Hans Timmer Discusses Economic Landscape at MIGA Event for World Bank/IMF Annual Meetings

As is MIGA’s practice, the agency held a client breakfast on the sidelines of this year’s World Bank Group/IMF Annual Meetings. The food for thought was served by Hans Timmer, the World Bank’s Director for Economic Prospects, who offered his insights into the current global economic landscape—of major concern for clients, development practitioners, and the general public alike.

Timmer opened noting the "perilous economic times" and underlining the World Bank’s worries about the effect on development. While attention is now focused largely on the developed markets due to sovereign debt crises, political stalemates, and teetering banks in those countries, Timmer pointed out that developing countries are now measurably starting to feel spillover effects. This is demonstrated by very recent August data showing that the trajectory of developing countries has changed: financial markets are seeing spreads for emerging market debt increase sharply for the first time since the economic crisis began in 2008.

He noted that for the past year and a half the World Bank and others have been able to say that developing nations were the drivers of recovery from the economic crisis, while acknowledging there was a downside risk. Now, he noted, we have to start facing the downside risk head-on.

Timmer is concerned in particular with how domestic demand in developing countries will be affected and the World Bank’s Economic Prospects group is monitoring this closely. In fact, Timmer mentioned that the World Bank is entertaining lower growth scenarios for the developing world than even the ones published by the IMF this week.

On the political side, Timmer mentioned several important recommendations. With respect to Europe, he underlined that the banking situation must be decoupled from sovereign debt. He pointed out that for developing countries there is less fiscal space, but some scope for monetary policy maneuvers. In the few countries where some room for fiscal stimulus exists, he urged extreme caution—as all vulnerabilities have increased.

Timmer stressed that long-term structural reform must continue, including building infrastructure and removing bottlenecks to growth. He emphasized the crisis the developed world finds itself in is not cyclical, but structural—and regrets that not enough attention has been paid to this fact.

There were some positive messages that Timmer delivered. First, he maintained that the increased role that developing countries are playing in the economy means that there is a shift in global power and a corresponding stabilizing role in international markets. He also believes that, even in Europe, the most logical endgame is more economic integration and a stronger union as a result.

Lastly, Timmer assured the audience that sustained attention to the structural nature of the crisis would result in attempts to create stronger fundamentals going forward—and important, if exceedingly difficult, lessons learned.