🔒 Premium – From the FT: Martin Wolf – Developing countries have hit the financial rocks

‘The dire situation on debt has become pressing — urgent action is needed’

By Martin Wolf of the Financial Times

It is natural for people to focus on problems at home. But it is also essential to take a wider view. The succession of shocks — the pandemic, supply constraints, Russia’s invasion of Ukraine, soaring inflation and tightening monetary and financial conditions — have adversely affected large parts of the world economy, but the weakest of countries and the most vulnerable people within them, above all. All this has had (and will have) dire consequences for economic development, the alleviation of poverty and even political stability in poor countries. These challenges, which emerge clearly in the World Bank’s latest Global Economic Prospects report must not be ignored. They certainly give its new president, Ajay Banga, a formidable in-tray.

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The World Bank’s summation of the consequences of these shocks, made worse by the longer-term slowdown in the growth of world trade, rising protectionism, the build up of debt and the worsening climate crisis, is grim. What can justly be called a “polycrisis” has “dealt an enduring setback to development in emerging and developing countries, one that will persist for the foreseeable future. By the end of 2024, economic activity in these economies is expected to be about 5 per cent below levels projected on the eve of the pandemic.” Worse, in more than one-third of the poorest countries, incomes per head will be below 2019 levels in 2024. This will have far-reaching effects: the impoverished and insecure will find it hard to improve their own human capital or that of their children. Today’s disasters will radiate far into the future.

As has long been the case, east Asia and south Asia are expected to perform relatively well. But performance elsewhere, notably in Latin America and sub-Saharan Africa, is forecast to be poor. Yet this has to be set in a longer-term perspective. The report indicates that, without China, incomes per head of emerging and developing countries have stagnated relative to those in high-income countries since the middle of the last decade. The relative incomes per head of the low-income countries have stagnated for even longer. In brief, the reduction in global inequality seems to have stalled.

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

Today, however, many of the most daunting challenges are financial. The long-term accumulation of debt, especially by low-income countries, is interacting with higher interest rates and turbulent credit markets to create serious debt difficulties. As usual, these include not just higher cost but reduced supply: credit, once again, is rationed. Thus, the report notes that one out of every four emerging and developing economies has now in effect lost access to international bond markets.

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The evidence supplied on the impact of tightening credit conditions is both striking and disturbing. Since February 2022, the cost of borrowing for C-rated borrowers has jumped by an extraordinary 14.4 percentage points. As a result, the growth forecast for 2023 for these countries has collapsed from 3.2 per cent a year ago to just 0.9 per cent now.

Yet debt pressures on the poorest countries are not a new phenomenon. Net payments of interest on public debt as a share of government revenue in low-income countries have not only risen significantly since the pandemic but have long been above that of the average of all emerging market and developing countries. Substantial debt relief is needed. Much of that will have to come, in one way or the other, from China. Today, remarkably, bilateral debt owed by low-income countries to the high-income members of the Paris Club has become less than half that owed to non-Paris Club countries, mainly China.

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The dire situation on financing and debt has become pressing. There is no chance that extreme poverty will be eliminated without urgent and radical change. The same is true if needed investments are to be made in climate mitigation and adaptation. Nor is it conceivable that the problems of poor countries with weak credit ratings will be addressed by the private sector on its own. There is an overwhelming case for urgent, effective and generous action.

Next week’s “summit for a new global financing pact” in Paris offers a valuable opportunity to make rapid progress. But it is important that such progress be made cooperatively with China. The needed changes must build on the recognition that what is going on now is as unsustainable as it is undesirable. They must be addressed at the urgent needs of both people and planet. They must bring down the cost of existing debt and provide the resources and risk-sharing instruments needed to generate affordable financing in future.

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Yes, the shocks of recent years have made generous and effective action more politically difficult in high-income countries. Frightened people become inward-looking. But these shocks have also, beyond any doubt, made action more vital. Banga has inherited what is, if wisely used, an institution more valuable as a pulpit than as a bank. In these hard times, he must use it well, to bring the world together to tackle these highly urgent challenges.

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