Developing Countries Hit Financial Rocks – 06/13/2023 – Martin Wolf

It is natural for people to focus on domestic problems. But it is also essential to take a broader view. The succession of shocks –the pandemic, supply restrictions, Russia’s invasion of Ukraine, rising inflation and tightening monetary and financial conditions– has negatively affected large parts of the world economy, but particularly weaker countries and their populations. more vulnerable. All of this had (and will have) dire consequences for economic development, poverty alleviation and even political stability in poor countries. These challenges, which appear clearly in the latest World Bank Global Economic Outlook report, should not be ignored. They certainly give their new president, Ajay Banga, a formidable pile of tasks.

The World Bank’s balance sheet is gloomy on the consequences of these shocks, aggravated by the long-term slowdown in world trade growth, the rise of protectionism, the accumulation of debt and the worsening of the climate crisis. What can rightly be called the “polycrisis” “caused a lasting setback to development in emerging and developing countries, a setback that will persist for the foreseeable future. By the end of 2024, economic activity in these countries is expected to be around 5% below levels projected on the eve of the pandemic”.

Worse yet, in more than a third of the poorest countries, per capita income in 2024 will be below 2019 levels. This will have far-reaching effects: the impoverished and insecure will find it difficult to improve their own human capital or that of their children . Today’s disasters will radiate into the extended future.

As has been the case, East and South Asia are expected to perform relatively well. But performance elsewhere, notably Latin America and sub-Saharan Africa, is expected to be poor. However, this must be put into a long-term perspective. The report indicates that, without China, per capita income in emerging and developing countries has stagnated relative to that of high-income countries since the middle of the last decade. The relative per capita incomes of low-income countries have stagnated for even longer. In short, the reduction of global inequality appears to have stalled.

The causes of this long-term stagnation of relative incomes are many and complex. They are in domestic politics and politics as well as in the global environment. But one factor must be rising protectionism and a slowdown in world trade growth. Notably, the volume of world trade grew at an average rate of 5.8% per year between 1970 and 2008, while growth in gross domestic product averaged 3.3%: trade was an engine of growth. Between 2011 and 2023, the average growth of world trade was only 3.4%, while that of global GDP fell to 2.7%. This is not deglobalization. But it’s definitely what some now call a “slowdown”.

Today, however, many of the most daunting challenges are financial. The accumulation of long-term debt, especially by low-income countries, is interacting with higher interest rates and turbulent credit markets, creating serious debt difficulties. As always, this includes not only higher costs but reduced supply: credit, once again, is rationed.

Thus, the report notes that one in four emerging and developing economies has already lost access to international bond markets. The evidence provided on the impact of tightening credit conditions is impressive and disturbing. Since February 2022, the cost of borrowing for C-rated borrowers has increased by an extraordinary 14.4 percentage points. As a result, the 2023 growth forecast for these countries has dropped from 3.2% a year ago to just 0.9% now.

However, debt pressures on poorer countries are not a new phenomenon. Net interest payments on government debt as a share of government revenue in low-income countries have not only increased significantly since the pandemic, they have long been above the average for all emerging markets and developing countries. Substantial debt relief is needed. A lot of that will have to come, one way or another, from China. Today, notably, the bilateral debt of low-income countries to high-income Paris Club members has become less than half of the debt owed to non-Paris Club countries, most notably China.

The dire finance and debt situation became pressing. There is no possibility that extreme poverty will be eliminated without urgent and radical change. The same is true for necessary investments to be made in climate mitigation and adaptation. Nor is it conceivable that the problems of poor countries with poor credit ratings will be solved by the private sector alone. There is an overwhelming case for urgent, effective and generous action.

The “summit for a new global financial compact”, next week in Paris, offers a valuable opportunity to make rapid progress. But it is important that this progress takes place in cooperation with China. The necessary changes must be based on the recognition that what is happening now is both unsustainable and undesirable. They must address the urgent needs of people and the planet. They must reduce the cost of existing debt and provide the resources and risk-sharing instruments needed to generate affordable finance in the future.

Yes, the shocks of recent years have made generous and effective action more difficult politically in high-income countries. Frightened people become introspective. But these shocks also made the action more vital, no doubt. Banga inherited an institution which, used wisely, is more valuable as a pulpit than a bank. In these difficult times, he must use it well, to unite the world in facing these most urgent challenges.

Translated by Luiz Roberto M. Gonçalves

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