Global economy at risk from surge of capital to developing nations, warns World Bank

Heavy and volatile flows of speculative capital into developing countries are highlighted by the World Bank today as a significant risk to global economic recovery.
Stressing the importance of the emerging world as a force behind growth, the bank says there is a sharp contrast between the robust performances of Asia, Latin America and Africa and the sluggish recovery in the richer nations of the west. The bank says the developing world is likely to be responsible for almost half of the 3.3% global expansion in 2011, when it expects a slowdown from the 3.9% of growth notched up in 2010.
Justin Yifu Lin, the World Bank’s chief economist, says: “On the upside, strong developing-country domestic demand growth is leading the world economy, yet persistent financial sector problems in some high-income countries are still a threat to growth and require urgent policy actions.”
In its Global Economic Prospects 2011, the World Bank says growth of 6% in developing countries will be more than double the 2.4% in high-income countries. It adds that global growth will pick up slightly in 2012 to 3.6%. But the study expresses concern that ultra-low interest rates in the west are leading to large capital flows into developing countries, causing big swings in exchange rates and asset prices.
Net international equity and bond flows to developing countries rose sharply in 2010 by 42% and 30% respectively, according to the bank, which notes that nine countries received the bulk of the capital. Brazil, one of the nine, has already announced curbs on capital, which have fanned fears of currency wars and protectionism.
“The pick-up in international capital flows reinforced the recovery in most developing countries”, saus Hans Timmer, the World Bank’s director of development prospects. “However, heavy inflows to certain big middle-income economies may carry risks and threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge.”
The report notes: “Capital inflows into some middle-income countries have placed undue and potentially damaging upward pressure on currencies. Many of these flows are short-lived, volatile and sometimes speculative in nature. Left unchecked, such flows can lead to abrupt real appreciations and depreciations … and can do lasting damage to economies.”
East Asia topped the regional growth table in 2010, the World Bank says, showing expansion of 9.3%. Latin America bounced back from a 2.2% fall in output in 2009 to grow by 5.7%. But while noting that sub-Saharan Africa, excluding South Africa, had grown by 5.8% in 2010, it warns that rising food prices threaten a return to the hunger and malnutrition of 2008.