Recession Pressures Global Economy

The global economy may shrink to within five percentage points below its potential — the first shrink since World War II, according to estimates released Sunday by World Bank. For some 129 of the poorer, developing countries, the downturn will be felt keenly, with the World Bank estimating these countries are short from $270 to $700 billion. This significant gap, the group said, is too large for the international financial institutions to cover on their own. “This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said Wold Bank Group president Robert Zoellick. “We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.” The world’s poorest countries have seen exports and revenue decline as an overall effect of the downturn in developed countries. As a result, these countries have come to depend on “development assistance” like that pledged at the Gleneagles Summit in 2005, but according to World Bank, many of these aid commitments have fallen behind. World Bank chief economist and senior vice president Justin Yifu Lin urged more developed countries to consider investing some of their fiscal stimulus in developing countries. “Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery,” Lin said. With world trade on track to post its largest yearly decline in 80 years — the sharpest losses likely to be focused in Asia — the World Bank pleaded the case that  aiding poorer countries now may help offset the devastation of existing poverty magnified by a global recession. The issue, of course, is that wealthier countries have likely already contracted enough as to make investing in poorer countries all but impossible. In the United States alone, unemployment has risen to 8.1 percent and initial unemployment claims have risen to a 27-year high. Real gross domestic product dove 6.2 percent in the fourth quarter 2008 over the third quarter, according to data released in late February by the U.S. Bureau of Economic Analysis (BEA). Real GDP had contracted 0.5 percent in the third quarter from the second, indicating a rapid decline in productivity. “Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third,” BEA analysts said in a statement. “The largest contributors were a downturn in exports and a much larger decrease in equipment and software.” Write to Diana Golobay at

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