Hans Timmer and Richard Newfarmer World Bank December, 2006 Global Economic Prospects, 2007 Managing the Next of Globalization

Growth in developing countries will remain strong, boosted by improved policies and favorable financial conditions 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 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 But turning points generate uncertainties, and significant downside risks remain Medium-term outlook

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 Developing ex. China & India 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 (%)

Developing countries policies have improved percent 1980s

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

Tighter monetary policy to contain inflation Percent -- Interest rates United States Source: World Bank month t-bill Core inflation

Turning point in global imbalances Current account balance, billions of dollars, 2002 and 2006, 2008 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 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 However, stresses over income distribution and in labor markets could undermine potential growth …and failure to manage environmental pressures entails serious risks …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 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… US$2001 trln. Source: World Bank simulations with Linkage model. Exports from developing and developed countries, Developing countries High-income countries $27 trln 32% 45% 22%

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

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

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

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

…while globalization spurs productivity, tensions in labor markets could become more severe Share of high-income countries imports of manufactures originating in developing countries (%) Managing stresses: labor markets

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

But Chinas surge – and that of other developing countries – represents more opportunity than threat Imports in USD billions Source: WITS, Bank staff calculations Managing stresses: labor markets Exporting requires importing, and Chinas imports rapidly Exporting requires importing, and Chinas imports rapidly

Annual carbon emissions (millions of tons) Source: OECD GREEN model simulations Managing 3 stresses: environmental pressures Global institutions and policies are still too weak to deal with severe environmental pressures Global institutions and policies are still too weak to deal with severe environmental pressures Carbon emissions are causing global warming Carbon emissions are causing global warming

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

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

Global trade reform can be pro-poor Global trade reform can be pro-poor Percent income gains (losses) by centiles of global distribution if official development assistance were to cease (expressed as difference from baseline scenario of chapter 2)

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

Hans Timmer and Richard Newfarmer World Bank December, 2006 Global Economic Prospects, 2007 Managing the Next of Globalization