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The world economy is emerging from the throes of a historically deep and synchronized recession provoked by the bursting of a global financial bubble. The consequences of the initial bubble and the crisis have been felt in virtually every economy, whether or not it participated directly in the risky behaviors that precipitated the boom-and-bust cycle. And while growth rates have picked up, the depth of the recession means that it will take years before unemployment and spare capacity are reabsorbed.
This year’s Global Economic Prospects examines the consequences of the crisis for both the short- and medium-term growth prospects of developing countries. It concludes that the crisis and the regulatory reaction to the financial excesses of the preceding several years may have lasting impacts on financial markets, raising borrowing costs and lowering levels of credit and international capital flows. As a result, the rate of growth of potential output in developing countries may be reduced by between 0.2 and 0.7 percentage points annually over the next five to seven years as economies adjust to tighter financial conditions. Overall, the level of potential output in developing countries could be reduced by between 3.4 and 8 percent over the long run, compared with its pre-crisis path.

Complete report as one file      Front Matter 

Chapter 1
Prospects for the Developing Economies

The acute phase of the financial crisis has passed and a global economic recovery is under way. Moreover, the recovery is fragile and expected to slow in the second half of 2010 as the growth impact of fiscal and monetary measures wane and the current inventory cycle runs its course. Indeed, industrial production growth is already slowing (albeit from very high rates). As a result, employment growth will remain weak and unemployment is expected to remain high for many years.
The overall strength of the recovery and its durability will depend on the extent to which household- and business-sector demand strengthens over the next few quarters. While the baseline scenario projects that global growth will firm to 2.7 percent in 2010 and 3.2 percent in 2011 after a 2.2 percent decline in 2009, neither a double-dip scenario, where growth slows appreciably in 2011, or a strengthening recovery can be ruled out.

Chapter 2
The Impact of the Boom in Global Finance on Developing Countries

The first seven years of the 21st century were very good for developing countries. GDP growth continued to accelerate as it had done in the 1990s but at an even faster pace, while economic volatility was far lower than in previous periods of rapid growth (IMF 2007). And while large countries with very fast growth rates, such as China and India, tended to attract the most attention, most of the acceleration in developing-country growth during this period occurred among smaller countries that in the past had been growing much less quickly.
Somewhat surprisingly and in contrast to popular perceptions, this growth spurt occurred during a period in which external demand conditions for developing countries were not that strong. Growth in high-income countries was actually slower during the boom years 2003–07 than during the preceding 13 years. Moreover, import demand from high-income countries was growing only 5.6 percent a year, marginally slower than during the preceding 13 years. More than all of the acceleration in developing-country exports came from an expansion in their share in high-income country imports and very rapid growth in South-South trade.

Chapter 3
Medium-Term Impacts of the Crisis on Finance and Growth in Developing Countries

The lessons of the financial crisis are likely to shape financial policies and market reactions for some time to come. Beyond the immediate and unprecedented global recession that it has provoked the crisis can be expected to alter the global financial landscape significantly over the next 5 to 15 years in at least three important ways.
First, authorities in high-income countries will almost certainly strengthen financial regulation to reduce excessive risk-taking by financial intermediaries, which will involve broadening the coverage of regulation and the imposition of higher capital requirements and other limits on excessive and risky lending.
Second, authorities in developing countries are likely to introduce rules and policies that insulate them from excessive financial volatility, by placing greater emphasis on domestically managed risk management strategies such as capital controls and reserve accumulation.
Third, market participants will likely be more risk averse than they have been over the past decade, and the extent to which today’s risk management instruments are used to increase leverage and global liquidity is likely to shrink.

Appendix: Regional Economic Prospects
- East Asia and the Pacific
- Europe and Central Asia
- Latin America and the Caribbean
- Middle East and North Africa
- South Asia
- Sub-Saharan Africa 
- Notes

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This edition of Global Economic Prospects, published on June 10, 2010, is the first of a new series of web-based forecast-oriented publications by the World Bank. It replaces the flagship of the same name, which has been discontinued and in which these forecasts used to be published as Chapter 1 (the forecasts that used to be published in Global Development Finance have also been discontinued in that publication and will appear here instead). All forecasts and databases were frozen on June 8, 2010.

This new edition of Global Economy Prospects will be published biannually - in December/ January and May/June of each year. This website encompasses all information found in the pdf files that represent the hard-copy form of these publications. In addition, the web-site includes information not available in the PDF versions, such as full databases, analytical tools and statistical briefs among others.