Five years on from the global financial crisis, the world economy is showing signs of bouncing back — pulled along by a recovery in high-income economies.
According to Andrew Burns, co-author of the World Bank’s twice-yearly Global Economic Prospects report, a 13 percent fall in food prices may signal that we’re now out of “firefighting mode,” but he insisted that the global community must redouble efforts to tackle longer-term challenges posed by high commodity prices.
Speaking to Devex on the Brussels leg of the report launch, the economist urged caution on drawing too many conclusions from the price easing witnessed between 2011 and late 2013: “In some senses it’s a welcome sign that we’re transitioning away from those very high prices and that increased supply is starting to feed through into the markets. But although food prices have come down, they still remain very high.”
Indeed, while strong supply and the release of Thai rice stocks led to a 14 percent drop in global rice prices and improved harvests saw maize prices fall 34 percent since June 2013, it is striking that prices for both foodstuffs remain 57 and 105 percent higher than their January 2005 levels.
Robust financial incentives
Burns saw the price-drop in food and a number of other commodities — including energy and metal — as part of a move towards a more “normal” outlook, explaining that the financial incentives that have driven investments in these sectors remained “robust.”
Indeed, at country level, he predicted that these initial investments will soon start to “bear fruit” in terms of increased output and a move towards more sustained growth.
“That will be a change in the nature of the growth going forward,” asserted the global macroeconomics expert.
However, Burns argued that the real challenge in the food market remains two-fold: First, to guard against volatility and to build up stocks; and second, to invest in strengthening productivity growth in the local food market for economies where demand is outpacing domestic supply.
Africa bucks the trend
On capital flows and the wider problem of decreased investment in developing economies, Burns observed that one of the big surprises in preparing the report was to recognize how developments in Africa have bucked the global trend.
“Throughout the developing world, flows have been declining in the post-crisis period, but in Africa they’ve actually been increasing quite sharply. Indeed, flows into sub-Saharan Africa as a percentage of the region’s GDP are actually higher than they are anywhere else in the global economy.”
Burns explained that the strong growth — “5 percent or almost 6 percent if you exclude South Africa” — witnessed in the region is attracting an “investment boom.” While there is room for optimism, however, Burns cautioned that the transition associated with financial deepening can be “fraught with risks” — particularly if excesses are allowed to build up.
“The trick is — looking at this from 30,000 feet in Washington, D.C. — that it’s more difficult to see those risks than it is for people at the country level, including World Bank country directors or policy makers in these economies,” he said. “They’re the ones that we have to rely on to take a look at what’s happening on the ground with a cold eye to ensure that — if there are excesses — efforts are made to try to calm them down and ensure that growth is resilient to any changes in global conditions.”
One issue included in the report that Burns felt was not given as much attention as some of the others is the anticipated recovery in trade, which is set to provide an important “tailwind” to developing countries.
He explained that during the 2000s, trade was growing twice as fast as GDP, but in the post-crisis period trade growth and GDP growth were growing at “roughly the same rate.”
“Our analysis leads us to the tentative conclusion that we’re going to see a reacceleration in trade as the global economy recovers,” he said.
Burns added: “The whole trade agenda … has suddenly ‘hotted up’ again, which is a very positive development and is something that bears close watching among developing economies.”
Burns observed that stronger growth in the higher income countries was being seen in the European Union as a “second engine of growth attaching itself to the train of global growth.”
And he sounded a note of cautious optimism, despite worries from some quarters as to how the eventual tightening of monetary policy in the United States would affect emerging and developing economies.
“Will tapering [the reduction of the Federal Reserve’s quantitative easing] derail the growth that we’re seeing in developing countries? As long as that goes smoothly then there’s no reason that it should, because although capital flows will tighten and interest rates will rise, it will be offset by stronger exports,” Burns explained.
Despite being “significantly less strong” than through the boom period, he predicted that growth will likely remain “fairly solid” among developing countries, falling from 7-8 percent to a more modest 5-6 percent. And he did not necessarily take the view that slower growth may cause problems: “We see it as a return to more sustainable growth rates, based on how productivity has been improving in developing countries, building year on year.”
Cause for concern
One area of potential concern, however, would be any future return to “disruption” in capital markets, as witnessed during the summer of 2013. If this happened, the World Bank economist warned, “then we’d start to worry about how well placed developing countries would be to adapt and respond to a sharp tightening of financial conditions.”
Burns explained that analysis of borrowing behavior shows that there are more than 20 countries where the lending-to-GDP ratio has increased by 15 percent or more in the past five years. Countries on that list included “large and systemically important” ones such as China, Brazil, Thailand and Turkey, but also smaller states “where the spotlight doesn’t normally turn, but where there has been a large expansion of credit over the last couple of years,” namely Malaysia, the Gambia, Lesotho and Malawi.
But does that mean that these countries are heading for crisis?
“Certainly not,” Burns asserted, “but this kind of expansion of credit in a relatively short period of time does raise the likelihood that — under stress — there could be pressure put on the banking system and potentially a significant challenge.”
To mitigate such a risk, he urged authorities in these economies to “go over the loan books very carefully” with their banks: “We want authorities to ensure that banks are in a position to withstand a significant uptake in non-performing loans, evaluate potential risks and to start working with their clients to make provisions so that when interest rates rise that these loans don’t pose a problem.”
In the current economic climate, the old Shakespearean maxim “neither a borrower nor a lender be” has rarely had such resonance.
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