Notes

Financial Blog Corliss Group Economic growth to accelerate around the world


The World Bank's most recent Global Economic Prospects (GEP) report, released this week, says a global economic recovery is underway, underpinned by strengthening output and demand in high-income countries.

Global GDP growth in 2014 will be 2.8 percent and it is expected to rise to about 4.2 percent by 2016, according to the report, which the World Bank publishes twice a year.

Average GDP growth in developing countries has reached 4.8 percent in 2014, faster than in high-income countries but slower than in the boom period before the global financial and economic crisis of 2008.

Demand side stimulus or supply side reforms?

The global economic slowdown that struck in 2008 was caused by a financial crisis that resulted in large part from the bursting of an enormous, fraud-ridden mortgage lending bubble in the US.

The crisis led to varying responses in different countries. The GEP report's authors said that in general, developing countries privileged demand stimulus policies over structural reforms during the past several years.

For example, in 2008 to 2009, China implemented a four trillion-renminbi ($586 billion) stimulus program as a direct response to the slowdown in global trade caused by the global financial crisis.

Critics pointed to over-investment in China as a risk to continued fast growth. The country is now struggling to contain a real estate bubble of its own.

The World Bank wants China and other emerging countries to refocus on structural reforms.

"A gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 financial crisis," the bank's chief economist, Kaushik Basu, has said. "In brief, now is the time to prepare for the next crisis."

The World Bank's mantra: Fiscal discipline and structural reforms

Yet the World Bank is well known for nearly always prescribing fiscal "tightening" - or cutbacks to government expenditures - and "structural reforms."

What is the rationale for public expenditure cutbacks? And what does the World Bank mean by "structural reforms?"

The World Bank consistently urges policymakers to prevent annual deficits from growing faster than the rate of GDP growth. Rising debt-to-GDP ratios mean that an increasing share of the public budget is devoted to servicing debt, leaving proportionately less money available to pay for government-provided infrastructure and services.

However, sometimes countries fall into recession when households, in aggregate, attempt to pay back previously incurred debt faster than they take up new debt. In the jargon of economists, this is called "deleveraging."