World Gripped By Structural Changes -World Bank's Zoellick
First Published Thursday, 10th May 2012 06:11 pm - © 2012 Dow Jones
OF Dow Jones NEWSWIRES
NEW YORK -(Dow Jones)- The world is in the midst of structural changes affecting developing and developed countries, said Robert Zoellick, president of the World Bank.
These changes are going to shift the paradigm on world trading to result in more trading among developed countries, said Zoellick, speaking at a Thursday forum organized by The Economic Club of New York. "We are quickly moving to a world economy with multiple poles of growth," he added.
Developing countries, which have been on a export-driven boom this past decade, increasingly have to focus on promoting domestic consumption--as in the case of China--or spending on domestic investments, as in the case of Latin America and Southeast Asia. Despite the upsides of the growth story, developing countries are concerned about the shift.
"There's a tendency for developing-country growth to stall" as they reallocate resources from one sector to another, Zoellick said. Many worry they could fall into the so-called middle-income trap based on data showing most countries that were in the middle-income category in 1960 remained there in 2008, except for 13 countries that moved up including Greece.
The backdrop of all advanced economies stumbling at below-potential growth only adds to these concerns.
In the U.S., the focus on short-term stimulus may not be enough as history shows such stimulus has less of an impact on a country burdened with long-term debt, Zoellick said.
The U.S. economy is expanding at a more-modest rate because of the overhang of structural issues including taxes and the fiscal cliff, he said.
On the other hand, the European Union is burdened with three interconnected problems: sovereign debt, banks that own this debt, and the ability of countries to expand under a single currency.
Some countries like Italy and Spain are pursuing "serious structural reforms" that are "hard to do," Zoellick said.
Germany, which is heading the call for austerity measures, is of the position that countries can't avoid overhauls, he said. Zoellick cautioned against liquidity measures like the long-term-refinancing operations, which he said don't "remove the European Union's problems."
"The missing piece is funding assurances for the medium term," which potentially would provide banks more of a cushion to work through their bad debt, he said.
Globally, he called for new growth models led by China as the structural changes are incorporated.
"The models of the past won't necessarily work for the future," Zoellick said.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; email@example.com