Global Economic Prospects, 2007 Managing the Next Wave of Globalization Dominique Van Der Mensbrugghe and Richard Newfarmer World Bank December, 2006

Medium-term outlook Growth in developing countries will remain strong, boosted by improved policies and favorable financial conditions The global economy has reached a turning point, and ingredients for a soft-landing are in place But turning points generate uncertainties, and significant downside risks remain

Strong growth in developing economies Real GDP annual percent change Forecast Developing 2008 Source: World Bank

Strong growth in developing economies Real GDP annual percent change Forecast Developing 2008 Source: World Bank

Strong growth in developing economies Real GDP annual percent change Forecast Developing High-income 2008 Source: World Bank

Strong growth in developing economies Real GDP annual percent change Forecast Developing High-income Developing ex. China & India 2008 Source: World Bank

Growth now broad-based # of developing countries Average annual GDP growth (%)

Growth now broad-based # of developing countries Average annual GDP growth (%)

Growth now broad-based # of developing countries Average annual GDP growth (%)

Growth, though tapering off, will likely remain solid over the medium term in most regions Percent change, GDP Source: World Bank

Developing countries’ policies have improved percent 1980s 2002-2004

Monetary tightening to contain inflation is driving adjustment Percent -- Interest rates United States Source: World Bank 2002 2003 2004 2005 2006 3 month t-bill Core inflation

Turning point in commodity markets Price indexes, Jan 2003=100 Forecast

Turning point in commodity markets Price indexes, Jan 2003=100 Forecast

Turning point in global imbalances Current account balance, billions of dollars, 2002 and 2006, 2008 2008 2006 2002 Source: World Bank.

Turning points come with risks Surplus of global liquidity might trigger sudden reversal of credit flows Global imbalance still large and might trigger sudden reversal in capital flows Correction in U.S. housing market might trigger sharper slowdown Disruption in oil supply might trigger renewed upward price spikes

The next wave of globalization Over the next 25 years, markets will become more integrated, developing countries will like grow faster, and become a major force in the global economy However, stresses over income distribution and in labor markets could undermine potential growth …and failure to manage environmental pressures entails serious risks Policy responses to these stresses are so far inadequate to the challenges, so new efforts are needed at both the national and multilateral level

Developing countries share of trade will rise as global integration intensifies… Exports from developing and developed countries, 2005-2030 US$2001 trln. $27 trln High-income countries Developing countries 45% 32% 22% Source: World Bank simulations with Linkage model.

…and the share of developing countries in global output will rise… GDP of high-income and developing countries (market exchange rates) US$2001 trln $72 trln High-income countries Developing countries 31% 23% 16% Source: World Bank simulations with Linkage model.

Growth would raise income and reduce absolute poverty Average per capita incomes in developing countries are likely to double..

Growth would raise income and reduce absolute poverty Average per capita incomes in developing countries are likely to double.. …and more people from developing countries will enter the ”global middle class” South Asia Europe & Central Asia East-Asia Number of people (million) Latin America Middle East Africa

Growth would raise incomes and reduce absolute poverty Average incomes are likely to double …and more people from developing countries will enter the ”global middle class” …and sharp reductions in dire absolute poverty Millions of people 28% Other 20% Sub-Saharan Africa 12% South Asia 8% East Asia

At global level, some regions lag, notably Africa Managing stresses: uneven benefits At global level, some regions lag, notably Africa Per capita incomes as percent of high-income countries Note: Ratio of PPP-adjusted per capita incomes relative to high-income average. PPP is fixed at base year (2001) level. Source: World Bank simulations with Linkage model.

Managing stresses: uneven benefits Within some countries, income distribution could become unequal in coming years Number of countries Note: Based on changes in the Gini-coefficient: very large >|0.05|, large>|0.03|, minimal change <|0.01| Income inequality decrease increase

Managing stresses: uneven benefits Returns to skilled workers will likely rise relative to unskilled workers Ratio of skilled wages relative to unskilled wages 2030 2001 Source : Bank staff calculations

One way to promote global equality: multilateral trade reform Managing stresses: uneven benefits One way to promote global equality: multilateral trade reform Percent income gains by centiles of global distribution expressed as difference from central scenario from global trade reform Note: Effects of a 75% reduction in tariffs and subsidies completed by 2025

Managing stresses: labor markets …and though globalization spurs productivity, tensions in labor markets will likely become more severe Developing countries’ manufactured exports to high-income countries as a share of high- income countries’ aggregate GDP

…and may take a different form because of services trade Managing stresses: labor markets …and may take a different form because of services trade Growth rate of exports of business services 1994-2003 Source: Data from IMF Balance of Payment Statistics: Business services are defined as Total services minus Transportation, Travel, and Government Services.

Managing 3 stresses: labor markets But China’s surge – and that of other developing countries – represents more opportunity than threat Exporting requires importing Surging growth means rising wages Internationally comparable average wage rates, indexed, 1998=100

Managing stresses: environmental pressures Global institutions and policies are still too weak to deal with severe environmental pressures Carbon emissions are causing global warming Annual carbon emissions (millions of tons) Source: OECD GREEN model simulations

Managing stresses: environmental pressures Global institutions and policies are still too weak to deal with severe environmental pressures Carbon emissions are causing global warming … and overfishing threatens major fisheries Trend 1995-2005 Trend 1950-95

Realizing the potential of global integration requires an affirmative policy response – domestically and globally Domestic policy must enhance competitiveness and ensure that growth is broadly shared Institutional measures to raise productivity and growth Removing barriers to integration Improving investment climate Investing in education Protecting workers – but not jobs Multilateral collaboration Using development assistance to promote integration of lagging countries Removing barriers to the products that the poor produce Near-term priority: Doha Development Agenda Reinforcing mechanisms to protect the global commons

Global Economic Prospects, 2007 Managing the Next Wave of Globalization Dominique Van Der Mensbrugghe and Richard Newfarmer World Bank December, 2006