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

2. 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

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

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

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

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

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

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

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

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

11. Developing countries’ policies have improved
percent
1980s

12. 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

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

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

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

16. 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

17. 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

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

19. …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.

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

21. 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

22. 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

23. 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.

24. 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

25. 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

26. 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

27. 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

28. …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
Source: Data from IMF Balance of Payment Statistics: Business services are defined as Total services minus Transportation, Travel, and Government Services.

29. 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

30. 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

31. 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
Trend

32. 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

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