The World Bank cut its forecast for global growth this year. According to its semiannual Global Economic Prospects report,[i] released today in Washington, the world economy will expand 3 percent in 2015, down from a projection of 3.4 percent in June.[ii]
Developing economies are expected to see an increase in growth from 4.4 percent in 2014 to 4.8 percent and 5.3 percent in 2015 and 2016, respectively. For Sub-Saharan Africa (SSA) specifically, the period 2015-2017 is expected to see real GDP growth (from previous year) of 4.6, 4.9, and 5.1 percent. Influential factors include infrastructure investment, increased agriculture production, and buoyant services, however the positive outlook is subject to downside risks arising from a renewed spread of the Ebola epidemic, violent insurgencies, lower commodity prices, and volatile global financial conditions.
For Eritrea, the next 3 years, according to the report, are projected to produce real GDP growth of 3.0, 4.0, and 4.3 percent. These projections are slightly lower than those by the United Nations Department of Economic and Social Affairs, which projects Eritrea’s growth to be 7.3 and 6.8 percent in 2015 and 2016.[iii] However, even with the discrepancy, the sharp global oil price decline will support improvements in Eritrea’s trade balance (since it is an oil- importer). Specifically, across 2014-2017, the changes in its trade balance due to terms of trade effects are expected to improve by approximately 3 percent of GDP, amongst the largest in SSA (on the whole, SSA is expected to be adversely affected by the sustained decline in commodity prices).
Overall, for Eritrea, as well as other low-income, developing countries, such economic growth can be central to poverty reduction and broader development goals. For example, between 1970 and 2010, growth in average per capita income accounted for three- quarters of the income growth of the poor.3 In particular, a significant part of poverty reduction was attributed to growth in labor income.[iv] Increases in labor income are associated with a reduction in poverty through at least two channels. First, growth in the agricultural sector, the primary source of income for the poor, raises incomes more than growth in less labor-intensive sectors, in particular the natural resource sector. Second, the movement of labor from the low-productivity agriculture sector to the higher-productivity manufacturing and service sectors raises labor incomes, including of those of the poor.[v]
[iv]a) Inchauste, G. J.P. Azevedo, B. Essama-Nssah, S. Olivieri, T. Van Nguyen, J. Saavedra-Chanduvi, and H. Winkler. 2014. “Understanding Changes in Poverty.” World Bank, Washington, DC.
b) Inchauste, G., and J. Saavedra-Chanduvi. 2013. “Opportunity Knocks: Deepening Our Understanding of Poverty Reduc- tion,” In Understanding Changes in Poverty, ed. Gabriela Inchauste, João Pedro Azevedo, B. Essama-Nssah, Sergio Olivieri, Trang Van Nguyen, Jaime Saavedra-Chanduvi, and Hernan Winkler, 1–12. Washington, DC: World Bank.
[v]a) Kuznets, S. 1955. “Economic Growth and Income Inequality.” American Economic Review 45 (1): 1–28.
b) Chenery, H. 1979. Structural Change and Development Policy. New York: Oxford University Press.
c) Ngai, L. R., and C. Pissarides. 2008. “Employment Outcomes in the Welfare State.” CEP Discussion Papers 0856, Centre for Economic Performance, London School of Economics.