The better performance of developing countries in today’s world of multipolar growth is reassuring," said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President, Development Economics.
"But, for the rebound to endure, high-income countries need to seize opportunities offered by stronger growth in developing countries."
The recovery faces several important headwinds over the medium term, including reduced international capital flows, high unemployment, and spare capacity exceeding 10 percent in many countries.
According to the report, while the impact of the European debt crisis has so far been contained, prolonged rising sovereign debt could make credit more expensive and curtail investment and growth in developing countries.
On the upside, world merchandise trade has rebounded sharply and is expected to increase by about 21 percent this year, before growth rates taper down to around 8 percent in 2011-2012. Almost half of the rise in global demand in 2010-2012 will come from developing countries.
The World Bank’s projections assume that efforts by the IMF and European institutions will stave off a default or major European sovereign debt restructuring. But even so, developing countries and regions with close trade and financial connections to highly-indebted high-income countries may feel serious ripple effects.
"Demand stimulus in high-income countries is increasingly part of the problem instead of the solution," said Hans Timmer, director of the Prospects Group at the World Bank.
"A more rapid reining in of spending could reduce borrowing costs and boost growth in both high-income and developing countries in the longer run."
Regardless of how the debt situation in high-income Europe evolves, a second round financial crisis cannot be ruled out in certain countries of developing Europe and Central Asia, where rising non-performing loans, due to slow recovery and significant levels of short-term debt, may threaten banking-sector solvency.
