GROWTH IN EUROPE AND CENTRAL ASIA REGION ACCELERATES TO 6.8 PERCENT, WORLD BANK SAYS

YEREVAN, APRIL 7, ARMENPRESS: Economic growth increased in the
Europe and Central Asian region by 6.8 percent in 2004, while global
growth reached 3.8 percent-the fastest rate in four years, says the
World Bank’s Global Development Finance 2005: Mobilizing Finance
and Managing Vulnerability. In Europe and Central Asia, the growth
reflects a positive international trade and capital flows environment,
as well as the benefits of continued reform, including improvements
in investment climate and governance across much of the region.

The positive impact of EU accession in Central Europe and the Baltics,
and progress with candidacy for EU membership in Bulgaria, Croatia,
Romania, and Turkey are also contributing to growth. Other factors
include continued political stability in Southeastern Europe, and
the positive impact of high commodity prices in the Commonwealth of
Independent States (CIS).

“Europe and Central Asia’s growth is outpaced only by East Asia’s,”
comments Pradeep Mitra, Chief Economist in the World Bank’s Europe and
Central Asia unit. “Rising oil prices have certainly played a part, but
more important are continuing reforms, democratization, and increased
political stability, which underpin the continued surge in investment.”

Globally, developing countries outgrew high-income countries, and
the gains were widespread-all developing regions grew faster in 2004
than their average over the past decade. But global growth momentum
has peaked, and developing country gains are vulnerable to risks
associated with adjustments to ballooning global imbalances-especially
the $666-billion U.S. current account deficit.

Specifically, inflationary pressures are building in Europe and
Central Asia, which could lead to tighter domestic monetary policy,
which, in combination with expected increases in world interest rates,
should mean higher regional interest rates, slowing investment, and a
dampening of consumption demand. Coupled with the negative influence
of a strong real effective appreciation by a number of the region’s
larger economies, and a leveling off of oil incomes, regional growth is
expected to slow to about 5.5 percent in 2005 and 4.9 percent by 2006.

The strong global performance was underpinned by solid U.S. growth
and rapid expansion in China, India, and Russia. Record expansion of
6.6 percent in developing countries was encouraged by favorable global
conditions and supported by years of domestic policy improvements. As a
result, financial flows to developing countries during 2004 reached
levels not seen since the onset of the financial crises of the
late 1990s.

Net private capital flows, including debt and equity to developing
countries, increased by $51 billion to $301.3 billion in 2004. Of this,
net foreign direct investment (FDI) totaled $165.5 billion, up by $13.7
billion in 2004. FDI to Europe and Central Asia has stabilized over
the past three years at 23 percent of the developing-world total,
significantly above its 9 percent share in 1994. In 2004, FDI to
the region reached an estimated $37.6 billion, up from $35.6 billion
in 2003.

Developing countries themselves continued to increase their exports of
capital in tandem with their strengthening current account balances,
which reached an aggregate surplus of $124 billion in 2004. FDI
outflows from developing countries rose to an estimated $40 billion
in 2004, up from $16 billion in 2002; these outflows are coming,
for the most part, from the same countries receiving the bulk of
private capital inflows, namely Brazil, China, Mexico and Russia.

“This recovery of financial flows is a welcome sign of renewed market
interest in developing countries and a tribute to the substantial
strengthening in economic fundamentals achieved in many countries,”
says Francois Bourguignon, the World Bank’s Senior Vice President
for Development Economics and Chief Economist. “But we should also
keep in mind that current global financial imbalances pose risks-of
disorderly exchange rate movements, or of interest rate increases-that
could threaten these gains. Developing countries need to prepare
themselves for adjustments, some of which could be sudden.”

The report points to a baseline scenario in which tightening of U.S.
fiscal policy and higher interest rates-along with strong growth
among developing countries-starts to redress global imbalances and
reduce the U.S current account deficit. But it also highlights the
risks to this outlook, and argues that developing countries need to
reduce their vulnerability to shifts in market sentiment prompted by
higher-than-expected interest rate hikes, or a greater-than-expected
depreciation of the U.S. dollar.