Shrinking global trade will damage developing economies

The looming decrease in global trade could set developing countries back for many years and erase recent gains development, according to Danny Leipziger, vice president of the poverty reduction and economic management network at the World Bank. In 2007 developing countries posted nearly 8% economic growth and attracted a record US$1 trillion in net private capital flows. But in 2009 the global economy is forecast to grow by only 1%, with developing country growth expected to fall to 4.5% from a previously projected 6.5%. The World Bank estimates each 1% drop in growth could trap another 20 million people in poverty. With most developed countries expected to slip into recession, there are fears that some will move to raise trade barriers. “The multilateral trading system is no doubt being tested,” says Leipziger. Examples include the subsidies and other forms of domestic support to various industries that developed countries are contemplating. Leipziger says keeping markets open is key. Governments should strive to use the crisis as an opportunity to invest in trade-related infrastructure, implement measures to facilitate trade, and maintain trade finance credit lines and guarantees, especially through their export credit agencies. “At the moment what’s constraining world trade is not only falling global demand but lack of trade finance,” says Leipziger. “We need to ensure developing countries have access to credit and international markets. I think that’s where the maintenance of an open trading system is very important. Even though OECD countries may be in recession, that doesn’t mean we should be resorting to protectionism, which will set developing countries back for many years. “It’s really incumbent on all countries to keep international trade and finance flowing, because that can limit the damage of the global downturn; we all stand to benefit the most from that, especially developing countries,” said Leipziger.