Developing countries told to scrutinize fiscal policy amid global turmoil

Economies of Developing Countries May Overheat

Developing countries are in danger of having overheating economies if they do not put up measures to tweak their fiscal strategies, the World Bank's Global Economic Prospects report warned today.

Lead author of the report Andrew Burn said that emerging markets need to move beyond crisis-level steps "towards a more neutral stance in terms of fiscal and monetary policy, and recreate the fiscal space that was there before the crisis."

The update shows that China, India and Brazil, the largest developing countries with production at full throttle, should hasten tightening interest rates, cut spending and if possible, let their currencies gain.

Global economic growth was forecast at 3.2 percent for this year and 3.6 percent for 2012 and 2013. The World Bank identified such threats to the global economic recovery as rising commodity prices, unstable oil prices, the European debt crisis, natural disasters in Japan and elsewhere and the political unrest in the Middle East.

The World Bank revised its growth projection for developed countries hit by enormous debt and rising unemployment from 2.4 percent set in January to 2.2 percent this year. Next year's growth is forecast at 2.7 percent.

Meanwhile, growth in developing countries is expected to accelerate a bit from 6 percent set in January to 6.3 percent. The 2012 projection was also revised upwardly to 6.2 percent.

As the world's leading economies dragged down the global economy, developing countries cushioned the blow by generating sustained growth. But it is feared that the overcapacity of domestic production will eventually cause overheating.

Despite high growth, the World Bank said high food prices remains one of the most serious problems facing developing countries.

Posted by James Fried on Wednesday June 08 2011, 5:13 AM EDT. Ref: WSJ. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0