Developing countries recovering from the impact of a
financial crisis that began in the West face the threat of a
double whammy as rising fiscal deficits and declining capital
flows push up the cost of long-term borrowing, the World Bank
Justin Lin, the banks chief economist, said that
developing countries faced a multi-billion dollar five-year
financing gap as capital flows dry up, forcing governments onto
the global financial market.
He said they faced a financing gap of $350 billion this year
that would decline only to $170 billion by 2013. With
smaller inflow of private capital, capital costs in the
developing countries will rise.
Lin told a roundtable of chief economists of the World Bank
and other development banks in Istanbul on Monday that the
rising cost of capital would cut the growth potential in
developing economies to as low 2.7%, much lower than their
recent historical growth rates.
The average implies that the potential growth rate for
the developing countries will be reduced by [between] 0.4% and
1.7% a year in the coming years, he said. Recovery
is with us but the foundation is shaky.
Louis Kasekende from the African Development Bank said that
the prospect of sustainable recovery and economy growth would
depend greatly on the recovery of demand in the advanced
He said that African growth rates would double to 3.9% next
year partly due to the recovery in commodity prices. But
it is too early for anyone to conclude that this reflects
sustainable recovery in the African economies, he said.
We will greatly depend on a recovery in the developed
countries and also in Asia.
Jong-Wha Lee, chief economist of the Asian Development Bank,
said that countries needed to open themselves up more to
inter-regional trade to offset the decline in Western demand
This is clearly a stronger recovery than people had
expected, but it cannot go back to the full potential GDP
growth. So Asia has to work on some structural issues, as well
as working together with the global community, which would be
very important for the sustainable growth, he said.
Ifzal Ali from the Islamic Development Bank highlighted the
role that Sharia finance could play in recovery for Moslem
countries. It ensures a productive linkage between the
financial and the real sectors of the economy, he
We have seen that, as Islamic banks are prohibited
from undertaking speculative activities and have been insulated
from toxic financial assets, they remain solvent and resilient
in the face of the global financial crisis.