The World Bank predicts developing countries' growth rates will fall to their lowest levels since the Latin American debt crisis in the 1980s. Releasing its report on Global Economic Prospects and Developing Countries 1998-99, the bank also admitted wholesale liberalisation of financial systems - such as fully flexible exchange rates and free movement of capital - was not always desirable. Blaming the financial crisis in Asia, it said gross domestic product growth in the developing world would slump from 3.2 per cent last year to 0.4 per cent this year. It said the mainland - one of the few economies set to weather the worst effects of the crisis - would grow 7 per cent this year, lower than the 8 per cent set by Beijing, and 'roughly 7.5 per cent' in 1999-2000. The bank said the mainland had been an important source of stability for the region and the world, but domestic demand was finally beginning to slow because of tight credit policies, structural reforms and severe floods. Capital flows to the mainland had also declined because of the turmoil in the rest of the region. The World Bank praised Beijing for resisting pressure to devalue its currency and for implementing banking-sector reforms. World Bank development prospects group director Uri Dadush cast doubt on the high growth rates Beijing expected. He said mainland policies had helped stabilise the region but the country could not alone revive Asian economies. 'China has played quite an important role . . . but at the same time, it is important not to over-emphasise its role,' he said. 'The region is much more dependent on trade with Japan than China.' He said the mainland appeared to have maintained high growth rates but it was puzzling that the high rate expected this year was not reflected in import performance. To prevent future crises, the World Bank said more flexible exchange rates, tighter fiscal policies and 'where necessary, restrictions on capital flows' were needed to handle excessive private borrowing in an environment of large capital flows and weak financial systems. The bank said domestic financial sector liberalisation, which greatly increased the risk of a crisis, needed to proceed carefully, in line with improved regulation. Capital account liberalisation also should be implemented with caution. World Bank senior economic adviser Mustapha Nabli said: 'Liberalisation of a country's domestic financial system, as well as its capital account, should be pursued, but the appropriate timing and sequencing of these reforms is crucial for minimising the risks of crisis. 'The lesson coming out of the East Asian crisis is for developing countries to strengthen their institutions and deepen their reforms so as to benefit from globalisation and not to retreat from it,' the report said. At the same time, the global economic architecture needed to be reviewed, although any changes were likely to be long term. The bank predicted global growth would halve - from 3.2 per cent to 1.8 per cent - this year. It would revive slightly, to 1.9 per cent, next year. The East Asian crisis countries - Indonesia, South Korea, Malaysia, the Philippines and Thailand - would see a sharp 8 per cent contraction, but should climb 0.1 per cent next year, before growing 3.2 per cent in 2000 and averaging 5.2 per cent between 2001 and 2007. The bank's chief economist, Joseph Stiglitz, said: 'But this will only happen if policies to prevent a deeper global slump are implemented quickly and developing countries strengthen their financial sectors.' For developing countries, the rebound would be slower as capital flows became more measured and selective. East Asian countries were unlikely to see the fast growth of previous years, relying more on productivity gains than increased investment, the bank said. Banks needed to be recapitalised to reach the 8 per cent capital adequacy ratio recommended by the Bank for International Settlements - costing about 20 to 30 per cent of gross domestic product. Regulatory institutions also needed to be strengthened, and confidence would have to be regenerated through injection of public funds and by restructuring domestic and foreign debt through rescheduling, write-downs or conversion of debt to equity. The social impact would also have to be considered as policy-makers implemented fiscal and monetary changes, the World Bank said.