Developing economies -which fuel 60 percent of global growth; are projected to finish the first quarter of the 21st century with the weakest long-term growth outlook since 2000, according to the World Bank(WB)’s latest Global Economic Prospects report. Even as the global economy stabilizes in the next two years, developing economies are expected to make slower progress in catching up with the income levels of advanced economies.
The global economy is projected to expand by 2.7% in both 2025 and 2026, the same pace as in 2024, as inflation and interest rates decline gradually. Growth in developing economies is also expected to hold steady at about 4% over the next two years. This, however, would be a weaker performance than before the pandemic—and insufficient to foster the progress necessary to alleviate poverty and achieve wider development goals.
“The next 25 years will be a tougher slog for developing economies than the last 25,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President for Development Economics. “Most of the forces that once aided their rise have dissipated.
In their place have come daunting headwinds: high debt burdens, weak investment and productivity growth, and the rising costs of climate change. In the coming years, developing economies will need a new playbook that emphasizes domestic reforms to quicken private investment, deepen trade relations, and promote more efficient use of capital, talent and energy.”
As a result, these economies now have greater sway on growth and development outcomes in other developing economies. For example, an increase of 1 percentage point in the GDP growth of the three largest developing economies—China, India, and Brazil—tends to result in a cumulative GDP boost of nearly 2% in other developing economies after three years.
Those effects, however, are only about half the effect of growth in the three biggest economies: the United States, the euro area, and Japan. The welfare of developing economies, in short, is still strongly tied to growth in the big three advanced economies.
“In a world shaped by policy uncertainty and trade tensions, developing economies will need bold and far-reaching policies to seize untapped opportunities for cross-border cooperation,” said M. Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group.
“A good start would be to pursue strategic trade and investment partnerships with the rapidly expanding markets of other developing nations. Modernizing transportation infrastructure and standardizing customs processes are critical steps to cut unnecessary expenses and foster greater trade efficiency. Finally, sound macroeconomic policies at home will fortify their capacity to navigate the uncertainties of the global outlook.”
Over the next two years, developing economies could face serious headwinds, the report notes. High global policy uncertainty could undercut investor confidence and constrain financing flows. Rising trade tensions could reduce global growth. Persistent inflation could delay expected cuts in interest rates. Yet the global economy could also do better than expected—especially if its largest engines, the United States and China, manage to gain steam. In China, additional stimulus measures could boost demand. In the United States, robust household spending could result in stronger-than-expected growth, with beneficial effects for developing economies.
The report argues that developing economies have many options to improve their growth prospects, despite the headwinds. With the right policies, these economies can even transform some challenges into significant opportunities. Addressing infrastructure needs, speeding up the climate transition, and improving human capital can improve growth prospects while also helping to achieve climate and development goals.
All countries, meanwhile, should work together to strengthen global trade governance, with the support of multilateral institutions.
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