Global recovery still a fragile process: World Bank

Global recovery still a fragile process: World Bank

Workers at an apparel factory in Ho Chi Minh City. The global economic recovery currently underway will slow down later this year and the process remains fragile, the World Bank has cautioned.

In its “Global Economic Prospects 2010” report released Wednesday, the bank says the slowdown will happen on the back of the waning impact of fiscal stimulus programs implemented by many governments. Financial markets remain troubled and private sector demand lags amid high unemployment, the report said, warning that the worst of the financial crisis may be over, but the global recovery was fragile. It predicted that the fallout from the crisis will change the landscape for finance and growth over the next 10 years. Global gross domestic product (GDP), which declined by 2.2 percent in 2009, is expected to grow 2.7 percent this year and 3.2 percent in 2011. Prospects for developing countries are for a relatively robust recovery, growing 5.2 percent this year and 5.8 percent in 2011, up from 1.2 percent in 2009. GDP in rich countries, which declined by 3.3 percent in 2009, is expected to increase much less quickly – by 1.8 and 2.3 percent in 2010 and 2011. “Unfortunately, we cannot expect an overnight recovery from this deep and painful crisis, because it will take many years for economies and jobs to be rebuilt. The toll on the poor will be very real,” said Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics. “The poorest countries, those that rely on grants or subsidized lending, may require an additional US$35-50 billion in funding just to sustain pre-crisis social programs.” The report warned that, despite the return to positive growth, it will take several years before economies recoup the losses already endured. It estimates that about 64 million more people will be living in extreme poverty (on less than $1.25 a day) in 2010 than would have been the case had the crisis not occurred. Implications for Vietnam Economists speaking to the press on the sidelines of a seminar held to discuss the World Bank report agreed that the greatest challenge facing Vietnam this year will be the task of ensuring growth without triggering runaway inflation. They said that while the government’s measures to overcome the impacts of the global economic crisis have been effective, serious shortcomings in the economy could affect its post-crisis development. Vietnam is one of 12 economies in the world gaining positive growth and keeping inflation low last year, said Phan Chi Thanh, deputy head of the Department of International Cooperation under the Government Office. He said the country had succeeded in attracting large investments, direct and indirect, accounting for 42 percent of its GDP, but even bigger challenges lay ahead. Tran Dinh Thien, director of the Vietnam Economics Institute, said the country’s land and manpower market still lacked a systematic structure, coordination among firms was weak, and the government’s macro management capacity is still low. Bottlenecks in the fields of transport and rural infrastructure, electricity and water supply have not yet been dealt with, he said. Matthias Dühn, director of EuroCham Hanoi, said infrastructure was not only limited to roads, seaports and airports, but also including sustainable power generation and power supply. “In 2009, we have observed troubling delays in many important infrastructure projects. With container shipping demand already challenging terminal capacity, the state of the nation’s ports remains an issue of the utmost importance and one which risks having a severely limiting effect on future investment if not addressed comprehensively and as a matter of urgency,” he said. Economist Thien said the efficiency of capital, land and labor use is low in Vietnam compared to other regional countries. This was reflected in the Incremental Capital-Output Ratio (ICOR) of 8 last year. “The ratio is too high to an underdeveloped country like Vietnam.” He also warned of the risk of an inflation hike in the context of big credit growth and impacts of the government’s stimulus. “Preventing an inflation hike is our most difficult task in 2010.” Credit in Vietnamese dong grew fast last year, a 37.7 percent increase year-on-year. The central bank increased interest rates in November 2009 to slow credit growth. Besides, the country’s stimulus packages, which cost some $8 billion, were very large compared to its GDP, he said. The packages were used to offer enterprises a 4-percent interest subsidy, tax reductions and tax exemptions in an effort to push the economy through the recession. The plan to increase salaries for employees was also a factor, and would contribute to raising the risk of an inflation hike this year, Thien said. Restructuring Thien said the country should focus on restructuring the economy, increasing firms’ competitiveness, and combating inflation to ensure stable economic growth. Vietnam should also strengthen the reform of state-owned enterprises, especially economic groups, so that they can use capital more effectively. Matthias Dühn said the biggest challenge for Vietnam in 2010 would be to carefully balance growth without fuelling inflation, while coming up with sustainable long-term solutions for the country. The Vietnamese economy is still relatively small in scale and businesses are very reactive to monetary or fiscal policies. Therefore, carefully tightening of monetary policies and ending the stimulus is a reasonable action under the circumstances, he felt. Dühn said Vietnam’s economy was still at a comparatively early stage, mainly exporting raw materials, like oil and gas, leather, rice and coffee. “We believe that one of the keys to sustainable economic development is to shift from these basic exports to more sophisticated added-value exports in the long run, in particular in the high-tech sectors.” In addition, the FDI composition needs to shift from speculative to more added-value and sustainable industries, in particular the manufacturing segment, he said. FDI, or foreign direct investment, in 2009 was driven mainly by real estate and not by the more important manufacturing sector. Opening up of the telecom and retail sectors to foreign competition, continuing privatization of state-owned enterprises, and, more generally, tackling corruption and red tape, will be other tasks to be pursued soon, he added. Reported by Ngan Anh