Finance ministers, economists and representatives of 180 countries convened in Washington DC earlier this month for the first in-person annual meeting of the International Monetary Fund (IMF)-World Bank Group since the onset of Covid-19 in 2020. With the global economy on shaky ground, the mood was sombre. Days before the event, World Bank president David Malpass warned, “A series of harsh events and unprecedented macroeconomic policies are combining to throw development into crisis. The human consequence of these overlapping crises is catastrophic.”
The crises that Malpass, a former United States (US) under-secretary of the treasury for international affairs, alluded to is manifesting in different ways in different parts of the world. In the US and much of the western world, runaway inflation, along with high gas prices, has made life difficult. The situation is much worse in low-income countries, many of which are in the throes of a debt crises.
There are a whole range of reasons — from systemic and structural ones to the pandemic-related supply-chain disruption and the geopolitical power play by Russia in Ukraine — that are triggering massive economic headwinds. Then, there are also consequential policy decisions by governments, such as the US Federal Reserve’s rate hikes and a decision by oil-producing nations to limit output. Unfortunately, the impending economic crisis has come at a time when the world is yet to recover from the misery inflicted by the pandemic.
Political effects of the downturn are being felt in many countries. In the United Kingdom, two prime ministers have lost their jobs in two months. Italian voters have turned to a far-Right politician to lead their nation. In the US, the Democratic Party is bracing for potential electoral setbacks in the midterms. As with most economic slumps, more than affluent nations, it is the developing world that is witnessing food shortages and an increase in poverty.
Another casualty is the global climate agenda. Last year, the World Bank Group presented a green, resilient, inclusive and development (GRID) strategy to tackle “rising poverty and deepening inequality while addressing both the immediate devastation wrought by Covid-19 and the longer-term challenge of climate change.” This was in addition to ambitious initiatives and policies the United Nations, the US, and various other western governments have been championing for years. These policies will probably take a backseat in the event of a major growth deceleration. Even before the pandemic, China, India and other major non-western economies were not on board on the climate crisis front. If a global recession kicks in, they are certain to ask whether green growth can be afforded.
At the IMF-World Bank Group meeting, many of the discussions were centred on lessening the impact of the crisis. Most of the participants felt that there was no single solution. This was because the current crises were attributable to multiple causes.
Take the case of inflation, which started with the supply chain disruptions at the beginning of the pandemic and got worse when the US and other rich nations announced stimulus packages. The Russian invasion of Ukraine, which led to highly punitive western sanctions against Moscow – coupled with the fact that the Chinese manufacturing sector has not been able to amp up production to pre-Covid levels – kept prices high despite measures to contain inflation.
Consider the energy crisis. As long as the Ukraine war continues and oil-producing nations do not increase production, gas prices will remain high.
And then, there is the debt crisis. Most of the debt of the middle- and low-income countries is owned by China and private creditors and investors. So, it requires financial discipline on the part of the debtor nations, as well as substantial outside help, to get out of the debt trap.
Taking this into account, most participants at the IMF-World Bank Group event knew that the options were limited. Consequently, they heeded the message delivered by IMF managing director Kristalina Georgieva: “Buckle up, and keep going.” They concentrated their attention not on grandiose, but on preparing the world for the bumpy ride ahead.