The global financial crisis has dimmed short-term prospects for developing countries and the volume of world trade is likely to contract for the first time since 1982, the World bank said in the Global Economic Prospects 2009 report.
The sharp slowdown has caused commodity prices to plummet, ending a historic five-year boom.
The report released on Tuesday, finds the global economy transitioning from a long period of strong developing-country-led growth to one of great uncertainty as the financial crisis in developed countries has shaken markets worldwide.
GEP 2009 projects that world GDP growth will be 2.5 per cent in 2008 and 0.9 per cent for 2009. Developing countries will likely grow by 4.5 per cent next year, down from 7.9 per cent in 2007, while growth in high-income countries will turn negative.
''People in the developing world have had to deal with two major external shocks -- the upward spiral in food and fuel prices followed by the financial crisis, which has eased tensions in commodity markets but is testing banking systems and threatening job losses around the world,'' said Justin Lin, World Bank chief economist and senior vice president, Development Economics. ''Urgent steps are needed to help reduce fallout from the crisis on the real economy and on the poorest, including through projects that build better roads, railways, schools, and health care systems,'' he added.
In the light of the crisis, the World Bank said the group is increasing its support for developing countries, including through new IBRD commitments of up to $100 billion over the next three years as well as via its private sector arm, the IFC, in the form of facilities for trade finance, banking recapitalisation, and for privately-funded infrastructure projects facing financial distress.
''With world trade volumes projected to contract 2.1 per cent in 2009, developing countries will see a big drop in their exports. Tighter credit conditions and increased uncertainty are expected to see investment growth in both developing and high-income countries slow in 2009 -actually falling 1.3 per cent in developed countries and rising by only 3.5 per cent in developing countries versus 13 per cent in 2007,'' the report noted.
''Policymakers in developing countries should monitor their banking sectors carefully and be prepared to enlist external support to shore up currencies and banking systems.'' said Uri Dadush, director of the World Bank's development prospects group. ''Given the expected decline in global trade, both developed and developing countries need to resist the temptation to resort to protectionism, which would only prolong and deepen the crisis,'' he added.
With prices of virtually all commodities falling sharply since July, real food and fuel prices in developing countries have dropped considerably, but they remain high relative to the 1990s and the social turmoil and human crises they triggered are still reverberating, the report said.
Overall, higher food and fuel prices have cost consumers in developing countries about $680 billion in extra spending in 2008 and pushed an additional 130-155 million people into poverty, it said.
The report said oil prices will average about $75 a barrel next year and food prices worldwide will decline by 23 per cent compared with their average in 2008.
Over the longer term, the report finds that supply should more than meet demand over the next 20 years.
''Over the longer term, the supply shortages that contributed to the sharp rise in commodity prices are expected to ease.'' said Andrew Burns, Lead Author of the report. ''Demand for energy, metals, and food should slow due to weaker population growth and an expected reversal in China's high demand for metals as investment rates there decline.''
Government policies should support investment in additional supply capacity and encourage greater conservation and efficiency measures to keep commodity supply and demand in balance, it said.
Although ample food supply is projected globally, food production in countries with fast growing populations (notably in Africa) may not keep pace with demand. To avoid becoming overly dependent on imported food these countries need programmes to boost agricultural productivity, such as those that expand rural roads, increase agricultural research and development, and intensify outreach efforts, the World Bank said.
While increased biofuel production from food crops is likely to persist in the absence of new technologies and non-food sources, the GEP said commodity exports can promote growth if the right policies are in place.
GEP recommends several measures that could reduce the chance of another food price crisis. These include discouraging export bans, providing more stable funding for food-aid agencies, and improving the coordination and information about global food stocks.