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The global slowdown

According to the World Bank report, Global Economic Prospects 2008, resilience of the developing economies is cushioning the current slowdown in the United States. The world economy is expected to grow by 3.3 per cent, marginally lower than the 3.6 per cent recorded last year. The recent moderation in growth at the global level — during 2006 it was 3.9 per cent — is largely attributed to the weaker growth registered by the high income countries. While the developing countries will continue to provide the stimulus to global growth, their growth is projected at a lower rate of 7.1 per cent. High income countries will grow by a modest 2.2 per cent. Neither the analysis nor the prognosis is new but they are extremely relevant for decision making across the globe. The spectre of a recession looms large in the U.S., with the dollar on a long decline and the housing and credit market crises accentuating the volatility in global financial markets. If the U.S. economy worsens, the global economy may not have the soft-landing that policy makers are hoping for. Developing countries would get lesser capital inflows. Their export revenues would fall and the value of the dollar investments depreciate sharply. In fact, the resilience of the developing economies would be severely tested in the event of a much sharper downturn in the American economy. Coincidentally, U.S. Federal Reserve Chairman Ben Bernanke has come out with a dire warning that the outlook for 2008 has worsened. Monetary measures by themselves may not be enough to prevent a slide into recession.

Clearly, the global economic linkages are going to be a challenge to developing countries in many unexpected ways. The recent increase in global food prices, which is attributable in part to the diversion of grain for biofuels, is hurting the urban poor in the developing countries. On a positive note, the GEP 2008 records that better macroeconomic management and technological progress have helped in increasing total productivity and real income growth in developing countries over the past 15 years, and that trend may contribute to reduction in poverty level over the next decade. Technology has been used to lower costs, improve quality and reach new markets. Besides, the use of relatively simple skills can fetch far-reaching development benefits. The technology gap between the rich and the poor countries has narrowed but it is still wide. Globalisation has been a key driver of technological progress. The World Bank report is a balanced assessment of the global economy and the prospects for this year, which in the context of the problems in the U.S., has begun on a highly uncertain note.

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