Global Development Finance Mobilizing Finance and managing Vulnerability 1: ANALYSIS AND STATISTICAL APPENDIX 2005 THEW。 RLD BANK
THE WORLD BANK Global Development Finance Mobilizing Finance and Managing Vulnerability I: ANALYSIS AND STATISTICAL APPENDIX 2005
o 2005 The International Bank for Reconstruction and Development/The World Bank 1818 H Street nw Washington, DC 20433 Telephone: 202-473-1000 Internetwww.worldbank.org E-mail: feedback @worldbank. org All rights reserved 123408070605 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of uch boundaries The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development /The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc, 222 Rosewood Drive, Danvers, MA 01923, USA; telephone978-750-8400;fax978-750-4470:Internet:www.copyright.com ll other queries on rights and licenses, including subsidiary rights, should be addressed to the office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422 e-mail: pubrights@worldbank. org Cover photo: CORBIS Cover design: Naylor Design ISBN=10:0-8213-59843 ISBN=13:978-0-8213-5984-6 eSBN=10:0-8213-6213-5 eSBN=13:9780-8213-6213-6 ISSN:1020-5454 The cutoff date for data used in this report was March 18, 2005. Dollars are current U.S. dollars unless otherwise specified
© 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 08 07 06 05 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Cover photo: CORBIS Cover design: Naylor Design ISBN 10: 0-8213-5984-3 ISBN 13: 978-0-8213-5984-6 eISBN 10: 0-8213-6213-5 eISBN 13: 978-0-8213-6213-6 ISSN: 1020-5454 The cutoff date for data used in this report was March 18, 2005. Dollars are current U.S. dollars unless otherwise specified
Table of contents Forew i Acknowledgments xi Selected Abbreviations xiii Overview and Policy Messages: Mobilizing Finance and Managing Vulnerability 1 Capital flows to developing countries continued to recover, but at a slower pace 2 The world economy is slowing 3 Growing global imbalances pose risks for emerging market economies 4 The complexity of developing-country debt poses new challenges 5 Meeting poor countries' financing needs requires recognition of the countries special challenges 8 Chapter 1 Financial Flows to Developing Countries: Recent Trends and Near-Term Prospects 13 Capital flows to developing countries 13 Capital flows from the private sector 15 Capital flows from the official sector 22 Annex: Recent trends in workers'remittances to developing countries 28 References 29 Chapter 2 Global Outlook and the Developing Countries 33 Global growth 34 Global imbalances. currencies and inflation 38 World trade 40 Commodity markets 43 Risks and policy priorities for the global economy 44 Notes 47 References 48 Chapter 3 Global Imbalances and Emerging Market Economies 51 The mixed effect of exchange-rate fluctuations 52 Global monetary tightening: higher interest rates 52 Potential volatility in emerging-market spreads 54 Capital flows and reserve accumulation 56 Promoting stability in global capital flows 61 Notes 63 References 63
Table of Contents Foreword ix Acknowledgments xi Selected Abbreviations xiii Overview and Policy Messages: Mobilizing Finance and Managing Vulnerability 1 Capital flows to developing countries continued to recover, but at a slower pace 2 The world economy is slowing 3 Growing global imbalances pose risks for emerging market economies 4 The complexity of developing-country debt poses new challenges 5 Meeting poor countries’ financing needs requires recognition of the countries’ special challenges 8 Chapter 1 Financial Flows to Developing Countries: Recent Trends and Near-Term Prospects 13 Capital flows to developing countries 13 Capital flows from the private sector 15 Capital flows from the official sector 22 Annex: Recent trends in workers’ remittances to developing countries 28 Notes 29 References 29 Chapter 2 Global Outlook and the Developing Countries 33 Global growth 34 Global imbalances, currencies, and inflation 38 World trade 40 Commodity markets 43 Risks and policy priorities for the global economy 44 Notes 47 References 48 Chapter 3 Global Imbalances and Emerging Market Economies 51 The mixed effect of exchange-rate fluctuations 52 Global monetary tightening: higher interest rates 52 Potential volatility in emerging-market spreads 54 Capital flows and reserve accumulation 56 Promoting stability in global capital flows 61 Notes 63 References 63 v
GLOBAL DEVELOPMENT FINANCE 2005 Chapter 4 Complex Challenges in Developing-Country Debt 67 The change since the 1990s 68 External debt trends in emerging markets 72 The rise of domestic debt markets 76 Balancing external and domestically financed debt No room for complacency, despite improvements References Chapter 5 Meeting the Financing Needs of Poor Countries 89 The external financing environment in poor countries 90 Other developing countries as a source of finance for poor countries 99 Meeting the Monterrey challenge--an agenda for donors and recipients 102 Sound economic and pro-poor policies in recipient countries 109 110 References 111 Statistical Appendix 115 Tables 1.1 Net capital flows to developing countries, 1996-2004 14 1.2 Regional composition of net FDI inflows to developing countries, 2002-4 1 1.3 Regional composition of net portfolio flows to developing countries, 2002-4 19 1.4 t official development assistance(ODA) from principal donor countries. 1990-2003 23 1.5 Net bilateral ODA and special purpose grants, 1990-2003 24 1.6 Projected increases in ODA from DAC donors, 2003-6 26 1A. 1 Workers' remittances to developing countries, 1990-2004 28 1A. 2 Developing countries with highest remittance flows, 2001 and 2003 29 2.1 The global outlook in summary 3 3.1 Current account balances in developing countries, 2000-4 57 3.2 Ratios of foreign-exchange reserves to imports and external short-term debt in emerging market economies, 2004 59 3. 3 Reserve carrying costs in emerging markets 60 4. 1 Selected indicators of the burden of external debt, 1997-2002/3 4.2 Corporate and financial sector comparison for Asian crisis countries, 1998 and 2003 71 4.3 External indebtedness of top 20 debtors, 1997 and 2003 74 5.1 Net capital flows to poor countries, 1990-2004 90 1.1 Financial flows to developing countries, 1990-2004 14 1.2 Financial flows to developing countries as a percentage of GDP, 1990-2004 15 1.3 Current account balance of developing countries, 1976-2004 15 1. 4 Financial flows to developing countries from the private sector, 1990-2004 16 1.5 Net equity flows to developing countries, 1990-2006 16 1.6 Share of net FDI inflows to low-income and least developed countries. 1990-2004 17
GLOBAL DEVELOPMENT FINANCE 2005 Chapter 4 Complex Challenges in Developing-Country Debt 67 The change since the 1990s 68 External debt trends in emerging markets 72 The rise of domestic debt markets 76 Balancing external and domestically financed debt 81 No room for complacency, despite improvements 85 Notes 85 References 86 Chapter 5 Meeting the Financing Needs of Poor Countries 89 The external financing environment in poor countries 90 Other developing countries as a source of finance for poor countries 99 Meeting the Monterrey challenge—an agenda for donors and recipients 102 Sound economic and pro-poor policies in recipient countries 109 Notes 110 References 111 Statistical Appendix 115 Tables 1.1 Net capital flows to developing countries, 1996–2004 14 1.2 Regional composition of net FDI inflows to developing countries, 2002–4 16 1.3 Regional composition of net portfolio flows to developing countries, 2002–4 19 1.4 Net official development assistance (ODA) from principal donor countries, 1990–2003 23 1.5 Net bilateral ODA and special purpose grants, 1990–2003 24 1.6 Projected increases in ODA from DAC donors, 2003–6 26 1A.1 Workers’ remittances to developing countries, 1990–2004 28 1A.2 Developing countries with highest remittance flows, 2001 and 2003 29 2.1 The global outlook in summary 35 3.1 Current account balances in developing countries, 2000–4 57 3.2 Ratios of foreign-exchange reserves to imports and external short-term debt in emerging market economies, 2004 59 3.3 Reserve carrying costs in emerging markets 60 4.1 Selected indicators of the burden of external debt, 1997–2002/3 69 4.2 Corporate and financial sector comparison for Asian crisis countries, 1998 and 2003 71 4.3 External indebtedness of top 20 debtors, 1997 and 2003 74 5.1 Net capital flows to poor countries, 1990–2004 90 Figures 1.1 Financial flows to developing countries, 1990–2004 14 1.2 Financial flows to developing countries as a percentage of GDP, 1990–2004 15 1.3 Current account balance of developing countries, 1976–2004 15 1.4 Financial flows to developing countries from the private sector, 1990–2004 16 1.5 Net equity flows to developing countries, 1990–2006 16 1.6 Share of net FDI inflows to low-income and least developed countries, 1990–2004 17 vi
TABLE OF CONTENTS 1.7 FDI outflows from developing countries, 1990-2004 17 quity price indexes, 2003-4 19 1.9 Net private debt flows to developing countries, 1990-2004 20 1.10 Gross private flows to developing countries, 1990-2004 20 1.11 Emerging-market bond spreads, 1997-2004 21 1.12 Official debt flows and foreign aid grants, 1990-2004 22 1.13 ODA as a percentage of GDP in recipient countries, 1990-2003 1.14 ODA as a percentage of GNI in DAC donor countries, 1990-2006 1.15 Percentage of ODA disbursed to Sub-Saharan Africa, 1990-2003 26 1.16 ODA and grants from nongovernmental organizations, 1990-2003 26 2.1 Developing-country and world growth, 1980-2007 34 2.2 Slowing industrial production, September 2003-May 2005 36 Regional growth projections, 2003-7 36 2.4 Estimated global imbalances in current accounts, 2004 38 2.5 Financing the U.S. current account: net flows by asset type, 2000, 2002, and 2004 38 Appreciation of developing-country currencies against the dollar between January 2002 and February 2005 39 2.7 Interest rates and the weakening dollar, 1995-2005 40 2.8 Very low real interest rates in the United States, 1997-2005 40 2.9 Rising consumer inflation, 2000-4 40 2.10 Slower trade growth, 2003-5 41 2.11 World semiconductor sales and East Asian technology exports, 1997-2005 41 2.12 Real effective revaluations of developing-country exchange rates, 2002-5 42 2.13 Commodity prices, 2000-4 43 2.14 Developing-country demand and commodity prices, 2003 and 2004 4: 2.15 Metals-Low stocks mean higher prices, 1995-2005 44 2.16 Terms-of-trade gains to developing countries from commodity price changes, 2001-4 44 2.17 Effects of higher interest rates on GDP growth, 2005-7 46 2.18 The dollar in historical perspective, 1970-2004 47 3. 1 Impact of dollar depreciation on debt service ratios, 2002-4 52 3.2 Short-term policy rates in developed countries, 2002-4 53 3.3 Short-term policy rates in major emerging markets, 2002-4 53 3.4 Movement of real Federal Fund Rates. 1991-2004 53 3.5 U.S. Treasury implied forward rates 54 3.6 Estimated additional debt service burden due to increase of one percentage point in U.S. interest rates 54 3.7 Change in sovereign bond spreads following increase of 200 basis points in U.S. interest rates, by degree of indebtedness of country 57 3.8 World current account surpluses as shares of U.S. current account deficit, 2004 57 3.9 Capital flows, current account balances, and reserve accumulations 3.10 Global foreign-exchange reserve accumulation, 1999-2004 58 3.11 Foreign-exchange reserves in developing countries, 1999-2004 58 3.12 Foreign official assets in the united states. 1980-2003 60 4. 1 Composition of developing countries external debt, 1990-2003 4.2 Developing countries' total public sector debt, 1990-2003 70 4. 3 Burden of public debt: external vs domestic, 1990-2002 70 4.4 Credit quality of emerging markets, 1997-2004 71
T ABLE OF CONTENTS 1.7 FDI outflows from developing countries, 1990–2004 17 1.8 Equity price indexes, 2003–4 19 1.9 Net private debt flows to developing countries, 1990–2004 20 1.10 Gross private flows to developing countries, 1990–2004 20 1.11 Emerging-market bond spreads, 1997–2004 21 1.12 Official debt flows and foreign aid grants, 1990–2004 22 1.13 ODA as a percentage of GDP in recipient countries, 1990–2003 23 1.14 ODA as a percentage of GNI in DAC donor countries, 1990–2006 25 1.15 Percentage of ODA disbursed to Sub-Saharan Africa, 1990–2003 26 1.16 ODA and grants from nongovernmental organizations, 1990–2003 26 2.1 Developing-country and world growth, 1980–2007 34 2.2 Slowing industrial production, September 2003–May 2005 36 2.3 Regional growth projections, 2003–7 36 2.4 Estimated global imbalances in current accounts, 2004 38 2.5 Financing the U.S. current account: net flows by asset type, 2000, 2002, and 2004 38 2.6 Appreciation of developing-country currencies against the dollar between January 2002 and February 2005 39 2.7 Interest rates and the weakening dollar, 1995–2005 40 2.8 Very low real interest rates in the United States, 1997–2005 40 2.9 Rising consumer inflation, 2000–4 40 2.10 Slower trade growth, 2003–5 41 2.11 World semiconductor sales and East Asian technology exports, 1997–2005 41 2.12 Real effective revaluations of developing-country exchange rates, 2002–5 42 2.13 Commodity prices, 2000–4 43 2.14 Developing-country demand and commodity prices, 2003 and 2004 43 2.15 Metals—Low stocks mean higher prices, 1995–2005 44 2.16 Terms-of-trade gains to developing countries from commodity price changes, 2001–4 44 2.17 Effects of higher interest rates on GDP growth, 2005–7 46 2.18 The dollar in historical perspective, 1970–2004 47 3.1 Impact of dollar depreciation on debt service ratios, 2002–4 52 3.2 Short-term policy rates in developed countries, 2002–4 53 3.3 Short-term policy rates in major emerging markets, 2002–4 53 3.4 Movement of real Federal Fund Rates, 1991–2004 53 3.5 U.S. Treasury implied forward rates 54 3.6 Estimated additional debt service burden due to increase of one percentage point in U.S. interest rates 54 3.7 Change in sovereign bond spreads following increase of 200 basis points in U.S. interest rates, by degree of indebtedness of country 57 3.8 World current account surpluses as shares of U.S. current account deficit, 2004 57 3.9 Capital flows, current account balances, and reserve accumulations in developing countries, 1980–2004 57 3.10 Global foreign-exchange reserve accumulation, 1999–2004 58 3.11 Foreign-exchange reserves in developing countries, 1999–2004 58 3.12 Foreign official assets in the United States, 1980–2003 60 4.1 Composition of developing countries’ external debt, 1990–2003 69 4.2 Developing countries’ total public sector debt, 1990–2003 70 4.3 Burden of public debt: external vs. domestic, 1990–2002 70 4.4 Credit quality of emerging markets, 1997–2004 71 vii
GLOBAL DEVELOPMENT FINANCE 2005 4.5 Change in net private debt flows(long-term plus short-term) of crisis ountries and others. 1994-2003 72 4.6 Total external debt of developing countries, 1990-2003 74 4.7 Composition of outstanding external debt of developing countries, 1970-2003 74 4.8 Substitution of bond financing for bank credit, 1990-2002 75 4.9 Volatility in acquisition of new debt, 1994-2003 75 4.10 Bank credit to developing countries, 1970-2003 76 4. 11 Composition of outstanding market-sourced debt in the developing world, 1970-2003 76 4. 12 Public debt stocks in emerging markets, 1997 and 2002 77 4. 13 Stock of outstanding domestic bonds, by sector, 1993-2002 77 4. 14 Share of domestic debt in total public debt in selected Asian countries, 1990-2003 79 15 Stock of domestic bonds outstanding in emerging markets, by region, 1993-2002 79 4. 16 Share of domestic debt in total public debt in selected Latin American countries. 1990-2003 80 4. 17 Distribution of volatility in risk premium for selected developing countries 4.18 Average credit quality, by region, 1999-2004 84 5. 1 Shift from aid toward FDI in poor countries, 1990-2003 91 5.2 ODA to poor countries relative to total ODA, 1990-2003 91 5.3 Sectoral distribution of ODa to poor countries, 1990-2002 93 5.4 Natural resource availability and ratios of FDI to GDP in poor countries, 1990-2003 94 5 Improving risk conditions in poor countries, 1985-2003 97 5.6 FDI in oil-and mineral-exporting poor countries, 1990-2003 98 5.7 Global military spending and aid, 1992-2003 102 5.8 Change in volatility of aid, 1970-2002 106 5.9 Volatility of different components of aid, remittances, and FDI, 1990-2002 106 Boxes 1.1 Measuring capital flows in dollars versus as a percentage of GDP 18 1.2 Implementation of the Heavily Indebted Poor Countries(HIPC) Initiative 25 1.3 Aid in the wake of the asian tsunami 27 3.1 Asset prices and unanticipated news 55 3.2 Determinants of emerging-market spreads 3.3 Developing countries as exporters of capital-a new twist on the Bretton Woods system 59 4. 1 Currency valuation effects have significant impacts 73 4.2 The role of short-term bank credit in trade financing 75 4.3 Foreign investment in developing countries'domestic debt markets 78 4.4 Assessing the risk of external versus domestic debt 84 Wide variations in the mix of external financing in poor countries 92 5.2 Growing financing role for NGOs 94 5.3 Workers' remittances to poor countries 95 5.4 The rise, fall, and recovery of FDI to poor countries, 1990-2003 96 5.5 Realizing the development promise of trade 97 Collapse in international bank lending to poor countries 98 5.7 UNDP, Japan, and triangular cooperation 101 5.8 New sources of financing 105 Securitization of future workers' remittances and other external flows 108
GLOBAL DEVELOPMENT FINANCE 2005 4.5 Change in net private debt flows (long-term plus short-term) of crisis countries and others, 1994–2003 72 4.6 Total external debt of developing countries, 1990–2003 74 4.7 Composition of outstanding external debt of developing countries, 1970–2003 74 4.8 Substitution of bond financing for bank credit, 1990–2002 75 4.9 Volatility in acquisition of new debt, 1994–2003 75 4.10 Bank credit to developing countries, 1970–2003 76 4.11 Composition of outstanding market-sourced debt in the developing world, 1970–2003 76 4.12 Public debt stocks in emerging markets, 1997 and 2002 77 4.13 Stock of outstanding domestic bonds, by sector, 1993–2002 77 4.14 Share of domestic debt in total public debt in selected Asian countries, 1990–2003 79 4.15 Stock of domestic bonds outstanding in emerging markets, by region, 1993–2002 79 4.16 Share of domestic debt in total public debt in selected Latin American countries, 1990–2003 80 4.17 Distribution of volatility in risk premium for selected developing countries 83 4.18 Average credit quality, by region, 1999–2004 84 5.1 Shift from aid toward FDI in poor countries, 1990–2003 91 5.2 ODA to poor countries relative to total ODA, 1990–2003 91 5.3 Sectoral distribution of ODA to poor countries, 1990–2002 93 5.4 Natural resource availability and ratios of FDI to GDP in poor countries, 1990–2003 94 5.5 Improving risk conditions in poor countries, 1985–2003 97 5.6 FDI in oil- and mineral-exporting poor countries, 1990–2003 98 5.7 Global military spending and aid, 1992–2003 102 5.8 Change in volatility of aid, 1970–2002 106 5.9 Volatility of different components of aid, remittances, and FDI, 1990–2002 106 Boxes 1.1 Measuring capital flows in dollars versus as a percentage of GDP 18 1.2 Implementation of the Heavily Indebted Poor Countries (HIPC) Initiative 25 1.3 Aid in the wake of the Asian tsunami 27 3.1 Asset prices and unanticipated news 55 3.2 Determinants of emerging-market spreads 56 3.3 Developing countries as exporters of capital—a new twist on the Bretton Woods system 59 4.1 Currency valuation effects have significant impacts 73 4.2 The role of short-term bank credit in trade financing 75 4.3 Foreign investment in developing countries’ domestic debt markets 78 4.4 Assessing the risk of external versus domestic debt 84 5.1 Wide variations in the mix of external financing in poor countries 92 5.2 Growing financing role for NGOs 94 5.3 Workers’ remittances to poor countries 95 5.4 The rise, fall, and recovery of FDI to poor countries, 1990–2003 96 5.5 Realizing the development promise of trade 97 5.6 Collapse in international bank lending to poor countries 98 5.7 UNDP, Japan, and triangular cooperation 101 5.8 New sources of financing 105 5.9 Securitization of future workers’ remittances and other external flows 108 viii
Foreword HE GLOBAL ECONOMY IS AT a countries have improved their capacity to manage turning point. Growth has peaked, and pres- debt, and many countries have acted aggressively sures to address global imbalances are grow- to address the weaknesses that contributed to pre ing, exposing important risks facing both developed vious crises But external debt burdens have risen and developing countries as the needed adjustments in more than half of emerging market economies occur. Whether or not the rebalancing occurs in an and, in many, domestic borrowing has risen dra orderly fashion will have a crucial impact on matically as well. Although the shift from external whether recent improvements in developing- to domestic borrowing can reduce vulnerability to country performance can be sustained-and external shocks, it also carries risks from possible whether progress towards the Millennium Develop- overborrowing or inadequate supervision. The ment Goals(MDGs) can be accelerated. The stakes central policy message is that excessive borrowing is risky, regardless of the source, and that efforts to Global economic performance over the last avoid the discipline required by external borrow year provides continuing evidence of the growing ing by switching to domestic sources will fail. interdependence of developed and developing Emerging market economies are also vulnera- countries. Global growth was high, in part from ble to the possible impact of larger-than-expected record expansion in developing countries, which increases in interest rates(which would translate have been benefiting from favorable global condi- into higher borrowing costs)and possible capital tions and from years of domestic policy improve- losses on dollar-denominated assets from dollar ments. Financial flows to developing countries depreciation. The impact could be particularly during 2004 reached levels not seen since the onset acute for economies in which reserve accumula of the financial crises of the late 1990s. And devel- tion far exceeds normal prudential levels, which oping countries' increasing integration with the entails fiscal costs as monetary authorities issue global financial system continues to raise their low-yield securities to absorb the excess liquidity stake in the health and resilience of that system. created by reserve accumulation But the strong recovery has also given rise to For low-income countries, the major vulnera- sizable global financial imbalances that will have bilities stemming from the current global environ- to be addressed. If the global growth cycle has in- ment are linked less to the evolution of interest deed peaked, the likely scenario involves contin- rates and exchange rates and more to the future ued(though slower) growth and an orderly reduc- of flows of aid from bilateral and multilateral tion in imbalances. But there are also risks-of sources. While the challenge of generating suffi higher-than-expected interest rates, of abrupt and cient aid to help low-income countries reach the disorderly exchange-rate movements, and of a Millennium Development Goals(MDGs) remains pronounced global slowdown that could encour- large, there are some encouraging signs of age protectionist sentiments and curtail expansion progress, as some donors have increased their of trade and investment linkages between devel- commitment levels and aid flows have turned up oped and developing countries wards. But concerns persist about whether these The resilience of developing-country financial increases are large enough, and whether adequate positions will be tested as global conditions tighten, flows are reaching areas that need them most, such with special concern for the vulnerability posed by as Sub-Saharan Africa. As the global community increased debt burdens, which have been at the reevaluates progress towards the MDGs in the heart of the financial crises over the last decade. coming year, donors and recipients alike must There is some good news here--aggregate exter- remain focused on the imperative of generating nal debt indicators are down, many developing resources that can be effectively used in developing
Foreword THE GLOBAL ECONOMY IS AT A turning point. Growth has peaked, and pressures to address global imbalances are growing, exposing important risks facing both developed and developing countries as the needed adjustments occur. Whether or not the rebalancing occurs in an orderly fashion will have a crucial impact on whether recent improvements in developingcountry performance can be sustained—and whether progress towards the Millennium Development Goals (MDGs) can be accelerated. The stakes are large. Global economic performance over the last year provides continuing evidence of the growing interdependence of developed and developing countries. Global growth was high, in part from record expansion in developing countries, which have been benefiting from favorable global conditions and from years of domestic policy improvements. Financial flows to developing countries during 2004 reached levels not seen since the onset of the financial crises of the late 1990s. And developing countries’ increasing integration with the global financial system continues to raise their stake in the health and resilience of that system. But the strong recovery has also given rise to sizable global financial imbalances that will have to be addressed. If the global growth cycle has indeed peaked, the likely scenario involves continued (though slower) growth and an orderly reduction in imbalances. But there are also risks—of higher-than-expected interest rates, of abrupt and disorderly exchange-rate movements, and of a pronounced global slowdown that could encourage protectionist sentiments and curtail expansion of trade and investment linkages between developed and developing countries. The resilience of developing-country financial positions will be tested as global conditions tighten, with special concern for the vulnerability posed by increased debt burdens, which have been at the heart of the financial crises over the last decade. There is some good news here—aggregate external debt indicators are down, many developing ix . countries have improved their capacity to manage debt, and many countries have acted aggressively to address the weaknesses that contributed to previous crises. But external debt burdens have risen in more than half of emerging market economies, and, in many, domestic borrowing has risen dramatically as well. Although the shift from external to domestic borrowing can reduce vulnerability to external shocks, it also carries risks from possible overborrowing or inadequate supervision. The central policy message is that excessive borrowing is risky, regardless of the source, and that efforts to avoid the discipline required by external borrowing by switching to domestic sources will fail. Emerging market economies are also vulnerable to the possible impact of larger-than-expected increases in interest rates (which would translate into higher borrowing costs) and possible capital losses on dollar-denominated assets from dollar depreciation. The impact could be particularly acute for economies in which reserve accumulation far exceeds normal prudential levels, which entails fiscal costs as monetary authorities issue low-yield securities to absorb the excess liquidity created by reserve accumulation. For low-income countries, the major vulnerabilities stemming from the current global environment are linked less to the evolution of interest rates and exchange rates and more to the future of flows of aid from bilateral and multilateral sources. While the challenge of generating sufficient aid to help low-income countries reach the Millennium Development Goals (MDGs) remains large, there are some encouraging signs of progress, as some donors have increased their commitment levels and aid flows have turned upwards. But concerns persist about whether these increases are large enough, and whether adequate flows are reaching areas that need them most, such as Sub-Saharan Africa. As the global community reevaluates progress towards the MDGs in the coming year, donors and recipients alike must remain focused on the imperative of generating resources that can be effectively used in developing
GLOBAL DEVELOPMENT FINANCE 2005 countries that have supportive policy and institu- volume provides analysis and summary tables on tional environments selected macroeconomic indicators and financial Equally encouraging is the growing evidence flows. A separate volume contains detailed, stan- that financial flows other than official aid are dardized. external-debt statistics for 136 countries growing-from rapid expansion in private invest- More information on the analysis, including ment(including substantial growth in South-South additional material and sources, is available at investmentflows),toprivategrantstootherwww.worldbank.org/prospects.Acompanionon- sources of foreign exchange such as workers remit- line publication, Prospects for the global Economy, tances. While such flows can not and should is available in English, French, and Spanish at substitute for sustained and targeted official www.worldbank.org/globaloutlook. they nonetheless highlight the growing options and opportunities open to low-income countries Global Development Finance is the World Francois Bourguignon Banks annual review of the external financial Chief economist and senior Vice President conditions facing developing countries. The current The World Bank
GLOBAL DEVELOPMENT FINANCE 2005 countries that have supportive policy and institutional environments. Equally encouraging is the growing evidence that financial flows other than official aid are growing—from rapid expansion in private investment (including substantial growth in South-South investment flows), to private grants, to other sources of foreign exchange such as workers’ remittances. While such flows can not and should not substitute for sustained and targeted official aid, they nonetheless highlight the growing options and opportunities open to low-income countries. Global Development Finance is the World Bank’s annual review of the external financial conditions facing developing countries. The current volume provides analysis and summary tables on selected macroeconomic indicators and financial flows. A separate volume contains detailed, standardized, external-debt statistics for 136 countries. More information on the analysis, including additional material and sources, is available at www.worldbank.org/prospects. A companion online publication, Prospects for the Global Economy, is available in English, French, and Spanish at www.worldbank.org/globaloutlook. François Bourguignon Chief Economist and Senior Vice President The World Bank x
Acknowledgments IIS REPORT WAS PREPARED BY THE Bussolo, Betty Dow, Annette de Kleine, Fernando International Finance Team of the World Martel Garcia, Don Mitchell. Mick Riordan, and Bank's Development Prospects Group Shane Streifel. The technical aspects of the forecast (ECPG) Substantial support was also provided were handled by Milko Iantchev, while Ketaki by staff from other parts of the Development Eco- Jain, Denis Medvedev, and Caroline Diaz-Bonilla nomics Vice Presidency, World Bank operational provided additional technical support. regions and networks, the International Finance The outlook for Sub-Saharan Africa was Corporation, and the Multilateral Investment carried out in cooperation with Celine Kauffman Guarantee Agency. (Organisation for Economic Co-operation and The principal author was Jeffrey Lewis, with Development [OECDI Development Centre), with direction by Uri Dadush. The report was prepared input from Delfin Go. Milan Brahmbhatt provided under the general guidance of Francois Bour- input for the East Asia and Pacific outlook. Other guignon, World Bank Chief Economist and Senior contributors to regional outlooks included Vice President. The principal authors of each Guillermo Perry (Latin America and the Caribbean chapter were Ejaz Syed Ghani(South Asia), Ali Mansoor(Europe and Central Asia), and Mustapha Nabli (Middle Overview Jeffrey Lewis, with contributions East and North Africa). Background notes and from the International finance papers were prepared by Paul Masson and Jean Team and Andrew burns Jose Padou(University of Toronto) and Neeltje Chapter 1 Douglas Hostland, Dilek Aykut, Van Horen. The online companion publication, Neil Bush. Mansoor Dailami. Prospects for the Global Economy, was prepared by Himmat Kalsi, Eung Ju Kim, Jeffrey Andrew Burns, with the assistance of the Global Lewis, and Dilip Ratha Trends team. The Web site was designed by Hager Chapter 2 Andrew Burns Ben- Mahmoud. Oxana michenko, and Kavita Chapter 3 Mansoor Dailami, Jeffrey Lewis, Watsa. The data platform, graphics engine, and Web nd Aung Ju interface were produced by Reza Farivari, Sarubh Chapter 4 Himmat Kalsi and Jeffrey Lewis Gupta, David Hobbs, Shahin Outadi, Raja Reddy Chapter 5 Neil Bush, Dilek Aykut, Douglas Komati Reddy, Malarvizhi Veerappan, and Cherin Hostland, Eung Ju Kim, Jeffrey Verghese Lewis, Dilip Ratha, and Neeltje Van The report also benefited from the comments Horen of the banks executive directors made at an in- formal board meeting on March 8, 2005 Preparation of the statistical apper Many others provided input, comments, guid managed by Eung Ju Kim, with inputs from Mick ance and support at various stages of the reports Riordan, Milko lantchev, and Dilek Aykut of preparation. Kevin Barnes, Barbara Mierau-Klein DECPG, and the Financial Data Team of the De- Vikram Nehru, Malvina Pollock, and Philip Suttle velopment Data Group(DECDG), led by Ibrahim (J.P. Morgan Chase) were discussants at the Levent and including Nevin Fahmy, Shelly Fu, and Bankwide review. In addition, within the Bank, Gloria R. Moreno. The financial flow and debt comments and help were provided by Alberto estimates were developed in a collaborative effort Agbonyitor, Paloma Anos-Casero, Jorge Araujo between DECPG and DECDG. The main macro- Amarendra Bhattacharya, Milan Brahmbhatt, Nina economic forecasts were prepared by the Global Budina, Christopher Juan Costain, Jean-Jacques Trends Team of DECPG, led by Hans Timmer and Dethier, Mark Dorfman, Shahrokh Fardoust ncluding John Baffes, Andrew Burns, Maurizio Norbert Fiess, Alan Gelb, Coralie Gevers, ejaz
Acknowledgments THIS REPORT WAS PREPARED BY THE International Finance Team of the World Bank’s Development Prospects Group (DECPG). Substantial support was also provided by staff from other parts of the Development Economics Vice Presidency, World Bank operational regions and networks, the International Finance Corporation, and the Multilateral Investment Guarantee Agency. The principal author was Jeffrey Lewis, with direction by Uri Dadush. The report was prepared under the general guidance of François Bourguignon, World Bank Chief Economist and Senior Vice President. The principal authors of each chapter were: Overview Jeffrey Lewis, with contributions from the International Finance Team and Andrew Burns Chapter 1 Douglas Hostland, Dilek Aykut, Neil Bush, Mansoor Dailami, Himmat Kalsi, Eung Ju Kim, Jeffrey Lewis, and Dilip Ratha Chapter 2 Andrew Burns Chapter 3 Mansoor Dailami, Jeffrey Lewis, and Eung Ju Kim Chapter 4 Himmat Kalsi and Jeffrey Lewis Chapter 5 Neil Bush, Dilek Aykut, Douglas Hostland, Eung Ju Kim, Jeffrey Lewis, Dilip Ratha, and Neeltje Van Horen Preparation of the statistical appendix was managed by Eung Ju Kim, with inputs from Mick Riordan, Milko Iantchev, and Dilek Aykut of DECPG, and the Financial Data Team of the Development Data Group (DECDG), led by Ibrahim Levent and including Nevin Fahmy, Shelly Fu, and Gloria R. Moreno. The financial flow and debt estimates were developed in a collaborative effort between DECPG and DECDG. The main macroeconomic forecasts were prepared by the Global Trends Team of DECPG, led by Hans Timmer and including John Baffes, Andrew Burns, Maurizio xi . Bussolo, Betty Dow, Annette de Kleine, Fernando Martel Garcia, Don Mitchell, Mick Riordan, and Shane Streifel. The technical aspects of the forecast were handled by Milko Iantchev, while Ketaki Jain, Denis Medvedev, and Caroline Diaz-Bonilla provided additional technical support. The outlook for Sub-Saharan Africa was carried out in cooperation with Celine Kauffman (Organisation for Economic Co-operation and Development [OECD] Development Centre), with input from Delfin Go. Milan Brahmbhatt provided input for the East Asia and Pacific outlook. Other contributors to regional outlooks included Guillermo Perry (Latin America and the Caribbean), Ejaz Syed Ghani (South Asia), Ali Mansoor (Europe and Central Asia), and Mustapha Nabli (Middle East and North Africa). Background notes and papers were prepared by Paul Masson and Jean Jose Padou (University of Toronto) and Neeltje Van Horen. The online companion publication, Prospects for the Global Economy, was prepared by Andrew Burns, with the assistance of the Global Trends team. The Web site was designed by Hager Ben-Mahmoud, Oxana Michenko, and Kavita Watsa. The data platform, graphics engine, and Web interface were produced by Reza Farivari, Sarubh Gupta, David Hobbs, Shahin Outadi, Raja Reddy Komati Reddy, Malarvizhi Veerappan, and Cherin Verghese. The report also benefited from the comments of the Bank’s Executive Directors, made at an informal board meeting on March 8, 2005. Many others provided input, comments, guidance and support at various stages of the report’s preparation. Kevin Barnes, Barbara Mierau-Klein, Vikram Nehru, Malvina Pollock, and Philip Suttle (J.P. Morgan Chase) were discussants at the Bankwide review. In addition, within the Bank, comments and help were provided by Alberto Agbonyitor, Paloma Anos-Casero, Jorge Araujo, Amarendra Bhattacharya, Milan Brahmbhatt, Nina Budina, Christopher Juan Costain, Jean-Jacques Dethier, Mark Dorfman, Shahrokh Fardoust, Norbert Fiess, Alan Gelb, Coralie Gevers, Ejaz
GLOBAL DEVELOPMENT FINANCE 2005 Ghani, Indermit Gill, Doris Herrera-Pol, Gregory Donovan, Carlos Humud, Santos Mahung, Carlos Ingram, Philippe Le Houerou, Ali Mansoor, Paldao, and Antoine Chevrier (Inter-American Susan McAdams, Celestin Monga, Christopher Agency for Cooperation and Development Neal, Richard Newfarmer, Julia Nielson, Akihiko Hiroshi Yoneda and Lori Merritt (Japan Interna Nishio, Brian Pinto, David Rosenblatt, Francis tional Cooperation Agency); and Steven Radelet Rowe, Carlos Silva-Jauregui, Mark Sundberg, Eric Center for Global Development Swanson, Ekaterina Vostroknutova, Yan Wang, and Steven Kennedy edited the report. Maria Gianni zanini Amparo Gamboa provided assistance to the team. Outside the Bank, several people contributed Dorota Nowak managed production and dissemi through meetings and correspondence on issues nation activities by DECPG. Book design, editing. ddressed in the report. These include: Brian and production were coordinated by Melissa Hammond and Simon Scott(OECD Development burn and Cindy Fisher of the World Bank Assistance Committee); Alfonso Quinonez, Sheila Office of the Publisher
GLOBAL DEVELOPMENT FINANCE 2005 Ghani, Indermit Gill, Doris Herrera-Pol, Gregory Ingram, Philippe Le Houerou, Ali Mansoor, Susan McAdams, Celestin Monga, Christopher Neal, Richard Newfarmer, Julia Nielson, Akihiko Nishio, Brian Pinto, David Rosenblatt, Francis Rowe, Carlos Silva-Jauregui, Mark Sundberg, Eric Swanson, Ekaterina Vostroknutova, Yan Wang, and Gianni Zanini. Outside the Bank, several people contributed through meetings and correspondence on issues addressed in the report. These include: Brian Hammond and Simon Scott (OECD Development Assistance Committee); Alfonso Quiñonez, Sheila Donovan, Carlos Humud, Santos Mahung, Carlos Paldao, and Antoine Chevrier (Inter-American Agency for Cooperation and Development); Hiroshi Yoneda and Lori Merritt (Japan International Cooperation Agency); and Steven Radelet (Center for Global Development). Steven Kennedy edited the report. Maria Amparo Gamboa provided assistance to the team. Dorota Nowak managed production and dissemination activities by DECPG. Book design, editing, and production were coordinated by Melissa Edeburn and Cindy Fisher of the World Bank Office of the Publisher. xii