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World Bank: Global economy will shrink in 2009

(Agencies)
Updated: 2009-03-09 09:24

The World Bank said Sunday that the global economy will shrink this year for the first time since World War II and that the global financial crisis will make it tougher for poor and developing nations to access needed financing.

Trade is forecast to fall to its lowest point in 80 years in 2009, as economic hardship ripples across the globe, the bank said. The most drastic trade slowdowns are expected in East Asia, where growth had been robust, the bank said in a paper prepared for a meeting of finance ministers and central bank officials next week.

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The impact on the poorest countries will be severe, the bank said, predicting that a group of 129 countries face a shortfall of $270 to $700 billion this year. The bank, which offers low-interest loans and grants to developing nations, warned international financial institutions will not be able to cover even the low end of that estimate. Only one-quarter of those vulnerable countries will be able to ease the economic downturn through job creation or "safety net" programs, the bank said.

The ramifications of the growing financial crisis on the world's poorest nations will likely remain for some time, the bank said. Because richer nations are borrowing more, developing nations are being squeezed out and many financial organizations that have provided financing to lower-income countries "have virtually disappeared."

Developing countries that are still able to get credit will face higher borrowing costs and lower cash flow which will lead to weaker investment and slower growth, the bank said.

To ease the burden on developing nations, the bank urged cooperation from developed nations, global institutions and the private sector.

"We need to react in real time to a growing crisis that is hurting people in developing countries," World Bank Group President Robert B. Zoellick said. "This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis. We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest."

Developed countries should spend some of their billions in stimulus funds in poorer nations to ease the burden on those countries, World Bank Chief Economist and Senior Vice President Justin Yifu Lin said.

"Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery," Lin said.