World Bank Warns Global Economy Remains Fragile

The head of the World Bank warned Italian Prime Minister Silvio Berlusconi and leaders of the other G-8 nations that recent steps toward overcoming poverty could be lost without decisive action.

Helping poor countries is important because such action has ripple effects throughout the global economy. “A decline in the average GDP growth rate in developing countries by one percentage point can trap as many as 20 million more people in extreme poverty,” World Bank President Robert Zoellick said.

The good news is that equation also works the other way. Growth in the developed world eventually makes its way to poorer nations. And aid to poor countries boosts international trade.

G-8 leaders will discuss how to combat the economic crisis by increasing international trade at a July 8-10 meeting in Italy. The goal is to “support development in poorer countries by offering them improved access to markets in wealthy countries,” according to the G8 summit website.

The G-20 already agreed to support low-income countries by pledging $1.1 trillion in aid at a summit earlier this year. “These investments will also help the people of your countries by boosting global demand and encouraging more balanced growth,” Zoellick said.

Emerging markets are critical to the world’s economic recovery,” said Andy Obermueller, editor of Government-Driven Investing. Emerging economies such as China, India and Brazil (among dozens of others) account for 40% of the world’s business, or $25 trillion a year. “Even if they may not be able to lead a full-blown global economic recovery, emerging markets certainly can give spark to and assist it.”

Their markets have responded positively to both aid from developed countries and global stimulus spending. Emerging market stocks have handily outperformed the U.S. market since it bottomed in March — jumping a stunning +59% compared with the S&P’s +32% gain.

And it’s easy to see why. China’s and India’s GDP is expected to increase by +9.6% and +6.5% in 2010, respectively, compared with the Euro Zone’s +1.2% growth and United States’ anemic +0.8% increase.

Emerging market stocks are expected to outperform their developed-nation counterparts in the long-run, but are typically best-suited for risk-tolerant investors who can stomach volatility.

Investors can access foreign markets with Emerging Markets iShares (NYSE: EEM), an exchange-traded fund (ETF) that invests in 338 emerging-market securities. The fund is concentrated in Brazil (15% of assets), China (12%), South Korea (11%), Taiwan (10%), South Africa (8%) and India (6%).

Though this ETF has had an impressive run so far this year, rising +23.2% vs. a -2.6% drop in the S&P, continued growth in emerging markets and weakness in developed nations suggest it remains a strong buy for long-term investors.