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

Hans Hans TimmerTimmer and Richard and Richard NewfarmerNewfarmerWorld BankWorld Bank

December, 2006December, 2006

MediumMedium--term outlookterm outlook

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

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

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

Strong growth in developing economiesStrong growth in developing economies

Real GDP annual percent change

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 1985 1990 1995 2000 2005

Forecast

Developing

2008

Source: World Bank

Strong growth in developing economiesStrong growth in developing economies

Real GDP annual percent change

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980 1985 1990 1995 2000 2005

Forecast

DevelopingDeveloping

HighHigh--incomeincome

2008

Developing ex. Developing ex. China & IndiaChina & India

Source: World Bank

Growth now broadGrowth now broad--basedbased

0

5

10

15

20

25

30

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

86-96 96-06

# of developing countries

Average annual GDP growth (%)

Growth now broadGrowth now broad--basedbased

0

5

10

15

20

25

30

35

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

96-06 00-08

# of developing countries

Average annual GDP growth (%)

Developing countriesDeveloping countries’’ policies have improved policies have improved

percent

-10

0

10

20

30

Av. Tariffs Median Inflation Fiscal Deficit

1980s1980s

20022002--20042004

Turning point in commodity marketsTurning point in commodity markets

80

130

180

230

280

330

Jan-03

Jul-03 Jan-04

Jul-04 Jan-05

Jul-05 Jan-06

Jul-06 Jan-07

Jul-07

Metals and minerals

Crude oil

Price indexes, Jan 2003=100ForecastForecast

Tighter monetary policy to contain inflationTighter monetary policy to contain inflation

0

1

2

3

4

5

6

Jan

May

Sep

Ja

n M

ay

Sep

Jan

May

Sep

Ja

n M

ay

Sep

Jan

May

Sep

Percent -- Interest rates

United States

Source: World BankSource: World Bank

2002 2003 2004 2005 2006

3 month t-bill

Core inflation

Turning point in global imbalancesTurning point in global imbalances

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

Source: World Bank.Source: World Bank.

-1000

-800

-600

-400

-200

0

200

400

USA Europe Japan Other HIC East Asia &Pacific (ex

China)

China Europe &Central Asia

OtherDeveloping

20022006

2008

Turning points come with risksTurning points come with risks

Surplus of global liquidity might trigger sudden reversal of credit flowsGlobal imbalance still large and might trigger sudden reversal in capital flowsCorrection in U.S. housing market might trigger sharper slowdownDisruption in oil supply might trigger renewed upward price spikes

The next wave of globalizationThe next wave of globalization

Over the next 25 years, markets will become more Over the next 25 years, markets will become more integrated, developing countries will like grow faster, integrated, developing countries will like grow faster, and become a major force in the global economyand become a major force in the global economyHowever, stresses over income distribution and in However, stresses over income distribution and in labor markets could undermine potential growthlabor markets could undermine potential growth……and failure to manage environmental pressures and failure to manage environmental pressures entails serious risks entails serious risks Policy responses to these stresses are so far Policy responses to these stresses are so far inadequate to the challenges, so new efforts are inadequate to the challenges, so new efforts are needed at both the national and multilateral level needed at both the national and multilateral level

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

Exports from developing and developed countries, 2005Exports from developing and developed countries, 2005--20302030

0

5

10

15

20

25

30

1980 2005 2030

US$2001 trln.

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

Developing countries

High-income countries

$27 trln

32%

45%

22%

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

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

0

10

20

30

40

50

60

70

80

1980 2005 2030

US$2001 trln

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

Developing countries

High-income countries

$72 trln

23%

31%

16%

Growth would raise income and reduce absolute povertyGrowth would raise income and reduce absolute povertyAverage per capita incomes in developing countries are likely toAverage per capita incomes in developing countries are likely to double..double..……and more people from developing countries will enter the and more people from developing countries will enter the ””global middle classglobal middle class””

0

200

400

600

800

1000

1200

1400

2000 2030

South Asia

Europe & Central Asia

East-Asia

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

Latin AmericaLatin America

Middle EastMiddle East

Africa

Growth would raise incomes and reduce absolute povertyGrowth would raise incomes and reduce absolute povertyAverage incomes are likely to doubleAverage incomes are likely to double……and more people from developing countries will enter the and more people from developing countries will enter the ””global middle classglobal middle class””……and sharp reductions in dire absolute poverty and sharp reductions in dire absolute poverty

0

200

400

600

800

1,000

1,200

1,400

1990 2003 2015 2030

East AsiaEast Asia

South AsiaSouth Asia

SubSub--Saharan Saharan AfricaAfrica

OtherOther28%28%

20%20%

8%8%

12%12%

Millions of peopleMillions of people

Managing stresses: uneven benefitsManaging stresses: uneven benefits

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

2005

2030

0

5

10

15

20

25

30

35

40

East-AsiaPacific

South Asia Europe &Central

Asia

MiddleEast &NorthAfrica

Sub-Saharan

Africa

LatinAmerica &

Carib.

Per capita incomes as percent of highPer capita incomes as percent of high--income countriesincome countries

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

WithinWithin--country income distribution could become unequal country income distribution could become unequal in coming years for many countries

Managing stresses: uneven benefitsManaging stresses: uneven benefits

in coming years for many countries

0

5

10

15

20

25

very largelargesmallminimal changesmalllargevery large

Number of countriesNumber of countries

Income inequalityIncome inequalitydecreasedecrease increaseincrease

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

Managing stresses: uneven benefitsManaging stresses: uneven benefitsReturns to skilled workers will likely rise relative to Returns to skilled workers will likely rise relative to unskilled workersunskilled workers

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

0

1

2

3

4

5

6

7

EAP ECA LAC MENA SA SSA

20302030

20012001

Source : Bank staff calculationsSource : Bank staff calculations

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

Managing stresses: labor marketsManaging stresses: labor markets

markets could become more severe

Africa

Middle East

LatinAmerica

ECA

China

Other Asia

01020304050607080

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

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

Managing stresses: labor marketsManaging stresses: labor markets

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

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

IndiaEstonia

RomaniaChinaIsraelBrazil

ArgentinaMauritius

EU-15US

CanadaBarbadosDominica*

AustraliaNorwayGhanaJapan

Growth rate of exports of business services 1994-2003

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

Managing stresses: labor marketsManaging stresses: labor markets

But ChinaBut China’’s surge s surge –– and that of other developing and that of other developing countries countries –– represents more opportunity than threatrepresents more opportunity than threat

Exporting requires importing, and ChinaExporting requires importing, and China’’s imports rapidlys imports rapidly

East-AsiaPacific

Europe and Central Asia

Latin Am.

Middle East and North Africa

South AsiaAfrica

0

20

40

60

80

100

120

140

1985 1990 1995 2000 2005

Imports in USD billionsImports in USD billions

Source: WITS, Bank staff calculationsSource: WITS, Bank staff calculations

Managing 3 stresses: environmental pressuresManaging 3 stresses: environmental pressures

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

Carbon emissions are causing global warmingCarbon emissions are causing global warming

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

1990 2000 2010 2020 2030 2040 2050

Others

Large developing countries

High-income countries

Annual carbon emissions (millions of tons)

Source: OECD GREEN model simulations

Managing stresses: environmental pressuresManaging stresses: environmental pressures

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

Carbon emissions are causing global warmingCarbon emissions are causing global warming…… and and overfishingoverfishing threatens major fisheriesthreatens major fisheries

10

30

50

70

90

110

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Trend 1950Trend 1950--9595

Trend 1995Trend 1995--20052005

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

Domestic policy must enhance competitiveness and ensure that groDomestic policy must enhance competitiveness and ensure that growth is wth is broadly sharedbroadly shared

Institutional measures to raise productivity and growthInstitutional measures to raise productivity and growth•• Removing barriers to integrationRemoving barriers to integration•• Improving investment climateImproving investment climate

Investing in educationInvesting in educationProtecting workers Protecting workers –– but not jobsbut not jobs

Multilateral collaborationMultilateral collaborationUsing development assistance to promote integration of lagging Using development assistance to promote integration of lagging countriescountriesRemoving barriers to the products that the poor produceRemoving barriers to the products that the poor produce

•• NearNear--term priority: Doha Development Agendaterm priority: Doha Development Agenda

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

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1 11 21 31 41 51 61 71 81 91Cumulative population ranked by per capita income

Growth incidence Average

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

Domestic policy must enhance competitiveness and ensure that groDomestic policy must enhance competitiveness and ensure that growth is wth is broadly sharedbroadly shared

Institutional measures to raise productivity and growthInstitutional measures to raise productivity and growth•• Removing barriers to integrationRemoving barriers to integration•• Improving investment climateImproving investment climate

Investing in educationInvesting in educationProtecting workers Protecting workers –– but not jobsbut not jobs

Multilateral collaborationMultilateral collaborationUsing development assistance to promote integration of lagging Using development assistance to promote integration of lagging countriescountriesRemoving barriers to the products that the poor produceRemoving barriers to the products that the poor produce

•• NearNear--term priority: Doha Development Agendaterm priority: Doha Development AgendaReinforcing mechanisms to deal with global externalitiesReinforcing mechanisms to deal with global externalities

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

Hans Hans TimmerTimmer and Richard and Richard NewfarmerNewfarmerWorld BankWorld Bank

December, 2006December, 2006