World Bank sharply cuts outlook for economy

The World Bank has sharply cut its outlook for the world economy and warned that jittery financial markets could cut Latin America off from the rising tide of global prosperity.

In its annual global economic prospects report, released yesterday, the bank also said there was little evidence that international investment treaties would help developing countries attract the foreign capital they desperately need.

The bank cut its forecast for world economic growth next year by more than a percentage point to 2.5 per cent and said the recovery in investment was still uncertain.

"Tension in financial markets made the recovery less uniform in 2002 as well as probably less robust in 2003," it said. "Vulnerability to adverse shocks has increased, and even the potential for a double-dip recession scenario in the industrial countries cannot at this juncture be entirely ruled out."

Looking at the separate regions, the World Bank slashed its 2003 forecast for the euro zone from 3.3 per cent to 1.8 per cent, fractionally ahead of the estimated 1.5 per cent this year.

The United States is seeing as likely to do better, notching up growth of 2.6 per cent next year, down from an original estimate of 3.1. For the OECD as a whole, the 2003 forecast has been trimmed to 2.1 per cent from 3.6 per cent previously. The World Bank forecast growth in developing countries would accelerate to an average 3.5 per cent from 2006-2015 as prospects brightened for Europe, Central Asia and Sub-Saharan Africa.

Middle-income countries dependent on capital from abroad, such as those in Latin America, were most at risk, given the falls in net capital flows to emerging markets. The report estimated that Latin American income per head contracted by 2.6 per cent this year, the second successive annual fall and the worst performance since the 1980s debt crisis.

The combination of spillover from Argentina, the problems in Brazil, political uncertainty in Venezuela and a reduced appetite for risk among global investors had all contributed to growth in the region falling behind the rest of the developing world. The bank also cut its forecasts for global poverty reduction, though it said that the millennium development goal of halving extreme poverty by 2015 was still on track.

The bank's advice to developing countries has recently focused on improving the business climate to attract domestic and foreign investment, a strategy criticised by some non-governmental organisations as merely traditional "Washington consensus" liberalisation under a new guise.

But, departing from international orthodoxy, yesterday's report doubted that bilateral or multilateral treaties would do much to improve foreign direct investment.

The bank argued that multilateral investment agreements, the latest proposals for which collapsed in 1998, were unlikely to achieve much.