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Global Economic Prospects (Vol. 8)

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Global Economic Prospects (Vol. 8)

Coping with Policy Normalization in High-Income Countries

World Bank,

15 min read
10 take-aways
Audio & text

What's inside?

What effect will the end of monetary easing in developed nations have on developing countries? Ask the World Bank.

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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Scientific

Recommendation

Since 2009, global influences have driven about 60% of the growth in capital inflows to developing countries, so any move that high-income countries make away from stimulus and quantitative easing will have a broad impact. The World Bank’s staff of economists and researchers set out to determine just how broad that impact would be by using sophisticated economic modeling tools that analyze the global effects of this pivotal change. The study concludes that the resulting worldwide rise in interest rates will introduce complex shifts in the way investment capital moves into developing countries. The World Bank says that if the transitions are smooth, the impact on developing countries will be minimal. However, turbulence during this transition period could result in economic distress in the form of precipitous capital flight. This report clearly details possible risks and proposes effective coping strategies, such as increased exporting. Tables, graphs, charts, figures and a statistical annex support the detailed text. getAbstract recommends this comprehensive, analytical look at the possible effects of normalization to policy makers, investors, executives, economists, academicians and strategic planners.

Summary

Moving Toward Steady Growth

Evidence suggests that high-income countries are now on an economic rebound: Their 1.3% growth in 2013 will likely intensify to 2.2% in 2014 and to 2.4% in 2015 and 2016. This is good news for the world economy – 2013 global growth rates of 2.4% are on a trajectory to reach 3.5% by 2016. This will buoy demand for products from developing nations, whose growth will go from 4.8% in 2013 to 5.7% in 2016.

The tapering of the Federal Reserve’s assistance to the US economy, beginning in January 2014, is a harbinger of better economic times. The related rise in global interest rates has not unduly disturbed the flow of capital into developing countries so far, but if the easing causes abrupt market changes, capital inflows – particularly to middle-income countries – could sink as much as 80% in a worst-case scenario.

If interest rates spike suddenly and capital inflows drop, developing countries’ resiliency will depend on local conditions, “policy buffers” and indebtedness levels. This rebalancing challenge will fall solidly on policy makers’ shoulders. They will face making changes, perhaps including tighter money, “controlled depreciations...

About the Author

The World Bank is an international financial institution that aims to reduce poverty by providing credit, advice and resources for capital projects to developing countries.

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