FeaturedInternationalVOLUME 15 ISSUE # 12

Global economy: Uncertainty looms large

After a long spell of weak performance, the world is in a recovery mode but on a modest scale. This is the forecast made by the World Bank in its semi-annual report titled “Global Economic Prospects.” But the rebound is contingent on many variables, two of which are the unprecedented rise in debt worldwide, and the prolonged deceleration of productivity growth, which needs to pick up to bolster standards of living and help in poverty eradication.

To be specific, global growth is set to rise by 2.5% this year from 2.4% in 2019, as trade and investment activities gradually pick up. However, advanced economies are expected to slow down as a group to 1.4% from 1.6%, mainly due to lingering weakness in manufacturing.

By contrast, emerging market and developing economies will see growth move up to 4.1% from 3.5% last year. But this growth will not be universal and is expected to remain limited to a small group of large emerging economies stabilizing after recession or turbulence. For many other economies, growth is set to decelerate as exports and investment remain weak.

Another negative in the situation is that even if the recovery in emerging and developing economies takes place as expected, per capita growth will remain below long-term averages and would advance at a pace too slow to meet poverty eradication goals. Income growth is expected to be the slowest in Sub-Saharan Africa – the region where 56 percent of the world’s poor live.

But, lurking in the background are many threats that could disrupt the expected rally. These include trade disputes which could take a turn for the worse. A sharper-than-expected growth slowdown in major economies such as China, the United States, or the Euro Area would similarly have a negative impact on the overall situation.

According to the World Bank, a resurgence of financial stress in large emerging markets, as was experienced in Argentina and Turkey in 2018, an escalation of geopolitical tensions, or a series of extreme weather events could all disrupt the pace of economic recovery around the world.

The report has underlined another threat posed by the rising wave of debt accumulation among emerging and developing economies in the last 50 years. “Total debt among these economies climbed to about 170% of GDP in 2018 from 115% of GDP in 2010. Debt has also surged among low-income countries after a sharp drop over 2000-2010.The current wave of debt differs from previous ones in that there has been an increase in the share of non-resident holdings of EMDE government debt, foreign currency-denominated private EMDE debt, and, for low-income countries, borrowing from financial markets and non-Paris Club bilateral creditors, raising concerns about debt transparency.

Public borrowing can be a tool to accelerate economic development and enhance investment in education, healthcare and infrastructure. But things could also go wrong as happened during the three previous waves of debt accumulation exemplified by sovereign defaults in the early 1980s; financial crises in the late 1990s; the need for major debt relief in the 2000s; and the global financial crisis in 2008-2009.

The lesson from these events is that governments need to take steps to minimize risks associated with debt buildups. Prudent debt management and transparency in transaction, good corporate governance, and common international standards would ensure that debt is used productively.

Yet another aspect of the disappointing pace of global growth is the broad-based slowdown in productivity growth over the last ten years. Growth in productivity – output per worker – is essential to raising living standards and achieving development goals.

It has been noted that average output per worker in emerging and developing economies is less than one-fifth that of a worker in an advanced economy, and in low-income economies that figure drops to 2%.  Among emerging and developing economies, which have a history of productivity growth surges and setbacks, the slowdown from 6.6% in 2007 to 3.2% in 2015 has been the steepest on record. The slowdown is due to weaker investment, dwindling gains from the reallocation of resources to more productive sectors, and slowing improvements in the key drivers of productivity, such as education and institutional quality.

The World Bank says that the outlook for productivity remains challenging. More efforts are needed to stimulate private and public investment; upgrade workforce skills to boost firm productivity; help resources find the most productive sectors; reinvigorate technology adoption and innovation; and promote a growth-friendly macroeconomic and institutional environment.

The report also focuses on price controls which are sometimes considered a useful tool to smooth price fluctuations. But they can also dampen investment and growth and lead to heavier fiscal burdens. Replacing them with expanded and targeted social safety nets alongside the encouragement of competition and an effective regulatory environment, can be beneficial.

Low inflation is associated with more stable output and employment, higher investment, and falling poverty rates. However, rising debt levels and fiscal pressures could put some economies at risk of disruptions that could send prices sharply higher.  To remedy this, strengthening central bank independence, making the monetary authority’s objectives clear, and cementing central bank credibility are essential.”