The head of the World Bank on Monday said a drop in investor confidence was already feeding through to developing nations from a growing debt crisis in advanced economies and urged "cooperative action".
World Bank President Robert Zoellick said stock markets in developing countries have been hit hard and capital flows have declined sharply since August when the euro zone's debt crisis intensified.
Continue Reading Below
"So far foreign direct investment to developing countries has held up, which is good, but we need a close watch," Zoellick told reporters ahead of meetings of global finance leaders in Washington this week.
"A new and larger risk looms. The drop in markets and confidence could prompt slippage in developing countries' investment and a pull-back by their consumers too."
He said poorer countries had less fiscal space compared to 2008 to counter an economic downturn and some were "walking a monetary policy tightrope" trying to balance inflation pressures and effects of the euro zone crisis.
Developing nations and emerging markets have been engines of global growth since the devastating 2007-2009 financial crisis. Any slowdown in developing economy growth could be a further setback to an already fragile global recovery.
Zoellick warned that increasing economic pressures could lead to a rise of trade protectionism pressures.
The euro zone debt crisis is now dominating the thoughts of policymakers worldwide with the United States, in particular, pushing for more dramatic action from Europe's leaders. Questions about European officials' ability to come up with a convincing solution for tackling a sovereign debt crisis has rattled confidence and roiled financial markets.
"The world is watching and waiting for Europe, Japan and the United States to address their hard problems," Zoellick said. "Some developed country officials have sounded like their woes are just their business. Not so."
Finance ministers and central bankers from the Group of 20 leading nations meet on Thursday in Washington to discuss global economic developments, followed by meetings of the International Monetary Fund and World Bank that extend into the weekend.
(Editing by James Dalgleish)