Daniel W. Drezner

I think the World Bank is being optimistic

I think the World Bank is being optimistic

The New York Times’ Mark Landler summarizes the latest World Bank forecast

The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent. The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty. Even more troubling, several economists said, there is no obvious engine to drive a recovery. American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries. “We know that the financial crisis now is likely to be the worst since the 1930s,” said Justin Lin, the chief economist of the World Bank, summarizing the projections. The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.

You can access the World Bank forcast directly by clicking here.  Not that I have a sophisticated model or anything, but I actually think the Bank is being overly optimistic in its growth assessments for next year, for the following reasons:

  1. Credit markets have yet to really unfreeze, because the underlying problem — putting a price on a lot of toxic debt — has yet to take place;
  2. It’s going to take some time for trust — a vital public good — to return to global capital markets;
  3. The crisis has done nothing to unwind the global macroeconomic imbalances that contributed to the asset bubble in the first place — if anything, the crisis has temporarily reinforced it;
  4. There is a very dangerous prisoner’s dilemma game brewing in the interplay of fiscal expansion and trade policy.  Unless export engines like Germany start to signal that they’ll prime their pump as well, you’re going to start to see some nasty protectionist attachments to any new government spending;
  5. Fiscal expansions are going to take a long time to kick in, and the ones being proposed are not necessarily conducive to countercyclical boosts
  6. Beyond the fiscal expansion, this crisis is going to result in a lot more state intervention in the economy.  Given what’s happened, it would be intellectually dishonest of me not to acknowledge that some of this intervention will be necessary.  A lot of it, however, is going to be misguided and stunt long-term growth. 

I would be very surprised if global growth was not negative in 2009.