World Bank Predicts Economic Crisis Will Lead to Stunning Decline in Global Trade

The Wall Street Journal reports that World Bank President Robert Zoellick said Saturday that the ongoing financial crisis will likely lead to a “stunning” decline in global trade for the first time in 27 years.

Speaking at a briefing during the Group of 20 meeting of finance ministers and central bankers in Sao Paulo, Brazil, Mr. Zoellick said that one of the primary drivers in the drop-off was a big gap in trade finance. The World Bank recently moved to expand a trade finance facility to $1.5 billion, up from $1 billion, that could be expanded further to help offset the gap.

The World Bank outlook, as well as a report from the International Monetary Fund, will combine to show that “the world economic outlook has weakened significantly, including for developing countries,” Mr. Zoellick said. The World Bank outlook will be released next week.

Emerging market countries were already under stress from inflationary pressures, especially from sky-high commodity prices earlier in the year. “The food and fuel crisis of the recent year has now been supplemented by the blow of a financial crisis. Virtually no country has escaped,” Mr. Zoellick said.

The economic blow from the crisis has caused a review of previous monetary policies in discussions with an eye toward fresh policies that could jump-start economic growth. “But there were some cautions by the developing countries’ central bankers because they noted the inflationary pressures that still exist and, depending on the country, they may have less room for a fiscal expansion,” Mr. Zoellick said.

As the ongoing financial crisis spread from the developed to the developing world, emerging market countries have also clamored for a greater role in shaping global economic policies. A bigger voice for emerging markets, however, may come in the form of working together in a “steering group” or new “network” approach toward financial regulation and oversight via multilateral institutions, Mr. Zoellick said.

Mr. Zoellick called the emerging powers a “group of countries that clearly wield influence in the international economy, so frankly, rather than have a G7 group and a BRIC group and a this group, it’d probably be better to have them engage together.”

Brazilian President Luiz Inacio Lula da Silva demanded that major reforms of the international financial system include strong input from large emerging nations and said the collapse of modern banking structures is victimizing the world’s poor. France has proposed incorporating emerging economies into the exclusive G-8 club of industrialized nations. Brazilian Finance Minister Guido Mantega suggested that group should include as many as 15 countries, but didn’t specify which emerging-market nations besides Brazil, Russia, India and China should be allowed to join.

The IMF could also become the world’s financial watchdog, with increased powers to curb financial crises with more money to aid troubled economies, European presidents suggested Friday.

But Brazil and other emerging-market nations have long complained their representation in the IMF and World Bank is insufficient, and Silva on Saturday said the G-20 is better positioned to forge new international financial regulations, because it more broadly represents both rich and developing countries.

While there is a clear recognition that global financial markets need further oversight and regulation, it remains a point of contention. “There is a sense that all financial institutions need some form of supervision and oversight and, perhaps, regulation but it’s a matter of degree. And that level of regulation will likely mean a loss of jobs in a lot of countries,” Mr. Zoellick added.

World Bank studies had shown that small and medium enterprises were often the best bet to work through an economic downturn, but often suffered the most through heavier regulation.

SS