Developing Countries to Benefit from Oil Price Slump

Ayhan Kose, World Bank Director of_web.jpg

The World Bank says gains from low oil prices could be substantial for developing-country importers if supported by stronger global growth.

The latest edition of Global Economic Prospects released Thursday said the lower prices reflected several years of upward surprises in oil supply and downward surprises in demand. Other factors are receding geopolitical risks, a significant change in policy objectives of the Organization of the Petroleum Exporting Countries (OPEC), and the dollar's appreciation.

"Although the relative strength of the forces driving the recent plunge in prices remains uncertain, supply related factors appear to have played a dominant role," it said.

The bank said soft oil prices were expected to persist in 2015 and would be accompanied by "significant real income shifts from oil-exporting to oil-importing countries.

"For many oil-importing countries, lower prices contribute to growth and reduced inflationary, external, and fiscal pressures," it added.

Madam Ayhan Kose, the World Bank Director of Development prospects, said lower oil prices provided a "window of opportunity to undertake fiscal policy and structural reforms as well as fund social programs."

"In oil-exporting countries, the sharp decline in oil prices is a reminder of significant vulnerabilities inherent in highly concentrated economic activity and the necessity to reinvigorate efforts to diversify over the medium and long term," Kose said.

The analysis on oil prices in Global Economic Prospects is complemented by two special features on how trends in global trade and remittance flows are impacting developing countries.

Global trade weak on cyclical and long-term factors

Global trade expanded by less than 3.5 percent in 2012 and 2013, well below the pre-crisis average annual rate of 7 percent, holding back developing country growth in recent years.

Weak demand, mainly in investment but also in consumer demand, is one of the main causes of the deceleration in trade growth.

With high-income countries accounting for some 65 percent of global imports, the lingering weakness of their economies five years after the crisis suggests that weak demand continues to adversely impact the recovery in global trade.

However, long-term trends have also slowed trade growth, including the changing relationship between trade and income. Specifically, world trade has become less responsive to changes in global income because of slower expansions of global supply chains and a shift in demand from trade-intensive investment to less trade-intensive private and public consumption.

The analysis finds that these long-term factors affecting trade will also shape the behavior of trade flows in the year’s ahead-in particular, which the expected recovery in global growth is not likely to be accompanied by the rapid growth in trade flows observed in the pre-crisis years.

Remittances have potential to smooth consumption

A second special feature reports that remittance flows to many low- and middle-income countries are not only significant relative to GDP but also comparable in value to foreign direct investment (FDI) and foreign aid.

Since 2000, remittances to developing countries have averaged about 60 percent of the volume of total foreign direct investment flows. For many developing countries, remittances are the single largest source of foreign exchange.

The study finds that, in addition to their considerable volume, remittances are more stable than other types of capital flows, even during episodes of financial stress.

For example, during past sudden stops, when capital flows fell on average by 14.8 percent, remittances increased by 6.6 percent. The stable nature of remittance flows, the analysis concludes, means that they can help smooth consumption in developing countries, which often experience macroeconomic volatility.


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