Yves here. Even though many here are likely well aware of the issue, it bears repeating. The US is running a very stimulative fiscal policy, with the too-obvious aim of securing Biden a second term in office, even as the Fed and other central banks are keeping interest rates high to try to choke inflation. Mind you, as an important INET paper showed, real income growth, even at the top, has been negative under Biden. That is at odds with the story neoliberals like to tell, that this inflation is the result of too much demand. We still have supply chain issues, now in part due to the impact of sanction or efforts to get out of their way. We have companies raising prices because they can. We still have a very very high level of profit share of GDP, with public companies still unduly using that to fund buybacks. So the Fed remedy, of using interest rates to choke worker pay, has already been lowering their spending power without taming inflation. In the meantime, as Jomo explains, countries in the global South take it on the chin.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
The World Bank expects the international economic slowdown to be at its worst in over four decades in 2024. This is mainly due to powerful Western nations’ contractionary macroeconomic and geopolitical policies.
Dismal Outlook
According to the Bank’s last Global Economic Prospects report, world economic growth will be weakest by the end of 2024. Only the US economy’s strength will statistically prevent a world recession.
World economic growth was expected to slow to 2.4 per cent in 2024. But even the US-controlled World Bank acknowledges growing geopolitical tensions are the main threat.
Medium-term prospects for most developing economies have worsened due to slower growth in most major economies. This has been exacerbated by tighter monetary policy and credit, sluggish trade and investment growth.
2024 would be the third year of economic slowdown due to tighter monetary policies supposed to rein in inflation. Central banks are fixated on bringing inflation below their two per cent target by tightening credit.
Worldwide growth was expected to slow from 2.6% in 2023 to 2.4% in 2024 – well below the 2010s’ mean. Developing economies would only grow by 3.9% in 2024, more than a percentage point below the previous decade’s average.
World Bank Chief Economist Indermit Gill feared, “Near-term growth will remain weak, leaving many developing countries – especially the poorest – stuck in a trap: with paralysing levels of debt and tenuous access to food for nearly one out of every three people.”
Gloomy Prospects
The Bank projected that developed economies would slow as most developing economies outside Asia recover. It also acknowledges precarious prospects for vulnerable developing economies due to much higher debt financing costs.
At the end of 2023, the Bank expected things to worsen due to the Gaza invasion, related commodity market pressures, financial stress, more indebtedness, higher borrowing costs, persistent inflation, China’s weak recovery, trade disruptions, and climate disasters.
US unwillingness to broker a ceasefire in Ukraine or to stop the Gaza massacre or South China Sea militarisation has worsened geopolitical risks and recovery prospects while diverting more resources for war.
Financial stress and higher interest rates have exacerbated inflation and stagnation. Meanwhile, the new Cold War has slowed growth in China and much of Asia by worsening ‘trade fragmentation’ and global heating.
The Bank urges multilateral cooperation to provide debt relief, especially for the poorest countries, address global heating, enable the energy transition, revive trade integration, address climate change, and reduce food insecurity.
The world economy has lost $3.3 trillion since 2020. Yet, instead of strengthening developing countries’ recoveries, the Bank still urges fiscal austerity and financialization.
A quarter of developing countries and two-fifths of low-income countries (LICs) would be worse off in 2024 than in 2019, before the pandemic. With limited fiscal space, developing nations with poor credit ratings are especially condemned.
With rich economies expected to slow from 1.5% last year to 1.2% in 2024, demand for primary commodities will further dampen. Despite other dismal projections, the Bank wishfully projected LICs would grow by 5.5% in 2024!
But instead of prioritising economic recovery, finance ministers and central bank governors agreed to continue policies worsening the situation by suppressing demand and ignoring ‘supply-side disruptions’ responsible for inflation.
Fiscal Follies?
For decades, the Washington-based Bretton Woods institutions urged developing economies to be much more open and market-oriented. Unsurprisingly, the global South now faces problems due to earlier procyclical policies.
The report advises commodity exporters – two-thirds of developing nations – how to cope with price fluctuations. Breaking with past advice, the Bank now calls for a more counter-cyclical fiscal policy framework.
Fiscal policies in recent decades have often been procyclical, overheating economies and deepening slumps. The Bank found fiscal policy in commodity-exporting nations 30% more procyclical and 40% more volatile than in other developing economies.
It argues commodity exporters’ fiscal policies have worsened price vicissitudes. It estimates that when commodity price increases enhance growth, government spending increases can boost growth by an additional fifth.
Greater fiscal policy pro-cyclicality and volatility amplify business cycles, hurting economic growth in commodity-exporting developing economies.
The Bank argues this should be addressed with “a fiscal framework that helps discipline government spending, by adopting flexible exchange-rate regimes, and by avoiding restrictions on the movement of international capital”.
The report claims such policy measures will help commodity-exporting developing economies boost per capita growth by about 0.2% annually.
Misrepresenting statistical correlations, the Bank urges easing restrictions on international financial flows, claiming this would “help reduce both fiscal procyclicality and fiscal volatility”.
Ignoring developing countries’ experiences, it urges the adoption of developed-economy “exchange rate regimes, [lack of] restrictions on cross-border financial flows, and … fiscal rules” as part of a “strong commitment to fiscal discipline.”
The report ignores overwhelming evidence of fiscal austerity and capital account openness exacerbating procyclicality and volatility.
Clearly, Bank advice has not changed much since the 1980s, when such policy recommendations worsened Latin America’s and Africa’s lost decades.
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Too many of the Global South’s policy makers study economics in the West?
The esteemed author says this like it’s a bad thing…
Greater fiscal policy pro-cyclicality and volatility amplify business cycles, hurting economic growth in commodity-exporting developing economies.
So we get commodities cheaper and someone makes more on interest rates plus economic emigration…more contango, more yield, and more cheap labor for the west.
I wonder if there’s a way for China to launder its Treasury holding by bailing out the Global South.
As a non-economist and non-financial type, am I correctly interpreting the author as saying the IMF does not have a clue about what it is doing?
World Bank, referenced here, and IMF are different things.
World Bank knows what its doing: its promoting economic dependence for imperial colonies, its even doubling down on it in the face of headwinds, encouraging vulnerable nations to hock themselves entirely to the Empire.
Looting has become its mission, and its showing commitment.
“The Bank argues this should be addressed with “a fiscal framework that helps discipline government spending, by adopting flexible exchange-rate regimes, and by avoiding restrictions on the movement of international capital”.“
I’m a bit out of my pay grade here, but this sounds to me like the World Bank is encouraging a loosening of capital controls which, thanks to my years of following this honorable blog, sounds like an open invitation for ‘hot money’ – vultures and other various speculators- to wreak havoc on a nation’s financial priorities, inviting a “bust out”, to use a mafiosi term. It certainly isn’t helping that the Fed is keeping interest rates high, making the rich richer and pummeling the real estate market (especially commercial RE) , thinking that they’re helping to reduce inflation to reach their fabled 2% target. Feels like the foxes rule the henhouse!
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