The long-term growth prospects of the world’s developing economies are being undermined by weak investment as the global economy continues a fragile recovery, according to the World Bank.
In their latest forecasts, released on Sunday, economists at the bank predicted the global economy would grow by 2.7 per cent in 2017 thanks to a recovery in the US, Europe and other advanced economies that is helping fuel the best growth in global trade seen in years.
That improving global picture, together with rises in commodity prices from recent lows, is expected to help emerging and developing economies as a group grow 4.1 per cent this year, up from a post-2008-crisis low of 3.5 per cent in 2016.
In their latest edition of the bank’s Global Economic Prospects, the bank pointed to a corrosive long-term trend. A slowdown in investment into developing economies has put the brakes on productivity growth in emerging economies, the bank warned. That echoes a trend in the US and other advanced economies where economists have been flummoxed by the issue of stalling productivity growth.
Moreover it may already have done long-term damage.
“Even if the expected modest rebound in investment across [emerging and developing economies] materialises, slowing capital accumulation in recent years may already have reduced potential growth,” the Bank’s economists write.
In an interview, Paul Romer, World Bank chief economist, said the long-term effect of weak investment on developing economies was one of the major long-term challenges now facing the global economy. He also argued that it was one of the basic ways in which global capital markets were failing to deliver the financial resources needed in the developing world.
“There is just a fundamental failure to match up this money that is looking for return and potentially high-return investments in things like infrastructure [in the developing world],” he said.
Helping to deploy that private sector money in the developing world has become a growing focus at the World Bank in recent years.
The move is driven in part by the fall since the 2008 crisis in public sector resources. Officials at the bank also say their own lending resources are being constrained by the need for a capital increase that is widely seen as unlikely to come any time soon given the Trump administration’s scepticism about funding multilateral institutions.
In his budget proposal last month US President Donald Trump proposed cutting almost $100m a year from the $1.1bn the US had pledged to give annually to the donor-funded World Bank arm that extends low-interest loans to the world’s poorest countries.
The bank’s concerns about investment highlight the diverging paths now seen in the developing world. Economists for years have warned about the risks of over-investment in China. But many other parts of the developing world have seen too little investment in things like infrastructure.
Among the places being hit hardest by the low-investment trend is sub-Saharan Africa where the recent poor performance of major commodity-exporting economies such as Nigeria and South Africa has put the brakes on efforts to reduce poverty.
The World Bank on Sunday said that it expected growth across sub-Saharan Africa to increase from 1.3 per cent in 2016 to 2.6 per cent this year and 3.2 per cent in 2018.
The midyear review from bank economists also marks the first time in years that they have not used it to downgrade their forecasts for the global economy, though they emphasised the world still faced short-term risks such as rising protectionism.