Trump's fiscal policies to have major implications for developing economies — World Bank

Devex
By Sophie Edwards

Donald Trump, president-elect of the United States. Photo by: Michael Vadon / CC BY-SA

The World Bank is predicting modest global economic growth of 2.7 percent for 2017 but this could go either up or down depending on the fiscal policies introduced by the incoming administration of U.S. President Donald Trump.

Emerging market and developing economies are expected to grow by 4.2 percent this year, up from 3.4 percent in 2016, while advanced economies could rise by 1.8 percent, according to the World Bank’s Global Economic Prospects report, released Tuesday. The upswing is largely attributed to “modestly rising commodity prices,” the report said.

However, the bank said its projections are subject to uncertainty and that actual levels of growth are likely to change according to how U.S. fiscal policy plays out after Trump is inaugurated on Jan. 20.

The incoming administration’s promised fiscal stimulus package, including tax cuts and spending on infrastructure, if implemented, could lead to stronger-than-expected growth, the report said. Conversely, if U.S. and European countries follows protectionist policies, this will hamper growth.

“Because of the outsize role the United States plays in the world economy, changes in policy direction may have global ripple effects. More expansionary U.S. fiscal policies could lead to stronger growth in the United States and abroad over the near-term, but changes to trade or other policies could offset those gains,” said World Bank development economics prospects director Ayhan Kose.

This uncertainty will hit developing countries hardest, who are already struggling to respond to weakened investment growth levels which dropped to 3.4 percent in 2015 from an average of 10 percent in 2010, and likely fell another half percentage point in 2016, the report said.

World Bank President Jim Kim urged private sector investors to be “encouraged” by the “stronger economic prospects on the horizon” and invest in emerging economies.

“Now is the time to take advantage of this momentum and increase investments in infrastructure and people. This is vital to accelerating the sustainable and inclusive economic growth required to end extreme poverty,” he said.

The report also calls for developing country policy makers to “be ready to employ the full range of cyclical and structural policies to accelerate investment growth,” in order to respond to encourage foreign investment.

World Bank chief economist Paul Romer outlined how the World Bank could help developing countries be ready: “We can help governments offer the private sector more opportunities to invest with confidence that the new capital it produces can plug into the infrastructure of global connectivity,” he said.