technology diffusion in the developing world doc

Chapter 3 Determinants of Technological Progess: Recent Trends and Prospects 105, Drivers of technologies progress A framework 107 External ramsmision channels 109 [Nurturing techaologia

Global

Economic Prospects

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ISBN: 978-0-8215.7365-1

ISBN: 978-0:8213-73668 DOI: 10.15960978-0-9213.7365-1

ISSN: 1014-8906

‘Cover photos Irgaion by Chris StowerfPanox; Man with Cell hone by Jasob

Silberberg/Panos; Train by QiliShen/Panox Map Projetion by Chris StowersPanoss and Researcher by Jenny Matthews Panos (Cover design: Cea! Stages

report was December 12, 2007 Dolls age current USS dollaes ules oherwise indicaed

Contents

Foreword xi

Acknowledgments xi

Abbreviations xv

Overview 1 “Technological achievement and difusion in developing countries 2

Some policy dections 13,

Nowe 15 Refeenses 18

Chapter 1 Prospects Growth outlook 17 for Developing Countries 17

Risks 18

Financial markets: Needed correction or aor dscupion? 18

Global growth 21 World rade 33

Inflacion and commodity markers 36

Risks and unceresinis: Danger of a banking crisis nda US ecssion 41 Long-erm prospects and poverty forecasts 43

Nowe 4E References 49)

Chapter 2 Technology and Technological Diffsion in Developing Countries 5! The role of ehnology in development 53

Measuring technology in developing countries 58

saluting overall rchnologcal progress 78 Technologies dfanion ove the longterm 87

Condadon 92 Technical Annex: Consraction ofthe summary indexes 92

Nose 99 References 101

Chapter 3 Determinants of Technological Progess: Recent Trends and Prospects 105, Drivers of technologies progress A framework 107

External ramsmision channels 109

[Nurturing techaologial adspivecapacey 127

Gonclision 150)

owes Hồ

References 156

Appendix: Regional Economic Prospects 165 ast Ais andthe Pacific 165

Europe snd Central Asia 170

Latin Ameren and the Caribbean 76 Middle East aod North Africa 184

South Asia 189

SubSsharan Aiea 193,

Figures Tr Robust growth among developing counties should cushion the developed couatey

lowdown 2

2 Scio innovation and invention i slmose exclusively high-income activity 3 3 Technological achievement: Converging, bu the gap remains large

4 The penetration of older and more recent rechnologcs depends on more than income 5

‘Technological achievement ends to evel ofa dflerot income ve in đi‹rcn

fegions 6

6 Most echnologes falc penetrate deeply iat developing economies 7

7 The urbanceral gap in eephone access in Inia is huge 7 8 Domestic absorsive capacity both conditions and aracs external lows 8

9 Developing counties crac in technology gos as sen ` T0

10 Macroeconomic srabilcy has improved since the cary 19905 LT

11 Literacy rates have incteaed inal gions l2

12 Developing regions have moch poorer governance than do OECD counsries 13 1.1 The perscved riskiness of high-yield corporate bonds inteased more than thạc ‘of emerging marker onde 19 1.2 Emesging marker asset selha more severe than during calc petiod of marker, Turbulence 19 1.3 Global equity markers fal them recover fe by emerging markets 20

LỆ Awepelown in growsh in 2008 2

115) Volatile patterns of proth among OECD countries 2

Kế Tighter eet and weak housing ye slower US growth 23

17 Robust growth in developing county industrial prodacion 24 1L8 Developing growth retain strong moment ding the Rise hal of 2007 26 V9 1.10 Ease Asia now accounts For anequartr of China’ imports 27 ath growth moderting through 2009 26

TL Exeral postions vary widely scros Europe and Central Asia 27 1.12 Growth eases in 2007 forthe Latin America and Canhbean region 28

1s

sa

Continued il revenue gains support growth among Middle East and North Asc oil exporters 30 South Asia growth is slowing asthe Indian rupee appreciates 32

Oil exporters drive 2007 grow renults foeSub-Sabaron Afica 32

‘Weak US growth reduces demand for developing county exports 35

[Export opportuni for highncome US curent account narows ver 2007 and Ho to continve doing 3036 counties 38 Inflationary pressures are rising in the Middle East and Now Afiea and SubSsharan Altea 37

Inflation is broly stable cewhere, though a high lạnh 37

Commodity prices continued gains through 2007 led by metals 38

Goppee ancy and sluminum peices sharply affected hy China 38

Growth inthe world’s demand foro slows 39

OPEC reduces output to support prices 39

Agricultural prices surge oer 2006-07 40

{Ave in food ries, fed by a ramp-up af the peices of fas, ols and rains 40 Longteem geowth, 1980-2030 44 Declining capitate growth for developed countries, 2002-3045

Sustained high productivity growth for developing counties 45

Patent activity i singin middleiacome coutees 6 ltricl consumption varies markedly even at similar income levels 63

Rail and voad densities se with income and population density 65

“Telephone densities are highly covelated with income, bu air ransportis aot 66

“The incidence of Intcne se varies widely across countries 73, Logistics performance inthe world 77

Diswibucon of technological achievement by dimension S0

Increase in stmmary technological achievement subindexcy, 1990-20005 82 Altesnative summary indexes of technological achievement 83

‘Technological achievement sses with income levels BH

Comparison of evel of technological achievement, carly 1990s and arly 200085

Domestic aborprive capacity both conditions and strats external flows 108 Rising share of high-tech imports ` H2

Eapors of low medina aid high-cchnology pode: 114

‘Shave of foreign affiliate in busines RSD expendicure 117 Licensing payment have isch shaephy 121

“The brain drains ‘hase of PD sents il ving inthe Unive Sates five years severe problem ina numberof small ountres 123

afergrvdewion 124 ighstiled emigrans ate dnpropestionstely represented in the diaspora 124 Mont developing countries have ineresed ther expovare to external

‘echnology 128 [amber of counties in confice worldwide 139 ciency of contact enforcement 152

Developing country governance sore elative 19 OFCD average T32

Regional serages of ix governance indiestore 133

Percaptn incre have wecelreted in erat fear 18

Alo

AL

Als

Except in Sub-Saharan Aca, le expectancy is improving 14

‘Educational expenditinns have sae i sete riers 187

‘Many developing county students filo ect era standards) 138

Levels of intelectual property protection 146

Level of and recent changes in technological absorptive capacsy 149,

Eat Asian grow moves up in 2007 165

Except for Cina inflation is now sailing across East Avia 166

Performance improves for East Asia countries other tha China 169

‘Mixed groweh euttrns aero Europe and Central Asia 171

External positions vaey widely cras Europe and Central Avia 171

Growth in Europe and Cental Asi eases nto 2009173

Growth ouuens were mixed scross Latin America in 2007176

Latin American inflation ensen over the last 13 years 177

{atin Ameria andthe Caibbeansovercign bond spreads dele, then increase again 177

Growth in Latin America and the Caribbean eases ino 2008179

Financia test Credit 183

Exchange rate policy dilemmas? 183

Export product vale} conceteation i iceesing 183

Export market Walue) concentration is falling 18

Growth in Middle East and North Ain picks up 188

Hiydeocachoa exports continue t se on higher prices, nodes volume gains 186

“ous and remittances offer widening tade dtc for Maghreb and Maseg countries 187

-Midale East and Noah Afi equities tebound from the wi 2007 slump 189 South Asian egonomies case into 2007 190

‘Monetary poy i tightened in sponse co a buiklp in inflcion 190,

Growth in Sub-Saharan Aca has aecelerated mackedl 198

‘teaching 4 35-year high in oikexporting countries find 4 10-yea high in ciLinporting counties 199 198

Comiibutions of invesment an consumption have increased 199)

Gross capital lows to devsloping countries 2005-07 30 The global outlook in summary, 2005-09 "22

Resent economic indeator, developing regions 2008-0725

Developments and prospects for world trade and payments 3£

overs in developing countries hy region selected years $6 Dispariy among TTP levels remains wide 58

Sense and innovative ose 61

Indicators of he slfasion of older technologies 68 Affordability of icine phones alls spay with lower incomes 67

Immnizaion rte lag sgiicartyin South Asia and Sub-Saharan Africa 68 Diffason of hh water and saniestion technology is ow in rural areas 63 Diffusion of ecet technologies 72

Share of higheech praducs in sotl exports 73 The quality of logics ervices in 2005 varies by income 77

Indicators included in summary indexes of technological achievement 79)

‘Technologies! achievement in developing countries relative to that in high-income countries #1 Inceene in technological achievement ia developing Gvinse elative to that in highsncome countries 81 (Overall ecological progress in absolute and clave terms 86

Succesful diffusion has accelerated 8

The pace at which technology diffs hay picked up among sucesfl adaptors 89 Siow diffusion mesns that many developing countries never each the 25 oF SD percent ‘hreshold 90 Indicators uted to eleuate he sumenary indexes and overall index slated to Technologial achievement 95

Indicators used to eleuate the sumenary indexes and overall inde of echnological ` Share of total arianet explained by principal componeas, technological achievement index 96 Share of total variance explained by principal components, technological absoeptive pasty index %6 Shaee of ctl variance explained by principal componeas for each subaroup of indicators 97 Factor loadings an variable weights for rechological achievement slgeoups 98

to loadings and vanable weights for techologcal absorptive capacity solgroups 98

Shaee of eral anignce explained by main pảndpalsomponent of technologieal achievement and technological absorptive capacity

ting the subindexes 99 Factor loadings and variable weights obtained fom second-stage principal components analysis (2000-03) 99

‘eae in technology goods has increased in descloping counties 111

Foreign dre inveriment ova perce of GDP 116 Focign direct investment a «percent of fixed capital formation 116

Selected purchases of high-ch firms by companies in developing counties arly 2000 TẠI

Increases inexposite ro external technologies index, 1990s ¢0 2000 129 Macroeconomic sabilty has improved in developing counties 130

“The reglatory burden is heavier in developing counties than inthe OFCD 131 Faluetional atsinmene indicators 135 Relves high youth racy ares 136

‘sk financial inermediston hinders echnology in developing countries 139 RSD inrensies have incresed 141 Prvatepuble wcror RSD 14h ast Asia and Pacific forecae summary 166

as Asia and Pacific county forecats 168

rope and Cental Avia forecat summary 170

rope and Cental Asia couney foreaats 174

Latin America and the Caibheanforscase summary 179

Latin America and the Caribbean country frecans 180

‘Middle East and Non Attic forcast summary 185

‘Middle East and North Afi county forcast 188

Sanh Ade lomsaet summary 192

South Avia country forcast 199

SubrSaharan Afi forest sammary 194

SubSahacan Afric county forests 195

Summary of empnical eslts 14 Developing country exports in the wake of the removal of barsers to

Chinese exports 31

Biofuel 41

Policy responses to Hsing fod prices 42

Technology can cooribte to welfare without aetiog mensues of shor-tcem futput 38

‘Technologies! innovation may spur farther innovation in upseeam and downstreste —— Promoting appropriate tcchoolgies ia Rwands 57

Shctcomings of available measures of technological achievement 60

Deepwater petroleum technology in Beall 62

The green revolution 68 “Technology and geowth in Latin Americas natural esourcebased economies 7 Ingovative ws of communications technology i improving Hnancial access for the poor 75 The technological divide within India 91

‘Technology impocts Different paths for diferent counties 113

European cll centers in the Maghreb have inapted local entrepreneurs and prompted a specialization in highvalu-added services 118 South Afticn investment in Zambia's retail ctor has improved the quality of local produce and fartiey caringe 11

‘Wal-Mart entry in Mexico boosted the Mexican soap, detergents and surfactants indusey 119

‘Technological transfers tough the diaspora and return migrants: Some examples 155

Proxipal make failures inpeding technological progres in developing sounetics H3

Government sponsored innovation: Brain biofuels H44

-Asoscssfal governmene program of rchaolagcal development and innovation Financing inthe Republic of Korea HS

‘Technology in 2020152

Foreword

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have ale benefited frm sing evel of orign det investment that fen brings with it hönleee s Tnbitdf proce chelonles and foreign markets Fall, highly shld i terion daspare are expening developing countries to technology Both through the tendo and maketng contact that the provide

to thee cointrymen and through the feturn of Societe Uniorunatly, progress in improving the capacity of developing counties 10 absorb fad make ase of those technologies through fut thelr economics has been ach weaker Whether echaological progress i developing counteer will continue to ovtpace high income counties will depend on the improve ent his regard The main impediments 0 futher progres is oot access to technologie, but the weakness of domestic skills nổ com” petencies, which prevents many developing Counties from expliing these tchnologien, and gis in the regulatory environment thac prevent innovative fms from being cte- ated and expanding The difsion of tech nologies within sounies is often slow, which teats that although some fiems may bave technologically sophisacaed operations, most Ado not, Moreosey most of the population and

‘ost ims operate ina low-tech environmen

‘Asa rev despite having technologically sophidiewe chúc and worlds fms he conomy-wide lvl of technological ahicwe=

‘ment in counties like China and India is not

‘ery itferne from that in other counties a Simi levels of development

‘This repore suggests number of pk

iso co boleter echoology dilicion aad

sbsorpion within developing countries rat,

Aeycloping countries should safeguard the

Pneple of openness and atively strengthen

Skills im the domestic population to ensure

that they s able to take advantage of future

opportunites Second, #0 assis diffusion

"hroughout the economy, poly needs to ri

force technologial sbsorpive capaci a the

submational 3nd regional tevels and co

Strengthen dissemination channels within

ountees, inclding the outreach, testing,

‘nackeing, and dissemination activites of ap

plied R&D agencies, Third, authorities should

sure that publicly supplied tcchvological

Seevces and technologynabling infasrac

tre ate widely available, whether they are de

lier dey bythe tate o by private fens,

Fourth i lowincome counties and in those

salddliacome commie with ueeves access

to quality secondary and tertiary scbookng,

‘tons shoul comcentrate om rising the quale ity and quantity of schooling Fanally, governments say need co inervene Hdeeey to encourage the rapid difasion of technology anda domestic culture of "new-to- themarket” innovation However caution required Although dice ietesentions have tenteimes been astointed with some nipor- tant technology successes, im many astnces they have not, Policies that have sucreeded have tended to make subsidies condiiona on performance and putin pave high-quality nd Independcntofindusty oversight system

Alan Get Acting See Vee President and Chief Economie

‘The World Bank

Acknowledgments

Anlrew Bare van the lead author and manager of the report The principal authors

of chapter I were Hans Timincr and Elliot (Mick) Riordan Chapter 2 was writen by Andrew Burns and Willam Shaw, with weiten costdbutins from Antonie David, Yvan Decreus, and Annette De Keine Chapter 3 was written by Andee Buros and Willa Shaw

‘wth writen contribuions from Dilek Ayu, Antonio David, Yan Decreus, Anette De Kleine, Mariem Malouche, Sanket Mekapatsy and Olga Salls Both Chapters 2 and 3 benefitted from the expen research asstneeof Tras Cheretay, Shu Tan, and Teng fang ‘Several people contributed substantively to chapter 1, The Clabal Trends Team, unde the leaderaip of Hans Timer, was sesponable fr the peoietions, wih written contributions From Job Bales, Paul Brenton, Mauriio Bussoo,Beety Dow, Teng fang, Anette De Kleine, Donald Mitchel, Denis Medsede, Gauresh Rajadhyaksba, Flot (Mick) Riordan, Chú Savescu, Shane Strife, and Dominique van der Mensbrughe The poverty aumbers eriginated with

‘haohua Chen from the Development Research Group ‘The accompanying online publication, Prospects forthe Global Economy (PGE), was pro duced by a team ed by Cristina Savesca and incding Sarak Ceo, Teg Fang, Shura Sahay,

‘nd Jeailee Vito, with technical support rom Gauresh Rajadhyaksha ‘Martha Grotton edited the por, Nigar Farhad Aljera and Michal Paul managed the pubs lication process, and Merell Tuck managed the disemination activites Roula Yavii provided lavaluable assistance with the design of some figures Book production as coordinated by Mary Fisk from the World Bank Office ofthe Publisher ‘The report was peeled under the guidance of Uk Dadosh, Fangois Bourguignon, and Alan Gab, Several reviewers feed extensive advice and comments throughout che concepuaization and writing stages These included Jean-Fangois Aes, Kevin Barnes, Vandana Chandea, Pe Cael Dahman, Mark Duơ, Alan Geb, Mary Hallward-Decieies, Daniel Lederman, Jtfeey Lewis, William Matoney, Clas Pa Sepulveda, and Alfred Watkins

Ts vont was produced by staff fom the Wert Bank's Development Prospects Group

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Overview

This ction of Global Economie Prospect is

ing elesed during a period of increased ue

ersiny following four years of record

{roth in developing countries In ation 0

xamining economic prospecte over the near

Sind longer term, i takes am in-depth look at

fhe caren level of ane recent erends in tech:

nological achievement and he main fatore

‘hat determine the exes to which developing

Courses succeed in implementing foreign

sechnologie Norwithvtanding the financial eurmoll

provoked by a tenement of Haka br th US morgage marker, and despite lange loner

là sec Rema natin expaiins Wo each racked securities appears ta be broadly Based

Lone to far have been manageable, shongh

credie conditions have tightened For develop

tng economic, sovereign risk premiums have

ieremed but remain low by historical am

Ards Equiey values, eachange cư and

commodity prices have come more volatile,

Sed the vlncrablity of counties with Lage

Current account defcin or pegged exchange

Fates has become move vale, “Againe ths background, global growth

slowed modestly 2007, comingin at kế pe ent aller a stcong 3.9 percent in 2006

Mont of the slowdown was stributable to

‘weaker geowth in high-income counties

Growin developing economies was 3 robust,

7.8 percent, broadly unchanged from 2006

Afigare 1) This strong performance in the

Aevcloping countries has offset some he

Mowdowa in US domestic demand that

stared with the unwinding of the housing

bobble cal in 2006 During 2007, developing

counties ascounted for more than half the frowrh in world import, contributing—along, Sith the depreciation af the dalla—o tường ret expos For the United Sates and farther: ing the reduction in global imbalances (Global growth in 2008 should moderato 4.3 percent, she rau expansion in devel loping countries partly compensates for 2x2 ieid@: lá Kipfleớne Snerikie) World ourpit should pick up in 2008, ex: paning by 346 perent, asthe US economy Sever leo: 0yiDijk dks "Sha shadow over this soft landing for the glabal Economy: Esternal demand for he prodost of tlveloping sountriy could weaken much

‘ewe Sharply ad Gomme prices Cod ke: tlie the faltering U.S housing market oF further financial turmoil were 12 push the United States into x recesion Alternatively, monetary sutbortics might overeat t0 the sument climate of uncertainty and cverti late the economy Thin woul be paricalaey dangerous for developing counties f the bul fof the resulting hiuidity were to move into rapidly growing developing regions, provoke ing the same Kind of overnvesiment condi- tion that arose inthe U.S housing market, Prospects forthe US, della represent an adiitional ink factor A recension in the United States ora eacessve casing of U.S monetary poly could contibuttofuther in the dolla A weaker dollar would bene sharp deine developing counties with dollar debe, but impose losses on those that hold dollse- denominated ast, would burt the competi= tivenes of fies exporting to the United Sates

ofthe economic and sacl progress few canaries hat been đức technolo of the past

Technology has been central to both economic sowh and many cements of secial welfare

Figuet Robust growth among

developing countries should eusion the

developed county slowdown

Ban | that are only pay eapered by standard mea

" TEEN | ing belt, education, and grader equals: As sures of gon đomesiepnded (GDP) tndu- , Sen | meseed by bại or molaeddo, Eac sin much ofthe dlerencs in bth the vel

“| find rate of growth of incomes across counties (Easely and Levine 2001; Hall and Jones

A PB | forward tisespesed vo ply a central ein 1999, King and Levine 1998), And, looking

PEPE EOE EO S| OK pina sector and thề dien fan sour toring of mance are ey to echt neo Art ane ti; he tice r=

Sy etaosahy erent ela pods and ‘cess depends onthe det Comet of teal cpm Of cane tokyo Seppo echoes pote by facing the sooth operation dŸ naien by chung tác Tạ xi HỆ Teledgesltrammetckr

ty he gee poplin sd by rowing the jhiealintnicerccea bcos cme Compknen co technologist sophisti

‘creas ite es rec wel

ey dfson ant sengten the Roger be anh Re sợi fee end dels (KD) gia Incxploringecholgie alo va achive nd Aiton cistepor ado bond Sfnion oftechslogy ond insepea propo ont thar enconpaner te schon tcng

th way the podecton proves pannel

by Sieh prods ond trvens are produed, take, and ade aval othe publ Understood in this way, technlogcl Technological achievement and estes at the national level can sen 8 Through scientific innovation and invention, diffusion in developing throegh the ednpion end adoption of p= countries he speid topic of tis eton of Global and through he spread of technologies arose “exiting, but new-tothe market technologies: Economic Prospect is echnay sn its firms, individual and the public sector within Aitfsion within the developing worl Much the country

il liatechange

{and those producing close substiete for US

‘espor while bent counties with caer ties pete tothe dolar—at st temporal

However the main impact of 3 reo de

lin ofthe dollar would Hkely desve fom the

increased uncertainty and fnanciakmaret

volt i Would provoke, which would i

crease trading cont and spreads on developing

Country debersuting in weaker export ad

investment growth throughout the global

economy yen should sch wisks nor materialize,

several deloping counses may be quite

‘ulneable to sadlcn aHitmea i inal

markets Most exposed are those countries

thar combine lage current acount dfits

‘with pegged exchange rates and with increas

ing domestic iaflaion Als at risk ate cou

tes whose domestic banking sectors have

blanc sheet characterized by linge curency

aismatchs,

The following dcsion traces the sri

ture of the overall repo, which i chapeer 2

explores the level fad scent tend a

technological achievement, swell a0 the

proces by which technology difses Between

Sed within counties Chapter 3 concentrates

fn the prowess by which countries absorb for

‘ga tecnaogy, both the mechanisms ehrough

‘which they are exposed to foreiga mo

fies and the domestic factors that dictate how

Succofally they absorb those techvologies

Although the chapecr identities number of

lesportant, policy relevant trendy, and &

pores thei policy implications, it lsies to

faure wock s more normative anlyis ofthe

policies that developing counties should

fellow t6 matinie the development benefits

of technologies progres

Policy needs to actively promote

technological adoption and adaptation as

swell as nurturing domestic innovative

capacity

‘Reena fnding ofthe eeportis that most de Yeloping counties lack the abit vo generate

innovations at the technological frontier,

Although the amber of pateats and siendie rural aces i strongly corelated with

GDP per capita for highincome counties,

most none ofthis active i sing performed inedevloping counties (figure 2) Te lack of deeasced hielageal copter oustin earn that chnelopieal progres bể Aleveloping countries occurs through the lopden and adaptation of pro-sitng but fewtrtiemaiet Gr newtethefion tech nologies Meco, relatively thin domestic technology sectors and much beter economic spd sintiic opportunities abroad mean tht

‘any mstionals of developing countries per- form cutingradge research in highancome countries Fer casmple, 2.5 millon of the 51.6 lon scents and engines Working inthe United States were burn in developing Counties (Kanaankutty and Burell 2007) The level of technological achievement in developing countries has converged with

‘that of high-income countries over the past 15 years ‘eustsied policy of incremed opeanesto for tien rade ad forcgn dice investment (FDI pls increased invexccnts i uma capital, tive contributed vo sbstaatil improvements

in technological achievement developing counties ote the past 1 yeats And despite rapid progress atthe technologie! fronten, technological achievement in both low and

Figure 9 Technological achievement:

Converging, Bute gap remain Ieige

api progress im developing countries

salddliacone counties has inreesed such

‘ore rapidly than inigh-income countries As + result, developing countries have closed the relative gap with bigirincome count, However the gap remains Large (igure 3) Moreover the trong aggregate performance of lowrincome coureseseeflects large improve rents in technological achievement by some, but much more modest advances by the ajay As a consequence, many ae only

‘maintaining pace with, oe even Tsing ground

to, high-income counties Ia gence, the level of technological aehieeneot abserved ia country is posi tively eorelated with income levels However,

‘considerable variation is ppareat within fae ome groups: Among other things, this va tion reflect the nature ofthe echnology bing, observed, the impact of the overall policy feamework on the ability of techoolgially Sophisticated firs to grow and the extent te whic government have given prot oad had success in delivering eves with a song technology component “The penetration of elder tebnologie such

as fine in telephones eletieal power eas poration, and heath care servicesmony of Which were originally provided by govern- rments—isonly weakly coreclaed withincome,

‘The low-income counties with the highest lization eter of these older technologies tend to have sates as high as hose af the aver- sạc loweramiddleincome country (igre 4) Similarly the loweemiddleincome and upper- Imialesineome countries with the highest i= lievian rate tendo have rte that match the sverage rate ofthe next highest income gro In pars this reflects the nature of the technologies in-question, suchas ektrical networks, road intrastrctote, fxel-lne telephony, and sanitation networks Many ofthese technologies require an infaneucare tha is relatively expenive #0 ceste and Imaieai, and which relies on large members fof individ wih sarce tecnica kills In

"ton, the observed difsion of older tech nologies today depends onthe intemiy ane Fciney with which government services have

Figure 4 The penetration of elder and mors recent technologies depends on more

ton deinered inthe pst Part of the strong

techaologieal showing ofthe counties in the

former Soviet ble is explained by the heavy

‘emphasis shar past governments ding basi infrastructure and eduction toa peed on po

wide range of the popolation Silay, past

governance problems and civil xi bếp

hin the relatively weak penetration ofthese

technologies in-many Sub-Saharan Mean

‘sounties, whereas macrosconomic turmoil

anda elatively unequal distribution of in

Somes and skills in Lain America may have

‘ontibured to weak outcomes inst region

“The penetaton rates of newer technolo les have sen scaly rapidly and ate more đđ§eg coachied vì income tha thease for alder technologies The infeastuctre foe ewer technologies sich as mobile phones, Computers ad che Iteroet is genealy les expensive to teateand egutes fewer (hough

‘wore skilled} workers co mainain, Marcater,

in many counties, regulatory feform has cant tae the private sector now aes thse Services ina competive envionment a com pated with the state-owned, monopolistic en- ronments ofthe past, As 3 result supply of

Figure 5 Technologieal achievement en

diferent egions to lool of at diferent income lovelain

hese new technologies as been more rogom

five to market demand and kes cestrained

by the budget constraint of governments of

state-owned-entrprises Furthermore, de

‘mand for these products hasbeen booed by

lowe endater conse revue of compsddte

prcng stateges and because some ofthese

fewer technologies lend themselves moe ea

iyo sharing than do sone older techoologics Overall although technological achieve

"me tends ose with incomes, this elation

ships noalieae and shows a endency to fevel

‘off Morconenit is no uniform actor ceions

‘Thus countries in Eucope and Ceneal Asia

tend to have somewhat higher levels of

achievement than would be expected nthe

bss of income ane, bur the oseral elton

ship berween technological achievement and

income inthe region tacks atively well shat

‘ofall eounres igure 5) In contasy, echo

logical achievement in Lain America tend tơ

In lower than what would be expscted given

incomes, and the overall elatonshipseggests

‘The level of tecbnology countries reflects the pace at which in developing technology diffuses within countries Although rca take tne fora technology to

in 9 foothold io developing countries the more serious impediment to teshaological achievement is the speed with which teh- ologis spread within these counties, On verges he time iteakes Bore oficial satis: Tisin a developing country revord significant

‘exploiacion ofa new technology has declined from almost 100 years for innovations

Figure @ Moet echnologes ato

penetrate deeply nto developing

Alscovered in the 1800s ro about 20 years

toda! However technological progress aso

depends on how rapidly the technology

spreads within the country Here the story i

less encouraging For technologies discovered

luring 1950-75, only a quarter of the devel

‘fing counties that have acicveda¢ least

5 pereene penetration level have gone on to

seach the 25 petcentheshold, ate uppetmidileincome counees igure 6, anal ofthese

“The sory is somewhat beter for newer

technologies Nor only have hese fechnoogies

spread more quickly between countries, bot

tlko the share of counties that have acicved

the 25 percent threshol is higher a 33 pe

ent Indeed, developing coumries have now reached the sme average level of peeteation

fof mobile phones as was observed in high

income counties in 1995 “The oncrenness of technological difsion

scrote countries is offen, mirrored within

“une, expecially Lage countries AIO

technology spreads celatiely rapidly among,

sles living in major stent sakes mach Tonger for it ind its way tothe ret ofthe

population of from 1p-petoraig compen

forthe average firm Specie sectors in a

‘anced urban enters in China and Indi for

cramp se work-clas level of technology, but the incidence of thse technologies ch: where ithe eur, a ia rural ages a par- Vang remains ow (igure 7) Even within sectors technology may fas oly slow y- 18 Brant snd Indi, for example, the est 90- phisticnted Gris use technologies and achieve lesels of produciiy tha rival world leaders, Bạt vi mi of ims operate at levels

ff paodetvity that see less than one-teh those ofthe cop performers

A framework for understanding the Aifusion of tecbnolagy within developing

‘The bulk of echnoogial progress in develop- ing countries has heen achieved hroogh the albsoepion and adaptation of preexisting and ewsohenadet or newtorheir tech tologie, rather than the invention ofeatiely new tehalogies, Given the sl wide ecaol- ogy gap tis likey to remain the case for the vast majority of developing counties ‘A developing countess ability to absorb and adopt foreign technologies depends on too main factors the extent to whish If exposed ro foreign technologies (he pace a

‘which technologies dif across counties)

snd its ability eo absorb and adap thos ec

ola to which ti exponed he pace st

‘which technology dilfses within the coun

try): Figure 8 presents sted deteription of

thew a developing counry absorb technology

AAs a fit step, am ceomom) b exposed to

Iighertec business processes, prodics a

services through foreign trade; foreign dre,

mm

other comeusientions chamaeh, lung

‘seademia and international orgacications (the lange artows atthe top of the figure) The

larger these flows, the greater the exposure of

the economy to the global (ehaologeel

enlee However exposure ro sew ideas and tech

siques is not sufcient to ensure that the

technology diffuses throughout the economy

Successful absorption of foreign technology

depends om the technologiel absorptive apacity of the economy (presented By the fulpleriaged drum) Absorptive capacity Akpends on the overall macroeconomic snd oternanee environment sehick snfluenees the willingness of entrepreneurs to fake rks

fn new and newstorthemarket echnologit, tnd the level of bane technological ltrney fod advanced Sil inthe population, which

‘ketenes « counte's capacity co undertake the eescarch aecoaary to understand, imple men and adapt them In ation, because fiews are the base mechani by which te nology spreads within an economy’s private tect the extent to which financing for inno

‘aie firms i aailable—theough the bank ing system, remittances, or government Suppor schemes—abo inflaence the este

te and speed with which technologies are sorbed

Government policy alo has cruial cole

i play, Governments ave offen the peary

chanel theough sehich corsa technologies,

Such as clectrisity, fsedsine telephones,

fransportation ilrastrcture, and medial ad

fdestional secs, ae delivered Moreover,

tovemment policy is legely responsible for

công 2 bisiness environment chat fal

fates ey frm entey and est ad that gi

hostile wo the profits eo he made from expla

ing now techies Too often rules andlor

asi fearres of the doses ark pe

‘ent ems rom evan money by exploiting

sew technology, and, 38 el, the echo

‘ay docs not spread within the county Policy

Should also ensure that R&D and dissemi

om eforts give prot to creating and into

dung products for which a market (domestic

‘or forigal exits anl to hdyjng fies exploit

‘hose opportunites “The overall process is, of course, much

‘more complicated and much less echanst

than is depicted in Figuee 8, Technological

flows and technological absorptive capacity

inflacnce cach ate How well technology di fuer depends on various market inperfe

‘ion, inching ineeasing returns to sale and

technological spillovers (the smal light Ne

rings toward the boron ofthe figure) Here

the existense of financial sector that ine

mediates beeween savers and innovacors may

be necessary fo overcome the ial cost of

some new technologies, In partculay access

torfinance may be ese innovative Rms

ste to achiee the nevesary sale o ulcash 3

potential sires irl, so hat ắc vi on Income garnered by the sbscestfal exploits:

sion of ene new technology permits the a59-

sition af another, thos resling in further

¬

Increased openness t trade, FDI, and

diaspora contacts have boosted

technologies! diffusion The dismantling of rade barriers in many de-

sloping counties over the past to decades hav dramatically incrested developing coun

sre’ exposure t fori technologies Their

imports of capital and intermediate goods (vhich permit the production of teholog- cally sophisticated goods and sevies) now Sepmevent between 6 and 14 percent of thee GDR, sa ieene of more than 0 percent since 1994 The ratio of high-tech imports

fe GDP more than doubled during the sme period Par 363 resul, developing countey Exports of high-tech goods have also i reas, rising from I percent of fal ex ports in the mid-1990s to 19 percent in 2002-04 (figure 9} bv the case of lower

‘middle-income counties, highsech goods rep- resent broadly the sae 29 percent share in total exports a8 i higvincome eountees (15 event i China is excluded ‘The casing of teststions 0 FDI also has contributed to technology dfsion within de-

‘loping counts FDL a major source of process technology and earning by doing 0p pores For indviuals in developing coun tiệt, Over the pase 15 yeaey FDI inflows to developing counties have almost doubled as petcntage of GDP ln ation, foreign ims ực making imporeae vontsibutons to the technological capacity of host counties, por- forming more than 40 percent of the rota RSD in some counties Ate sme time the competition, standaeds and knowledge of forsign markets that frcign fim ring vo the domestic market can have important spillover eet Finally many firms in devel

‘oping sountries have increased thei set vo suming cdp technology by purchasing eco logicalysophiscated firms domized in high

Tm acliion to dismantling baeies co for: sign invent, some mileincome coon: tres have encouraged greater FDI Hoses by implementing stronger regimes governing in rests property rights fvidence sents hae stronger intellects! property rights are svoviated sith a rie in Enowledge flows to fates and ia inward FDI flows toward Imiddleincome and lange developing coun tres, hut nt in poor counties) A fev coon

la egal he than FDI co maximize technology transfers co

local firms Howeves, thin strategy seems to

‘work ony foe countries with substantial ma

Set power: In parca, fear of losing conte

over catingedge technologies sometions

nutes maulisational firms forced toto joiat

‘entues ta reserve thei be technologies for

the dome market and tanser only older

Jee eins ones Substantial technology transfers are aso a

existed with iterations! wigration and the

diaspora of developing countries Not all of

these are postive, Eventhough 93 percent of universiyeducited individuals from develop

jing counts turn to oF emai in tei cou

eyo gin Dacgce and Marfouk 2008), the

‘rn drinis aserios problem fora number of ‘mostly small counties, However the existence

of a welkedacaed disspora (more highly

skilled individuals migrate than lowered

Inivdils) constitutes 28 important techno

logical source forthe home countey—= bri

tin, ait wer This especialy thease when weak employment prospet in the home coun

tty reduce the ceonomie benefits inital

forgone by the individuals depactre For most coutris, high-skilled out

snigeaion mains atmanagable technologically savey asporse contribute to ves these

technological transfers by svengthening rade

nd invevement linkages with more advanced conomien through netvode tac provide sce to technology and capital and through = tmitaree Remittances aoe only contribute co domestic enteprenewahip and investment, but

ko, along with the introduction of mobile phone series, hve greatly expanded the pro Sslom of hunking snd other arming fi tence servos wiki devloping Cotati Hemuelien a miện earblg "process

‘eetnaloes FdHly, nhinữg minh tớ provide important resources, uch a entepre- neenhip, technology, marking kaowledee, sod anvestment capital The elles fs single = turning cnigee seed with sil scquized in a developed economy cam have (and has had large economic and techasogial effet oa the ceuans of erga Better macroeconomic and educational polices have improved absorptive

‘capacity in developing counties [Although increase in the flows of the peici=

pl international teanmaiters of technology fave en masked, improvement the Factors the determine the eapaety of developing counties to absorb an electvely use that Technology hasbeen much more getdual On the poise side, most developing counties

‘ments have become more sable over the past Ate, Ife expectancy is up from 59 years 15 years The number of incrnacionalcon- in 1990 to 66 yeas in 2005 fin Sub-Sabacan

As has fallen by more than 30 percent since Africa, exteemely Tow incomes andthe

‘the 1990s, median inflaton has dropped from —HIVIAIDS epidemic have led to a drop in boot 20 percent in the early 19908 to less life expsstaney since 1990), The labor forse chân 5 potent, and exchange rate volality in most devstoping counties has also become has fallen by more than 50 percetieveryde- etter educated Adult teraey tates have in

‘eloping region igure 10} All these changes ceased in every developing tegon over the seduce fk nd increase she ikelhood thaten- past 15 yeas (figure 1} The shate of hil ttepreneus will tke ashance and inrodace 3 dren graduating ftom primary school ha also new technology within a country These same insta inal eons excep East Asia 3nd shanges have contibured to improved per the Pasitc where it stood ae 98 percent in

‘apie GDP and a significant decline in the 2005) Meanwhile secondary school and colt ruinber of people ving in abolutepovery, lege enrollment rites are wp acros the hoard

‘hich hae eased the consrsnts onthe ability Increased school enrolment has eased youth

‘oF poor counties t0 generate resources for leraey rates to close £0 100 percent in al Investment, and has ineteaed the wilingness the predominantly middle-income regions AS

of firms nd individ to take risks Improvements in the quality of human of 1S-t0 24-yearolds in SebSaharan Aca onding to oficial atic, almost 75 percent capital in most developing countries have in: can read and wre That rae compares or

‘ressed she counties capaceyt0 adopt and aly with an adult literacy rate nf 6D percent

‘ape technologie Poor health i ecedng as and sugges tha overtime the technol {factor the impedes technologial progres liters ofthe population wil it Although Lite expectancy in midileincome sountnes polices promote Ineracy and extend school

ttendance ate eitical, in too many esses, the

‘aly ofthe education delivered in many de

‘elping countries emaias low Lange propor

ons of students offialyclastfied as hterate

{ait pas international standardized tests of

racy and aumeracy “Technological prostsscequtes addtional

improvements in the ual ofthe labor fore

leyond strengthening educational stems

Tesining can make as important contebution

to bh the productivity f private ims and he efficiency of public services, For example the

Aissemieation ofthe simple sills regueed (0

‘ul rainwater collection tems can impeove

accesso clean dining wate ant educe the

incidence of dnese And investing inthe do

mea sil ieqoired so support high-kil and

Iighsalue-added industries can help masinize

‘he technology spillovers rom FDL

but improvements inthe business

Climate and govemance lags

In contest ro improvements i the quay of

human capital business climate and gor

smtanee indicators have shown lite improve

ment, on average, over the past decide

Governance in several countries bạc

improved, norably in Cental Eueope and he Talis’ countries, proving thar morivated

political ladeship can make difeenc But, in many other counties, the quality of overnance has declined or remained stable Progren in the damantling of regulsoey lees that inpede technology diffasion has ako been slow Restrictions en labor mobility that constrain em’ ability to reallocate

‘workers within he frm ca be important bar erst the adoption of new technologies, sd restrictions on lem entry and eit tend prop top inefficient flee and Ut the expansion and craton of innovative ones Overal the tine and con involved in stating + business, the efficiency of contact enforcement, the time required to zesolve inslvenies, the aver-

‘ge amount recovered, andthe degree of cor- fupion in developing counties generates an

‘verll investment climate that is enh lee onducive to innovation than that observed in the indostaleountses igure 12) ‘Along with climinating unnecessary requtemens, technological progress often redtics the strengthening of regulatory iniia- fives For example, improvements in the effectiveness of public-sector insations have ontibued o more sfficen logistics eves, {key determinant of tade competitiveness, Steengesing comcast enforcement, the effic sieney of couet operations, che secsiy of ropery righ inching the reliability and timely updave of property registries) andthe sfetite regulation of financial markets can be eral to ensring a adequate retar to investments in technology Government so

an play key role in boosting chuglogieal progress throwgh the definition and promo: fiom of product standards, and in helping Firms comply ith hem Despite the limited amount of atthe: frontier scenic innovation performed in de sloping countries, technological progress Aepends on RED and especialy technology fdssemination activites In most developing ounties and sectors, RSD shoul Tose on the adoption and adaptation of preexisting technologies, noe on efforts to expand the lobal tchoologcal frontier For lowincome ounties, policy shot Focus on strengthening,

Figure 12 Developing regions have much poorer governance than do OECD counties

gota ens paste pect

‘ison incentives and on maintaining sttong much kes, To the extent tha technological fies to privatescctor Rms alsecpite capacity limits the level of tex logical achievement that an economy can

on reach (as sugested by the tendency for he Some policy directions is cevew of the level of and tends in level off the aiely weak improvement in holgial achievement in Lain America (0 technological achievement in developing aorptive capacity aay rest ina Rie intro the major anomie of tenor slowing ofthe eof techonogcal popes in logical Knowledge, and of the determinants some eoustes ales they fake sigiicnt countries ably to abso them auggese 3 steps to ruse the quality of domestic human dumber of enpiialeonclsions (box 1} This capital improve the regulatory coveonment,

‘port docs not offer a womprckemive expe and increase the eliceney with which they tation of why technological progress oscur,_delver goverament serves This dik may be tor does it incide an nvdephanalis of ost marked for hose counties such a Ie the policies that governments can adopt to donesia and Mexico hat have taken advan Increse the cate of technological progres, cage of globalization in a clativly passive NNeverthele, the preceding analysis makes manner exploiting their lowewage vompara- clear that some combination of openness tive advantage without taking stone cps C0 for foreign technology, strong domestic improve dete competencies,

Box 1 Summary of empirical results

Fistesnmr un, det cnn hve rogresed markedly ove the past 15 years Ava

‘ent, ecological achievement i all come

roups and in very ceion has advanced more

{ek than ighincome counts Secon, the technologie rome ha advanced a+

high income counre (and sme developing coun

Cee ee ee

eee ee ee

Cute ets lags paca for low come

“Third, large exten the convergence i tech

nologial achievement reflect a slant perese

J the opennen of developing counts to den

Second, because ofthe complementarsy of technologies and ifessrscture, counties

‘where alder chnolages have yet to penetrate

paniculacy deply may also fae limits othe

sent to which eter technologies are abe to

(dif, Therefore, the authorities should focus

for eating tha publicly supe technolo

lscrvcesere elie wey slay, ad

Economically ab posuble, whether they are de

Tom đơn hy th hắc o by private fps “Thin + main remaining challenge is lô

ensure that technologies difse throughout

the county, wot just se major cates oF tp

efor firms Thi Jocs not micas trying

fo eretescberch centers everywhere, bat it

does requice enforing absorpive capacity 2

the aubentional level Moreoven it meas py

tng atention to dssemination chanacs with

countries, including domestic eassportation

lnfrastractre, and the essential role to be

played by the outreach, ting, marketing,

fand disesination activites of aptid RECD

Fourth, notwithstanding the relatively

Sương inprovetnent in techologicalaciev

meat by some low-income counties, maty

‘thes have improved only marginally oF ot

aval In pacity impeovemients i techno

logis absorptive capacity have bee ited

Se ti creat (a He progr sn improving the busines climate sd fovernnce (nh vep bs ben mach more mite oa oul technological absorptive capac is

‘vanced mck les sucky than tecnologia eee

Effons to concentraté on increasing the salty of human eaptal must continue, noe nly by chong thật more students sty in School longer but tho by rung son,

‘which in on many eases ae to lowe Ty, sven the importance of market fl ture for example increasing ett to scale, the potential for coordination failures the d= Feultcs n appropeisting the all retort tem mơ lv niet ad Cala

ee impecfctions, governments ma seed €0 intervene directly to encourage the rapid thtsion of technology and the growth af i= beaut domestic entre of trehnclogy adapta: lien and rewethe market innotation, Pall ties that haye been ied inlide, among ater, Suppor forindastey specific esearch, subsides for specie products, buries to trade tha favor techaologyintnsive activites, and dc rected credit rogram Suck poles have heen ‘sociated wih economic ral, parculadly

in several Ee Asan counties, However, they have alo been asocated with significant fl

re notably ia some Lain America and Sub Saharan Alfio countries In those eases

‘where diect interventions have Bech success Ful the have ended to make support condi ional on peformance and have maiatained Iih-quality governenc monitoring programs

`

tal ners

Note 1 Sil dtd ee bea poi

amt ih eight te a exon

References

{ty Technalosy Adoption Making the Theories

ace he Fats” Journal of Monetary Eom std 398,

Dougie Fede, and Ahielim Nha 2004 "esi the nro Moby of Sk

spe Seis 381- Worl Bank, Washington, Dc

‘coe Aecomlaie Spi Ft ara Growth

HỘ Poàn, Hal Rober ad Chases Jones 198 Why Do Som Cts Prt So Mich More Out

Fe Waker Than Orloro™ The Bury oor

‘of Eso ASA annul, Neale Joon Brel 207 "Why Dal They Ge othe United Se? rest Imigot Steer ad Eien.” Uo Bri Nitra! Siewe Roundinan Diets for Seca Behr! and’ Econom, Seats An NA oe Kanimine Daniel Are Ken, and Maino Mas Inga for 1996-2008 Wild Bak Poy Recarah Working apr No 230, Word Rake Tedomeneliem Eooomic Devens ad sons Goth" Carpi Recher Conor foe Seen Pic Paley 0259.98

1

Prospects for Developing Countries

Following the sudden and sharp drop lá

market valdations of US, moregage-backed

Secures in mid-2007, global markets have

tered phase of heightened uncertain

“This as been reflected in increased volaliy

fe equity makes, commodity prices, and

exchange cates "Notwitistanding the increased voladio,

the impact on developing counties has bees

telatively tinge to date Rink premiuns have

scalted, but rain relatively Tow ia his

Corie context, and capital inflows remain

plentifl although bank lending as deopped

ffl Aggeegate growth in developing oun

ties continues tobe strong, rellecting

improved fundamentals ia many couneien,

sizable revenues from commodity exports,

‘nd continue aces eo international finance

ac moderately higher cost Their song B08

‘domestic product (GDP) geowth is partially

offering, weaker U.S domestic demand,

‘which i now expected to remain subdued

wll inco 2008 este the resilience demonstrated by the

sfobal economy, risks exist and increased

‘olny has made several developing cou

tes more vulnerable to financial disturbance,

‘specially those with large eurtent account

dich, pegged exchange rates, or domestic

banking store tha have borrowed heavily

Jn ineernatonsl markets

Growth outlook J average, developing countries have

con aleted only modest by the lve

dows in the United Sates during 2007, whic

|S now anisipated to continue into 2008,

before picking up in 2009 GDP growth mong Tow and midlesncome cconomies ase ust OL percentage pint in 2007 trom the strong 7-5 percent recorded in 2006

Despite weaker US impor growth, cominaed robe spending by ibenporting counties and tibrant expansions in China and Indi ate po jected co keep developingcountey growth Strona at 7 percent or moe 2008 ad 2008 ‘Over the longer ter, the resilience of de~

Seloping countees improved fundamentals

wl be testeds More prudent maeroccononic

‘management and technological progess (ce chapters 2 and 3} have conabuted to an

«casein tral factor prodtivity (TFP) and real income geowrh over the pas 15 yeas (Over the next 10 years, these aime factors are expected to ctable developing counties do Achieve annual pee capita income gins of 5.9 perent and perhaps as muchas 34 per- ent inthe following decade, These projec- tions imply per capita income growth hat

‘more than ewe as fist 8 that in highncome Councies, Growth of sich magniide would reduce the number of people living on Tess than a dolar a day fom 1.2 billion in 1990 tnd 970 milion in 2008 t0 624 milion by

2015 Such aggregate outcomes are ho gia"

fnteed hovteves and peetormance across in-

‘vidual countries key 0 be diverse, Taflation bạc remained remarkably mated worldwide despite four jeans øf sương frowth Many developing counties have com>

Tained domestic inflation following s ghen

ing of monetary and đe pleie The sharp increases in commodity prises mainly had

‘mete direc impaces on inflation, wih oly

"7

Aiited second-round effects, Moreover thei

ning integration of developing counties

into global mactees and thes rising shares fa

‘world trade have belped daripen inflation

Blobally through heightened saterational

Competition Insome countries, however al

tion may become aa increasing challenge: Ta

several vilesporting countnes, spending of

‘et export revenues is beating up domenic

‘markets In Cina ffs slow growth may

sot succe in quickly reversing a ecet ace

ration of inflation, and: demaod presi

emain pronounced in setenl countries i Europe and Central Asia and Latin America

and ức Cadbbcan, la Sub-Saharan Africa, the

Combination of song domestic demand and

ising international grain prces could push

`

lanly i imporedependent const stats Continved high and increasing oil pices

have stimulated the use of food cops for bio

fuel and ised ferazer cont, Piss of mie

ain vegstable os incteased by 33 and 50 pe

en especie daring 2007, Wheat produ

‘ion fell shore of sonsmpion pay beause

ie has been dsplced by maize and party

Icnise of adverse weather conditions As &

rest stocks have ceached hist lows, and

‘wheat prices have jumped 30 perent Fm a macroeconomic perspective, these rice in

sreases have hit lowincome counties the

haedestreskingin a rermsof sade loss equal

0055 percer of the GDP, wit the poorest, urban and nonfaeming rue segments ofthe

population hearing the greatest hucden White

Experience shows that sect a earstd in:

ome sppore, athe han price conto tắc

most effete way #0 help these valerate

onsumery the inwitronal requirements for

Sst sfey nets ean be daunting

Risks he financial eurbulence hat emerged inmid-

21907 has demonstrated how sodden and

enssie slusment in #nancol viet cam Eenue the dynamics of nancial behavior

sr inhereralyeificul to contol and becuse

seveerhianliantsoroee han ade ely: inthe location or magnitude of undeing ok cule the roi of a breakdown ia hey Financial inttution o ayiaem cannot ke ly dacounted Moreover the Htihood of Bian fia poles would iereste rapidly if home fics in the United States were co fal pesipi= tous a event that could pus the US eon omy ito recession, Sich dreumntanees, nd the likely US monesry policy reaction, would reinforce the dolar’ ld, wi a consequent stabilizing “To dat, strong fundamentals in developing eft on global makes counties have helped mitigate the slowdown in the United Sates, but ia the ease of major đc ‘pion adverse ets inemergng markers are tnlkely eo be avoided, which a some poi

‘wouldexacerbate the US, slowdown, Subst Tally tighter financial conditions could generate

‘credit crunch chat would ave consequences for investment and growth in middleincome counties, Low-income counties would also Sutfee substantial sepeeassions resulting from

‘weaker global demand for commodities, price declines and erms-terade loses Even with-

‘out forte even in international Financia markers, several developing counties have become more vulnerable to final pressure ava result of heightened anviety and increased

‘oat in foreign exchange markers Another important risk s that the loosening

‘of moneraty policy in response tothe US ub prime morgage cis sould case growth £0

‘vershooe Commodity markets could tighten further inflationary pressures would mount, and financial imalanses would increase Father than recede Sch a scenario could 30% the sods of # mush shaper slowdown inthe medium eer and ilastates the caren chal Tenge facing money authorities in both high income and developing countries

Financial markets: Needed

correction or major disruption? he fant mater trl of the cond

al of 2007 rested ro the erat

cf ni for ân exetded peed of

` 1

fvide seekel search for yok that indoced

any imvestor to take on aditional risk This

‘vas supported by eobast global growth nd

favorable Rania conditions, fling 2 four

sear espansion i the labs edit eele, Rapid rohan the market forase-backed securities

nd structured financial products (collateral

‘aed debt obligations in paticulae) throughout

‘major Banca enters autated oth lending

{by making the calibration and elaine of

sis easier) and Borrowing (by fete i

‘essing ligt and the availablity of ce

Emerging macket bond spreads dednel lơ

cor fos and equity prices increased rapily

Jn many developing counres during the fist

Tal of 2007 However the degre of cn was

Specialy underestimated in the lower credit

gen ofthe U.S mortgage market (ub

prime aad “ale-A" oars, and ence the value

fof many weetbackel seoudio was groly —

‘Corrections to this overvaluation began

suxenty ia Lte Joly and sing deaulr ates

inthe US subprime morgage marke spilled

‘over into equity currency and bond markers

‘worldwide Credit conditions for corporate

borrowers tighened significant, while gov

examen bond viel declined shaepy ia what

fe known asa "light quality.” Spreads on noninvesmene grade USS corporate secures

‘widened by 200 basis point in oly and the

first half of August indicating that investors

ppetit for tsk bad diminished consider

(figure 1.1} In mi-Augas, the U.S Federal Reserve and the European Central Bank pro:

ded ample guy to the banking sem 10 help seablze financial conditions

The selloff in raky ast served to widen

‘merging market hond spreads by about 100, hai pont by mi Augan,rasing the cos of

apt for corporate horowers in boh mạc re and emerging markets Ax Finacial on

Alone rigtened once more neat the end of

the yeap U.S high-ield spreads jumped to

{00 basis points by the end of November

tnd emerging market spreads retested, then

Inereated 0 270 asi points, with he overall

widening atiburable to the current episode

‘moving to 170 pois ven though the curmoil has affected emerging markets, 50 far the finanial fall hasbeen Knited hough nevertheless more se- flows than othe fey short-lived episodes of marker turbslence and volatility that have occured since 2008 (gure Lợi, Hight co

Figure 12 Emerging markt asso salt

‘mote sovere than dung ator poids of

‘marke turbulence

Figure 1 Global equity markets fl then

recovered by emerging markets

All and the need eover losses in the

Subprime marker provoked a selhaff across

che chữ speqrum of hoc set in mạ

‘re and emerging markers: Equity price de

lines ia emerging market economies initially

"exceeded those in mature markers, bt emer

ing markets eebounded sharply, outpacing

fans in -mature makers (figure 1.3) The Morgan-eanley composite index of emer

ingimarket socks picked up close eo 50 pe

sent fom the beginning of the yeu, ell

Shove the dexsloped: markets before both

terested in tandem by late Novertber The

rebound In emerging, marker equities was

Table 11 Gross capi en rg he

underscored by a eesumpion of inflows te uty fd, whic had experienced oul

ff some 85 kien dưng lúc ủy ad chi

‘August Ut cel corrections were global

in naniee and stock cachanges in East Aa and the Pacific and Latin America and the Caribbean were continuing to drive sid recover in emersing market equ ‘Gres capital flows co developing coustsies showed ste gains in 2007 before financial

‘uncertainties ave, Baad issuance, bank loan simniiment, sa củdấy placements together averaged $53 billion 9 month from January Uwowgh Joly, up trom S41 billon during

2006, but decline in August dropped flows

te $42 billion (able 1.1) The snge inflows before August Was concentrated tn bond is- Soance and equity placement, and these eate- ove intially experienced he steepest flat alter the turmoil BY Octobe, bord and eg tity lows hal scovered fully or alot fly, but sharp falloff in bank lending eocrged, vith commiaments dropping $25 billion dur- ing the month, Viewed on the bass of only roderate increases in sovercign spread, the Taek of bond issuance in August and Septem bet may have rested desiions by govern ments in developing counties to postpone new issuance besitee of limited financing reeds rather than an inability to acess the market However, fr corporate borrowers in

‘merging economies, which accounted for N0 perent of bond issuance doting 2007, Finacial condtions have deteriorated The Acline in banking flows is a concen, possibly releting paral eansctm withdrawal rom

lows to doveloping counties, 2005-07

energy mien: as bee gheclt, eed ces, Hàm chiếc main

ha nuee + ae Hi Hoa tam, hecing le) wih dasosal rooseee,

Š ty xgbobb me dezrherlseeis: lg rapid el cet comes for both

fiber aie nh tối báotge tHirsEx, A=ong developing couse

smsncd lim at 74 pee in 2007, air Global growth fe four Jos offobust GDP and ade ied by continued strength in Ene and tauily sag 75 perce in 2006, ce

growth, Sead ieteasing commodity Sowh Asia M China and Inia ate exclude,

‘wees low bord market spends gradually scNity i lows art middleincome counties

hanging interes tes and relate sable spe by 02 percentage pins to 5.7 peat

` ` ithe yea

ets hs increased Conlitons in labalfinan~ Hs 2008, global growth is expected to mod

{Sal markets have tured from exceptionally eat farthe, asthe elective cost of capital r=

favorable oss stable and less preicabl, More than in recent years eserves and and househols Weak domestic demands ex- ans elevate for ancl nstttions firs

other butlers will he needed to absorb unex~ pected to keep US GDP growth below 2 pe

pected shocks Policy makers must prepare cet in 2008, wie growl in Europe snd

both forthe posbity thar their economies pan should continue to ease under the addi

‘may slow shaply and for the possiblity that onal Weight of appreciating cuerencies

{romth may sontinoe vo exeted potential OECD import demand is projeted to move

Similar hey must prepare for the possibility Soma sold 6.8 perce gainin 200710 5.4 pe

fof an abrupe depression of ther ureencies cet during 2008, slowingexpore growthin de-

{s wel as the possibilty thar coninaed caps sloping countees y a point to 11 percent and

{al inflows coult push them up Commasity dampening tei output growth 071 percent

[ces may spike or they could give up part of The OECD counties are anticipated tr

the grins realized this decade Despite such a volatile climate aggregate Stability in financial markets helps revive con cover daring the course of 2008, a etuning

growth is Hkely to remain robust for the dex sumer and business confidence and residential

‘loping counties, mainly Because of strong,

Alomestic momentum in mor of ther Indeed,

Economie performance for many developing

‘conomies was excrpsonsly abuse dunn [ PA9We 14 Astopdown ingrowth in 2008

tắc Ret ha of 2007, much sronger than am | Aeuoomemmloixmg

Seipated in Gla Development Finance in| 3 =

can 2007 (World Bank 20073), Table 1.2 and figure 14 summarize recent | 4| ÝÏ— ý

developments and the bạc cae outlook

‘ord grow coed fom 3.9 percent in 2006

026 pero n 2007, with he slowdown led

by members ofthe Organisation for Economie

Govoperation and Development (OECD)

‘Their GDP dipped by 0.3 prsntage pis to 218 pereet in the gear The downturn was

‘more marked in the United States, with | & ¢ & gS SS vết

iow swing frm 29 percent in 2006 t2

22 percent in 2007, Mac of the destine

2

investment: bottoms’ nh, On_agerestey

froth in developing countries is expected to

be robust in both 2008 and 2009, emaining

st oralove 7 percnt

The high-income countries

Among OECD counties, the Rot quarters of

2007 appeared to bet prelude to more

‘oll growth (igure 15 US GDP weak

toed share tu the Bet gunrer, before ee

Sounding to 38 and 4.9 percent in the second

and tind quarters onthe strength of busines

favestment inthe second quarter, suspen

strong cocatmér demand ard svek-beillng

fa the third, and strona net exports ia bot Tht high-frequency dita pint to weaker con

sumption growth inthe fourth quart and

for the year 36a whole, 22 percent growth is expected, 0.7 percentage points below 2006

seull figure 16 Ts conteast, Japan andthe Euro Acca ma

tained a favorable pace of growth in the fist

‘quarteg with busines confidence breaching

{cord highs, but developments inthe second

quarter were disappointing In Europe, 8

tacachmeat in business capital outlays more a hated GDP gains ofthe previous quae

ter while in Japan, aside ia fied investment

‘teed growth ive a dese, Thin quater

sults for Eueope povided an upside surprise,

Figure 5 Volatile patarns of growth

smong OECD counties

ith growth cturning to a favorable 29 per-

se, GDP gains were broadly based aevos Counts, while business investment, stocks,

AI consumer spending in France and (Germany revised to spur overall goth The Japanese economy rebounded mod- estly i the thd quarter as well to register roweh of LS peecen alter a 18 percent de- line in the previous quarter based on much improved tet export and a moderate boost © household spending, For 2007 a6 a whole, European geowth ss expected to eester s strong 2.7 percent ising the Unied Sats forthe first tne in more than a decade, sad rowth io Japan should register 2 perce GDP growth in the United States is jeetedto weiken forthe in 2008, fling co 9 percent Dating the yeas, continuing di ules i the commercial poper marke, the Source of working capital for most US busi- tes, iplice a hose in the effective cost of shoreterm funds, despite a cumulative rede tion of 100 bass poins in Federal fands over September through December, which carted the eae to 4.25 percents Recovery i anti:

pated for 2009, ith growth registering

3