As the World economy slowly recovers from the global financial crisis, developing countries will continue to face scarce financing, the World Bank has said in its latest report on the global economy.
The report titled “ Global Economic Prospects 2010: Crisis, Finance and Growth” which was released on Thursday indicates that due to the effects of the global recession , developing countries will face higher borrowing costs , lower credit levels and reduced international capital flows.
“The toll on the poor will be very real. The poorest countries, those that rely on grants or subsidized lending, may require an additional $35-50 billion in funding just to sustain pre-crisis social programs,” said Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics.
The report warns that, despite the return to positive growth, it will take several years before economies recoup the losses already endured.
It estimates that about 64 million more people will be living in extreme poverty (on less than $1.25 a day) in 2010 than would have been the case had the crisis not occurred.
Over the next 5 to 10 years, increased risk aversion, a more prudent regulatory stance, and the need to curb some of the riskier lending practices during the boom period that preceded the crisis, can be expected to result in scarcer, more expensive capital for developing countries.
“As a result, over the next 5 to 7 years, trend growth rates in developing countries may be 0.2 to 0.7 percent lower than they would have been had finance remained as abundant and inexpensive as in the boom period,” said Andrew Burns, lead author of the report.
The report finds that very relaxed international financial conditions from 2003 through 2007 contributed to the boom in developing country finance and growth.
Much lower borrowing costs caused both international capital flows and domestic bank lending to expand, which contributed to a 30 percent increase in investment rates in developing countries.
“While developing countries cannot avoid tighter international financial conditions, they can and should reduce domestic borrowing costs and promote local capital markets by expanding regional financial centers and improving competition and regulation in local banking sectors,” said Hans Timmer, Director of the World Bank Prospects Group.