Warning on emerging markets

THE ECONOMIC crisis in developing countries will be deeper and more prolonged than anticipated, the World Bank says in a new report today. Growth prospects, it adds, have been hit by a slump in capital flows to emerging markets.

The Bank, the world's leading development institution, has slashed its growth forecast for developing countries to 1.5 per cent in 1999, down from its already-subdued December forecast of 2.7 per cent.

This would be the slowest growth recorded since 1982, at the height of the debt crisis, and full recovery is unlikely before 2001.

According to the report, capital inflows to developing countries from the financial markets collapsed from $135.5bn (pounds 83bn) in 1997 to $72.1bn last year.

At the same time, official aid from developed to developing countries has fallen substantially and the prospects for future aid remain bleak.

"The decline in aid poses a problem because poverty is increasing. The number of poor in the world is not declining," said Mustapha Nabli, a World Bank economist.

He said that the $190bn committed by the international community in rescue packages to countries like Indonesia, Korea and Russia, affected by last year's financial crisis, amounted to six times the amount spent on aid to the poorest countries.

The World Bank, which often plays soft cop to the International Monetary Fund's hard cop on the world economic stage, has rarely issued such an outspoken report as this year's Global Development Finance, its annual summary on capital flows.

Its gloomy conclusion that the developing world will stagnate assumes sluggish growth in the industrialised countries which make up the Organisation for Economic Co-operation and Development (OECD). But the report says: "There is still a substantial risk that the world economy will plunge into recession in 1999."

There are several linked reasons for the gloom. One is the general slowdown in world growth and the expansion of world trade. A second is the sharp falls in commodity prices.

More important is the closure of world capital markets to emerging economies in the wake of the financial crisis. The report shows that foreign direct investment declined but held up far better than capital inflows from the financial markets. Thanks to the availability of assets at bargain-basement prices and the drop in exchange rates in many countries, direct investment amounted to $155bn last year, little lower than 1997's record $163.4bn.

But the World Bank expects it to decline further this year, in line with weaker world trade growth and diminished profitability. In general, the recovery of capital flows will be slow, it predicts.

All is not bleak in the assessment. Some of the Asian crisis countries - notably South Korea and Thailand - are on the way to recovery as a result of their harsh IMF medicine.

But the report notes that even here, the tough macroeconomic policies and radical restructuring have exacted a harsh social cost. Unemployment in both countries tripled between 1996 and 1998.