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Safety from economic shocks

Along with its upbeat forecast for the global economy, the World Bank also points to those nations finding new security from financial shocks by aligning policies with settled economic principles.

By the Monitor's Editorial Board / January 15, 2014

Shoppers walk through doors decorated for the coming Chinese lunar new year at a mall in Beijing Jan. 15. The global economy is slowly picking up steam, five years after a financial crisis, the World Bank reported Tuesday.

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In its latest forecast for the global economy, the World Bank isn’t really worried about the economy itself. Real growth is expected to be 3.2 percent this year, states a bank report issued Tuesday. Both rich and poor nations are “finally turning the corner five years after the global financial crisis.”

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Rather, the World Bank’s economists point to a mentality of “complacency” and “stasis” in certain countries toward repeating policy mistakes of the past. Unable to deal with or even see structural flaws such as high debt or excessive credit, these countries leave themselves likely to be ignored by global investors for misunderstanding basic economics. To err in ignoring inflation, for example – as India has done – is to risk capital flight.

To make its point, the bank cites countries in the midst of fixing fundamentals, such as Mexico. They are expected to enjoy stronger growth over the next couple years. And by making adjustments in line with settled economic rules, these nations are making themselves safer from potential financial shocks from other countries.

“It is important to avoid policy stasis so that the green shoots don’t turn into brown stubble,” said Kaushik Basu, the bank’s chief economist.

The current upbeat global economy is certainly attractive for taking on the “daunting political challenges” of improving macroeconomic stability. “Now is the time to act,” said Andrew Burns, the main author of the World Bank report. The wealthiest areas – the United States, Japan, and the eurozone – are in their first coordinated expansion since the global crisis of 2008-09. (Of the three, the US is furthest along in its reforms.) World trade has nearly doubled in the past two years. Developing countries have largely shed the “unsustainable turbo-charge pre-crisis growth.”

“We’re moving into a new phase where developing countries are growing at a rate much closer to their underlying sustainable rate of growth,” said Mr. Burns.

Countries that do necessary reforms, especially in shoring up finances, will be far less vulnerable to one possible shock that worries the World Bank: a too-fast withdrawal of stimulus money by the US Federal Reserve. If the American central bank misjudges the pace of lowering its purchases of bonds, countries that have ignored necessary reforms may see interest rates shoot up, the bank predicts.

Many nations learn fast if they ignore basic economics. Others suffer along until they do. To bring greater harmony into the global economy, the World Bank recommends all nations return to fundamentals, shedding a temptation for complacency.

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