8 12.4 9.4 14.2 21.0 15.7 4.8
Malawi
GDP at market prices (2000 US$)b 3.4 2.7 8.2 8.4 7.9 6.5 7.9
Current account balance/GDP (%) 8.5 11.8 19.3 17.9 20.7 19.8 19.6
Mali
GDP at market prices (2000 US$)b 4.0 6.1 5.3 3.1 5.1 3.9 5.1
Current account balance/GDP (%) 8.9 8.2 6.4 9.9 9.1 10.5 10.4
Mauritania
GDP at market prices (2000 US$)b 2.9 5.4 11.6 0.9 2.1 5.9 6.4
Current account balance/GDP (%) 0.3 49.0 2.8 4.9 4.4 9.4 10.7
Mauritius
GDP at market prices (2000 US$)b 5.3 4.6 3.5 5.4 5.0 3.8 5.3
Current account balance/GDP (%) 1.6 5.0 10.0 8.4 10.0 8.2 8.3
Mozambique
GDP at market prices (2000 US$)b 5.0 8.4 8.7 7.0 6.0 6.3 6.4
Current account balance/GDP (%) 16.4 11.6 9.0 15.8 17.0 16.0 16.3
Namibia
GDP at market prices (2000 US$)b 4.2 4.7 4.1 3.8 3.6 3.1 4.5
Current account balance/GDP (%) 3.1 4.3 18.8 20.9 23.0 21.3 20.1
Niger
GDP at market prices (2000 US$)b 1.8 7.2 5.1 3.2 4.9 3.6 4.9
Current account balance/GDP (%) 6.9 9.1 9.2 10.9 14.5 13.7 15.4
Nigeria
GDP at market prices (2000 US$)b 2.8 7.2 5.2 6.5 6.3 5.8 6.2
Current account balance/GDP (%) 0.8 31.5 22.5 21.8 20.3 7.0 4.6
Rwanda
GDP at market prices (2000 US$)b 0.2 6.0 5.5 6.0 8.0 5.0 5.5
Current account balance/GDP (%) 1.2 3.9 15.7 15.6 21.7 15.7 16.7
Senegal
GDP at market prices (2000 US$)b 3.1 5.6 2.3 4.6 4.5 4.7 5.9
Current account balance/GDP (%) 5.7 6.5 9.3 11.7 14.4 12.7 12.8
Seychelles
GDP at market prices (2000 US$)b 4.5 1.2 5.3 7.3 2.3 0.5 3.0
Current account balance/GDP (%) 7.4 29.0 22.6 31.4 30.2 27.4 23.8
Sierra Leone
GDP at market prices (2000 US$)b 4.7 7.3 7.4 6.4 5.8 5.1 6.5
Current account balance/GDP (%) 9.0 14.3 8.8 7.2 8.3 9.6 9.7
South Africa
GDP at market prices (2000 US$)b 1.8 5.0 5.4 5.1 3.4 2.8 4.4
Current account balance/GDP (%) 0.2 4.0 6.5 7.3 8.0 8.1 8.3
Sudan
GDP at market prices (2000 US$)b 5.8 8.6 11.8 10.1 10.3 8.0 8.1
Current account balance/GDP (%) 8.2 10.8 13.6 10.7 6.8 8.9 9.0


1991–2000a 2005 2006 2007 2008e 2009f 2010f


(continued)


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Swaziland
GDP at market prices (2000 US$)b 3.1 2.3 2.1 3.2 2.2 1.8 1.9
Current account balance/GDP (%) 2.4 3.3 5.9 9.5 10.7 10.7 9.3
Tanzania
GDP at market prices (2000 US$)b 2.9 6.8 6.2 7.1 7.2 6.3 7.0
Current account balance/GDP (%) 12.5 7.0 12.9 12.7 14.2 12.7 12.9
Togo
GDP at market prices (2000 US$)b 2.2 1.2 4.1 2.3 0.8 2.4 3.3
Current account balance/GDP (%) 8.5 21.8 17.6 16.0 22.1 16.9 16.9
Uganda
GDP at market prices (2000 US$)b 6.8 6.7 8.4 8.9 7.9 5.9 7.6
Current account balance/GDP (%) 7.0 4.8 7.6 8.0 8.8 9.3 9.9
Zambia
GDP at market prices (2000 US$)b 0.7 5.2 6.2 6.2 6.1 4.6 6.0
Current account balance/GDP (%) 10.6 10.0 7.3 7.2 5.5 8.1 9.5
Zimbabwe
GDP at market prices (2000 US$)b 0.9 5.3 4.2 6.3 4.9 2.1 2.1
Current account balance/GDP (%) 7.5 28.5 30.7 36.6 40.2 18.1 18.6


Source: World Bank.


Note: — not available.


a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages.
b. GDP measured in constant 2000 U.S. dollars.
c. Growth and current account figures presented here are World Bank projections and may differ from targets contained in other
World Bank documents.


d. Liberia, Somalia, Sǎo Tomé and Príncipe, are not forecast because of data limitations. Current account balances exclude
official transfers. In SACU members they include nonduty SACU transfers.


e. Estimate.
f. Forecast.


Table A12 (continued )
(annual percent change unless indicated otherwise)


1991–2000a 2005 2006 2007 2008e 2009f 2010f


the current global financial turmoil. South
Africa’s risk of financial contagion, however,
is limited by low exposure to “toxic” assets
and foreign currency risks. However, a “flight
to quality” could cause large portfolio out-
flows, which would imperil the country’s abil-
ity to finance its large current account deficit,
which in turn could trigger sharp depreciation
of the rand and higher inflation.


Sub-Saharan African countries that are less
integrated with international financial and
capital markets would suffer more from lower
external demand, dwindling tourism revenues,
remittances, or aid. Commodity prices would
fall further in such a scenario, causing export
revenues in many countries to fall sharply and
eroding fiscal positions, corporate profitabil-
ity, and incomes. Vulnerability to external
shocks, including terms-of-trade shocks, has


Figure A18 Economic growth to slow in
Sub-Saharan Africa


5


6


7


8


9


0


1


2


3


4


2009 2010


Oil importers, excluding South Africa


Oil exporters
South Africa


2005 2006


GDP growth (%)


2007 2008


Source: World Bank.


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R E G I O N A L E C O N O M I C P R O S P E C T S


179


increased over the past couple of years, as ex-
ternal and fiscal balances have deteriorated in
many countries. Several countries have
reached a point where external imbalances are
unsustainable and a shut-off of financing, or
large negative terms-of-trade shocks, could
lead to balance of payments and currency
crises, with adverse consequences for hard-
won macroeconomic stability and long-term
growth. Moreover, fragile economies that rely
heavily on external aid and face daunting re-
construction and stabilization challenges will
see their efforts to normalize the situation de-
railed by lack of sufficient external financing.


A sharp deceleration in growth would have
significant consequences for poverty reduction
in Africa. According to Arbache and Page
(2007), had the region avoided some of the
sharpest declines in per capita GDP growth,
overall growth would have been 1 percentage
point faster every year for the past three
decades. Another risk is that the large-scale in-
jection of liquidity into the global financial
system comes to fuel inflation if monetary au-
thorities fail to reverse polices at the first signs
of a turnaround.


Notes
1. A downturn in the global high-tech cycle, in


which East Asia plays a key role in the production and
export of higher-tech goods, also contributed to the
slowing of trade growth.


2. Russia currently holds somewhat less than
$500 billion in reserves, along with two large oil funds
(about $140 billion and $50 billion, respectively, as of
September 2008); it also has ample fiscal and current
account surpluses (the latter, $90 billion, or 8 percent
of GDP as of September 2008).


3. Core inflation is calculated as headline CPI net of
food, household energy, and transport fuels. Data for
Belarus, Russia, and Turkey, where detailed sub-
indexes are not available, are from official sources di-
rectly, which may use different definitions and calcula-
tion methods.


4. This report covers the developing (that is, low-
and middle-income) countries of the Middle East and
North Africa region, and thus excludes high-income
economies Bahrain, Kuwait, Qatar, Saudi Arabia, and
the United Arab Emirates. In addition, for a number of


middle- and high-income countries, the availability of
economic data is insufficient for inclusion in the report;
these include Djibuti, Iraq, Libya, and the West Bank
and Gaza. For recent developments and the outlook for
a broader range of Middle Eastern and North African
economies, see Economic Developments and Prospects,
2008, The Middle East and North Africa Region
World Bank, 2008.


5. Several GCC countries have responded forcefully
to head off financial contagion. Qatar on October 13
launched a $5.3 billion plan to purchase up to 20 per-
cent of shares in banks listed on the Doha stock ex-
change. This followed by one day an announcement
that United Arab Emirates would guarantee all de-
posits and savings in national banks, as well as all in-
terbank operations in the Emirates. And Saudi Arabia
cut interest rates in line with the Federal Reserve, while
indicating that some $40 billion would be made avail-
able to local banks.


6. National income and product account figures are
presented in calendar years, although originally re-
ported in fiscal years by Bangladesh, India, Nepal, and
Pakistan. For example, fiscal year 2007/08 is reported
as calendar year 2007 for India, and as 2008 for
Bangladesh, Nepal, and Pakistan, due to differences in
the timing of their fiscal years.


7. Nepal’s currency is pegged to the Indian rupee.
8. Source: Boston Analytics Consumer Sentiment


Index (BACSI), which is based on a monthly survey
targeting Indian consumers across 11 cities (Delhi,
Mumbai, Kolkata, Chennai, Hyderabad, Bengaluru,
Nagpur, Kochi, Lucknow, Chandigarh, and Jaipur).
See http://www.bostonanalytics.com/news.html.


References
Arbache, Jorge Saba, and Page, John (2007). “More


Growth or Fewer Collapses? A New Look at
Long Run Growth in Sub-Saharan Africa.” Policy
Research Working Paper 4384, World Bank.


Calvo, Guillermo, and Ernesto Talvi. 2007. “Current
Account Surplus in Latin America: Recipe against
Capital Market Crises.” http://www.rgemonitor
.com/latam-blog/58/current_account_surplus_
in_latin_america_recipe_against_capital_market_
crise.


DJF (Dow Jones Factiva). 2008. http://www.factiva.com.
Fajnzylber, Pablo, and J. Humberto Lopez. 2008. “The


Development Impact of Remittances in Latin
America.” In Remittances and Development:
Lessons from Latin America, ed. Pablo Fajnzylber
and J. Humberto Lopez. Washington, DC: World
Bank.


ISI (ISI Emerging Markets). 2008. http://www.securities
.com.


10363_Pg141-180:10363_Pg141-180 11/29/08 7:13 AM Page 179




Izquierdo, Alejandro, Randall Romero, and Ernesto
Talvi. 2008. “Booms and Busts in Latin America:
The Role of External Factors.” Research Depart-
ment Working Paper 631. Inter-American Devel-
opment Bank, Washington, DC. http://www.imf
.org/external/np/seminars/eng/2007/whd/pdf/
session1-2.pdf.


Österholm, Pär, and Jeromin Zettelmeyer. 2007. “The
Effect of External Conditions on Growth in Latin
America.” Working Paper 07/176. International
Monetary Fund, Washington, DC. http://www.imf
.org/external/pubs/ft/wp/2007/wp07176.pdf.


World Bank. 2008a. Migration and Remittances Fact-
book 2008. Washington, DC: world Bank.


______. 2008b. “Rising Food Prices: The World Bank’s
Latin America and Caribbean Region Position
Paper.” Washington, DC.


______. 2008c. “Shockwaves from the North: Latin
America and the External Deterioration.” Chief
Economist Office, Latin America and the Caribbean
Region. http://siteresources.worldbank.org/
EXTLACOFFICEOFCE/Resources/870892-
1197314973189/Shockwaves.pdf.


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The eruption of the worldwide financial crisis has radically recast prospects for the world economy. Global Economic Prospects 2009: Commodities at the Crossroads analyzes the implications of
the crisis for low- and middle-income countries, including an in-depth
look at long-term prospects for global commodity markets and the
policies of both commodity producing and consuming nations.


Developing countries face sharply higher borrowing costs and reduced access
to capital. This will cut into their capacity to finance investment spending—
ending a five-year stretch of developing-country growth in excess of 6 percent
annually. The looming recession presents new risks, coming as it does on the
heels of the recent food and fuel crisis.


Commodity markets, meanwhile, are at a crossroads. Following decades of low
prices and weak investment in supply capacity, commodity prices first spiked—
spurred on by five years of very fast developing-country growth—and have now
plummeted in response to the financial crisis.


In the longer run, commodities are not expected to be in short supply. Prices
should be higher than they were in the 1990s but much lower than in the
recent past. These higher prices should provide producers with sufficient
incentive to discover new supplies, improve output from existing resources,
and promote greater conservation and substitution with more abundant
alternatives. At the same time, slower population growth will ease the pace at
which commodity demand grows. Policies to limit carbon emissions and boost
agricultural investment, along with the dissemination of efficient techniques,
should also contribute to this long-term outcome.


This year’s Global Economic Prospects also looks at government responses to the
recent price boom. Producing-country governments have saved more of their
windfall revenues, and are therefore less likely to be forced to cut into spending
now that prices have declined. The spike in food prices tipped more people
into poverty, which led governments to expand social assistance programs.
These programs need to be better targeted to the needs of the very poor so
that governments can respond effectively the next time there is a crisis.


For additional information, please visit www.worldbank.org/prospects.
An online companion to the prospects section of this report, including
access to additional data and analysis not reported here, is also available at
www.worldbank.org/globaloutlook.


“While developing countries
entered this tumultuous


period with much improved
fundamentals, this crisis is


expected to test severely both
them and the international


financial system. In the longer
run, even after developing-


country growth recovers,
commodity supply should keep


pace with demand, but policy
will need to foster conservation


efforts and technological
progress. In particular, if poor


countries are to maintain
domestic food self-sufficiency,


governments will need to
strengthen investment in rural


infrastructure, agricultural
research, and technological


outreach.”


—Justin Yifu Lin
Senior Vice President and


Chief Economist
The World Bank




2009Commodities at the Crossroads


Global
Economic
Prospects


SKU 17799


ISBN 978-0-8213-7799-4


G
lobal E


conom
ic Prospects


2009


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