The World Bank said on Monday that the global economic turmoil is having dramatic effects on capital flows to the Caribbean and other developing countries.

The Washington-based financial institution said that while the Caribbean and Latin American entered the crisis supported by stronger fiscal, currency and financial fundamentals than in the past, they too are "feeling the crisis in part because of falling commodity prices, but also on the financial side as foreign funds were withdrawn quickly".

Flexible exchange

It said flexible exchange rates in many countries in the region were able to absorb much of the initial shock and avoid systemic problems, even as equity markets tumbled.

But the World Bank said regional gross domestic product (GDP) is expected to decline by 2.3 per cent in 2009, reaching two per cent growth in 2010.

It said amid global economic recession and financial-market fragility, net private-capital inflows to developing countries fell to US$707 billion in 2008, a sharp drop from a peak of US$1.2 trillion in 2007.

The World Bank warned that international capital flows are projected to fall further in 2009 to US$363 billion.

"The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction," said Justin Lin, senior vice-president, Development Economics.

"Developing countries can become a key driving force in the recovery, assuming their domestic investments rebound with international support, including a resumption in the flow of international credit," he added.

Hans Trimmer, director of the Bank's Prospects group, said in order to prevent a second wave of instability, policies have to focus rapidly on financial-sector reform and support for the poorest countries.

He said while global integration and the expanding role of private actors in international finance have brought huge benefits, they have also widened the scope for turmoil.

Corporate finance collapse

"Today, developing countries rely heavily on private flows and many countries are being hit by a collapse in corporate finance, with big companies and banks that were powering growth now in distress."

The World Bank said charting a worldwide recovery will require quick implementation of detailed reforms and an eventual shift away from governments having high stakes in the financial system to a resumption of private-sector control of the banking system.

In addition, the bank said the big expansion of the money supply in advanced countries "will need to be unwound and fiscal deficits will need to be cut in the medium term to maintain debt sustainability and avoid another debt crisis as seen in the 1970s and 1980s".

'Today, developing countries rely heavily on private flows and many countries are being hit by a collapse in corporate finance' - Trimmer