There may be a US recession, says World Bank president

“My own view (is that) there is more to be worked through in the European market too,” said Zoellick, a former US trade representative who also held top Treasury and State Department posts. “This is spread more widely than one might have thought. I believe one of things we have seen in the market is that the use of these instruments has been far more distributed than people originally thought.”

But the impact on developing economies so far was limited, compared with the way emerging markets tumbled domino-style in the 1990s, when Southeast Asia, Russia and Latin America fell into devaluation crises, and in the 1980s, Zoellick said. “What is striking about this period of financial turmoil is the relative lack of effect compared to other periods.”

Although India and China were expected to see slower growth this year, both economies were expected to stay relatively robust giving broader balanced growth around the world economy. “That is very significant in the systemic sense in that while I don’t believe there is decoupling (the theory that US economic problems will not affect other economies)…, we do have domestic demand in those countries that provides an independent source of growth,” he said. “I think this is a very important and a good development for the international system.”

Nonetheless, there were early signs that US market jitters were starting to hit bonds from developing countries with some issuers offering less debt than they hoped for and some companies apparently not going to market at all, he said. “Certainly what I have sensed in the United States is the intensity of the anxiety has increased greatly in the last week or two and I think some of this may be flowing through to developing markets but it is still a little early to tell.”

Zoellick also said he was hopeful that rich countries suffering from dry credit markets and emerging countries holding trillions of dollars in export revenues would agree on a new code of conduct for sovereign wealth fund investments. The World Bank, with other institutions, is involved in drawing up guidelines aimed at smoothing the way the funds from the oil-rich Gulf or new trade powers such as China invest in developed economies without raising political suspicions. “I am cautiously positive that people will find reasonable ground on this,” Zoellick said.

A first draft of the guidelines, expected to touch on issues such as transparency, is due to be published in October. On high food prices which have triggered riots in countries such as Cameroon and led the United Nations to warn of a $500 million shortfall in its food aid budget, Zoellick said the World Bank was roughly doubling its investments in agricultural projects in sub-Saharan Africa to $700 million this year. “When one talks about markets today,it’s not only New York and London but it’s also agricultural markets and their effect on Africa.”