The External Environment for Developing Countries

Recent increases in inflation across the industrial countries have helped shift the focus of monetary policy from supporting growth and shoring up fragile financial systems in the United States and Europe to stemming incipient price pressures. The Federal Reserve has called a 'halt' to policy rate cuts for the near term; the European Central Bank (ECB) has hinted at a 25 basis point increase for July. Across developing countries, central banks are raising rates as well to stem inflation pressures. Recent developments in oil and food markets do not auger well for letup in price pressures soon. Oil reached new highs of $140/bbl, while floods in the U.S. Midwest will affect maize prices adversely. Global development finance-2008 launched on June 10, features a substantial lowering of activity among Organization for Economic Cooperation and Development (OECD) countries for 2008 and 2009, but a general resilience among developing economies. Strong import demand in emerging markets supports OECD exports, and cushions global output to move down by a percentage point to 2.7 percent in 2008. Downside risks include still weaker OECD growth, increased tensions in financial markets and a further run-up in food prices and inflation more broadly.