Global Development Finance 2004 Harnessing Cyclical Gains for Development Washington DC April 2004

1. Global Development Finance 2004Harnessing Cyclical Gainsfor DevelopmentWashington DCApril 2004

2. Outlook for the global economy • The global recovery has found firm footing, and is largely driven by rebound in investment • Developing countries continue to grow faster than high-income countries; improved macro policies key to this success • Global growth likely peaks this year and the prospects are for somewhat slower growth in 2005

3. Capital stock adjustment drives the cycle Percent World GDP growth Contribution of investment Other contributions Source: World Bank

4. Momentum of global economy at peak World industrial production and merchandise export volumes, excludes China, 3m/3m saar Forecast Exports Industrial production Source: World Bank, DECPG

5. Commodity prices are soaring Petroleum and non-energy weighted price indices, current US dollars, 1990=100. Petroleum Non-energy Source: World Bank, DECPG

6. …yet inflation remains subdued Consumer price inflation, median for Developing- and GDP weighted mean for High-income. Developing High-income Source: World Bank, DECPG

7. Interest rates continue to be low Central bank policy rates Percent Euro Zone United States Japan Source: National Agencies

8. Trade: Developing countries outperform OECD Exports and imports (GNFS), 2003, percentage change Percent Source: World Bank

9. Developing economies are key to growth Industrial production excl. construction indices, seasonally adjusted, Jan 2000=100. Developing excl. China High-income * Kinks stem from shifting Lunar New Year not accounted for by seasonal adjustment. Source: World Bank, DECPG

10. Developing economies are key to growth Industrial production excl. construction indices, seasonally adjusted, Jan 2000=100. China* Other Developing High-income * Kinks stem from shifting Lunar New Year not accounted for by the seasonal adjustment. Source: World Bank, DECPG

11. Policies have fostered environment for growth Uptrend in Developing country growth

12. Prospects for slower growth in 2005 GDP growth Developing countries OECD Source: World Bank

13. Policy challenges • High-income countries: pursue fiscal adjustment, orderly realignment of current account imbalances and deliberate transition to higher interest rates. • Low- and middle-income countries: use current favorable environment to consolidate fiscal balances, and avoid excessive accumulation of short-term debt.

14. Falling 0 and 1% 1% and 2% 2% and 3% 3% and 4% Above 4% Number of countries (16) (16) (14) (8) (14) (16) Per capita income growth rate (%), 1998-2003 Per capita income growth and population in developing countries (1998 – 2003).

15. Developing countries remain net capital exporters to the developed world Developing countries’ current account balance $ billion Percent CA as a share of GDP (right axis)

16. Foreign exchange reserves have risen sharply, especially in East Asia $ billion

17. Developing countries’ external liability position has improved Selected debt indicators Percent

18. Private capital flows recovered in 2003 …but remain well below 1997 peak $ billion $286 in 1997 Net private flows $200 in 2003

19. Bond issuance and ST bank lending lead the recovery $ billion Net private equity flows Net private debt flows

20. The risk premium on developing country debt has declined steadily 938 points (Sep., 2002) Basis points EMBIG spreads 424 points (Mar., 2004) Mar-04

21. After 1990s surge, recent FDI flows are down Net FDI inflows $ billion All developing countries Latin America

22. Despite FDI concentration, Poor Countries receive sizeable share FDI-GDP Ratio

23. Aid has started to increase…but much more effort is needed OECD DAC nominal ODA flows As % of OECD GNI Monterrey target, 2006

24. Trade finance is a key source of finance for less creditworthy countries Trade finance by commercial banks, by investment rating, 1980-2003 Percent of total bank lending Non-investment grade and non-rated Investment grade

25. Remittances are a growing and stable source of finance, especially in poor countries Remittances as % of GDP

26. International investment in developing country infrastructure has declined since 1997 $ billion Total international investment in developing country infrastructure Latin America East Asia

27. Concluding messages • Developing countries must maintain improvement in fundamentals, and avoid excessive debt accumulation • More effort is needed to expand aid flows • Sustainability of private capital flow recovery depends on careful management of developed country macro imbalances