At the same time, finance and development ministers agreed October 12 that industrialized countries must not back down from their commitmentsto boost aid to developing countries already battered by high food and fuel prices.
Developing countries "risk very serious setbacks to their efforts to improve the lives of their populations from any prolonged tightening of credit or a sustained global slowdown," World Bank President Robert B. Zoellick warned Sunday.
"The financial shock waves in the United States and Europe will reverberate in the global economy," he added.
He estimated 100 million people have already been driven into poverty this year and that the number would grow.
"This has been a manmade catastrophe," said Zoellick. "The actions and responses to overcome it lie in all our hands."
Impact Already Seen in Some Places
Zoellick said the financial crisis could be a "tipping point" for many developing countries.
Sub-Saharan Africa, one of the hardest hit regions from rising food and fuel prices, could suffer additionally if foreign direct investment and aid flows to Africa drop off as a result of the financial crisis, said Shanta Devarajan, Chief Economist for the Bank's Africa region.
"The lives of hundreds of millions of Africans, including the two million on AIDS treatment, may be threatened," Devarajan said on his blog.
The financial contagion has already reached countries in Latin America and the Caribbeanand is beginning to affect exports, tourism and remittances (money sent home from migrant workers), according to the World Bank's Chief Economist for the region Augusto de la Torre.
De la Torre said the region has witnessed large declines in stock price indices and significant currency adjustments. Slowing world growth could slow Latin American growth from 5.6 percent in 2007 to 4.6 percent in 2008 and to between 2.5 and 3.5 percent in 2009.
Falling oil prices will also slow growth in the Middle East and North Africa (webcast) from 5.7 percent to 4 percent this year, Bank economists predicted at a roundtable discussion held during the Annual Meetings. Some countries in the region have been among the most affected by the food crisis.
Bank economists warned most countries in Eastern Europe and Central Asia will also experience slower growth. A downturn in Western Europe and Russia, Kazakhstan and Ukraine would hit low income economies by slowing remittances.
That money sent by friends and relatives is the "largest source of external finance for a number of low income and lower middle income countries," and the impact of reduced remittances will be "particularly felt by those already affected by the food and energy crisis," said Shigeo Katsu, World Bank Vice President for the region.
World Bank Could Double Lending
Zoellick said the World Bank has over $40 billion in capital and stands ready to double lending for developing countries if needed. Last year, the Bank lent $13.5 billion from that fund. "I could imagine that will go up considerably this year," Zoellick said.
In addition, nations pledged a record $41.7 billion last year to the Bank's fund for the 78 poorest countries, IDA. One of the Bank's private sector arms, International Finance Corporation, is exploring the possibility of a fund to help recapitalize banks in developing countries. IFC said it might contribute around $1 billion and seek to raise another $2 billion from various sources, including international financial institutions (IFIs), commercial banks and other investors.
The Bank responded to the food and fuel crisis earlier this year with a $1.2 billion rapid financing facility to provide immediate help to the poor and a new plan to boost agriculture and food security in Africa. Some $850 million for the rapid financing facility has already been approved or is in the pipeline. Australia announced at the Annual Meetings a AUD$50 million contribution to the food facility.
Zoellick said the World Bank Group is also developing an Energy for the Poor initiative with a number of donors to help countries strengthen social safety nets to protect the poor against the impact of high fuel bills.
A Need to Modernize Multilateralism
But Zoellick said the world needs to rethink the way it solves economic problems amid today's global crisis, including turning the Group of Seven into a Steering Group that empowers rising economic states.
He said economic multilateralism needed to be redefined beyond its traditional focus on finance and trade. Energy, climate change, and stabilizing fragile and post-conflict states were economic issues and not just part of the global dialogue on security and the environment.