The Big Question is a regular feature in which Project Syndicate commentators concisely address a timely topic.
Every shock that has hit the world's advanced economies in recent years - from the COVID-19 crisis to the war in Ukraine and the effects of Western sanctions on Russia - has hit poor and middle-income countries harder. Amid worsening food insecurity, spiking energy prices, and empty fiscal reserves, social cohesion is unraveling and growing political turmoil seems inevitable.
In this Big Question, we ask Mauricio Cárdenas, Jayati Ghosh, Kent Harrington, and Vera Songwe how the multiplying risks many countries now face can be mitigated - and what might happen if they are not.
Developing and emerging countries must confront today's interdependent and overlapping global crises - new pathogens, high food and energy prices, cyberwarfare, and climate disasters - precisely when capital is fleeing. While advanced economies do "whatever it takes" to deal with these challenges, the rest of the world does "whatever it can." And whatever the rest of the world can do is increasingly limited.
According to JPMorgan, net outflows from emerging-market fixed-income funds this year are $50 billion, an amount comparable in size to the net inflows that these economies experienced in 2021. With capital leaving, currencies depreciate fast, exacerbating inflationary pressures, and central banks respond by raising interest rates, weakening growth prospects. This is particularly bad news in countries that are still recovering from the pandemic.
About 97 million more people are living on less than $1.90 a day relative to 2019, raising the global poverty rate from 7.8% to 9.1%; 163 million more are living on less than $5.50 a day. Consider Brazil, where, according to FGV Social, the pandemic pushed another ten million people into poverty, while extreme poverty jumped by more than a third in 2021, to 14%.
Globally, three to four years of progress toward ending extreme poverty are estimated to have been lost. Unfortunately, this backsliding is getting worse. Recent estimates by the United Nations Development Programme suggest that soaring food and energy prices could push up to 71 million people into poverty by the end of 2022, with clear hotspots in the Caspian Basin, the Balkans, and Sub-Saharan Africa (particularly the Sahel).
This explains why populism is on the rise, as recent elections in Latin America attest. If the new leaders ignore that global financial markets are tighter and that investors have a preference for safer assets, a more traditional debt crisis in the emerging and developing world could occur. In this case, the new generation of global challenges would then be compounded by a sudden stop. Adopting sustainable fiscal policies at the country level and rapidly recycling the recently issued $600 billion in special drawing rights (SDRs, the International Monetary Fund's reserve asset) at the multilateral level, would allow low- and middle-income economies to cope with today's huge challenges.
Sri Lanka's meltdown is a harbinger of economic crises and likely social and political turmoil in many other countries. Several (Egypt, Ghana, Tunisia, to name just a few) are already in severe debt distress, and many others very close to potential default if current trends continue.
Too often, these crises are viewed in terms of their effects on debt sustainability and global financial stability, rather than the economic impact on the population. Many countries with low per capita income and significant absolute poverty are facing stagflation. Billions of people are increasingly unable to afford the minimum nutritious diet as defined by the Food and Agriculture Organization of the United Nations (FAO) and cannot meet basic health expenses. Material insecurity and social tensions are increasing.
This process has been unfolding for several years now. The period of ultra-low interest rates in advanced economies encouraged easy money to flow to "emerging" and "frontier" markets to finance new debt. But when low- and middle-income countries (LMICs) were battered economically by the COVID-19 pandemic, they were prevented (by debt overhang and fear of capital flight) from increasing fiscal spending as much as advanced countries did, and their "recovery" was much more muted. Then the Ukraine war and related profiteering by big corporations generated inflation that made matters worse, especially for food- and fuel-importing countries.
Monetary hierarchies in the global economy mean that mobile capital leaves LMICs much more quickly at the first sign of any problem. Once "investor sentiment" moves against LMICs, it is amplified by private credit rating agencies, often disregarding specific country conditions. More widespread financial "contagion" is therefore all too likely.
Instead of simply bewailing the problem, multilateral lenders and the G7 need to take urgent action. That means speedy and systematic debt resolution measures that include private creditors and sovereign creditors like China; policies to limit speculation in commodity markets and profiteering by big food and fuel companies; recycling of SDRs by countries that will not use them to countries that desperately need them; and a fresh $650 billion allocation of SDRs to provide immediate relief. Without these minimal measures, the global economy is likely to be engulfed in a dystopia of debt defaults, rising poverty, and increasingly severe socio-political instability.
Forecasters may differ on the forces shaping the developing world in 2022, but all agree that vulnerable countries face an unprecedented set of crises. From declining global growth, rising energy costs and looming debt default to food shortages and the pandemic, the predictions highlight the potential for social and political instability. And yet they understate the magnitude of the problems ahead, because the complexity of the challenges belies attempts to calculate their effects.
Consider the connections between energy, war, and agriculture. Natural gas is the primary feedstock in producing nitrogen fertilizers. Severe weather in 2021 drove plant closures on the US Gulf coast even before gas prices spiked and Russia invaded Ukraine. The war and sanctions on Russia - a leading nitrogen, phosphate, and potash producer - have disrupted fertilizer exports, threatening global agricultural output.
The political complexity comes next. Rising fertilizer costs and supply shortages mean higher food prices. According to the UN, the developing world accounts for 40% of global food imports; in 53 countries, households spend nearly two-thirds of their income on food. Poorer countries obviously will be hit hard. The FAO warns that price hikes in 2022-23 raise the risk of famine. Added to food shortages, the spike in the cost of living already is a powerful catalyst for unrest.
So are the social repercussions of the pandemic. IMF economists last year presciently flagged the risk of post-pandemic instability. Private-sector analysts have focused on middle-income countries that boosted social-welfare spending during the pandemic as the most vulnerable. Their budget cutbacks as economic growth falters will mobilize populations that have depended on the subsidies. Sri Lanka and Kazakhstan are two examples of unrest producing regime change, and more are likely.
Instability also may bring to power governments that make problems worse. Leftist or populist leaders, such as those elected in Chile, Colombia, and the Philippines already are creating uncertainty among investors as well as international institutions and governments abroad. Whether the issue is unsustainable policies, human rights, or the environment, their actions can hurt their economies, including impeding needed help this year and beyond.
Students of geography are familiar with the concept of moving tectonic plates and how we got from Pangea to today's continents during a multibillion-year process of divergence and convergence. Economic historians, too, study global divergence and convergence. And now we are experiencing a new period of dynamic decoupling within the global economy. Unfortunately, the absence of a global synchronized collective response to the multiple crises we face will lead to worse outcomes for nearly everyone.
The disruptions caused by the COVID-19 pandemic, supply-chain bottlenecks, and fragmented markets are being compounded by rising fuel, food, and fertilizer prices, as well as by advanced economies' monetary-policy tightening to fight inflation, which has resulted in high interest rates and increased pressure on debt-to-GDP ratios in emerging markets. In Africa, over 30 countries have seen their currencies fall against the dollar - half by over 10%. More than 140 developing countries have experienced currency depreciations by 2.8% against the US dollar, and their bonds yields have increased by an average of 77 basis points. Governments in many developing countries do not have the buffers to cushion these multiple, continuous, and worsening shocks.
At the individual and household level, the crisis is devastating. The food import bill in Latin America has increased by 28%, in Asia by 22%, and by 15% in Africa, while the share of food in the average household consumption basket is over 30% in Africa and Asia, compared to less than 10% in the United States.
The world can trade its way back to convergence, relying on emerging economies' growing middle classes and abundant labor to drive what geographers call subduction. But it will require rapid access to concessional financing to get there. Additional liquidity is needed to protect livelihoods while governments launch new investment programs.
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