Avoid a dual-track economic recovery
With the widespread threat of illness and death, the coronavirus may be an accurate demonstration of what the entire world has in common. The economic recovery is doing the opposite.as a World Bank Report It was made clear this month that the legacy of the pandemic is a widening gap between those living in the rich world and those elsewhere.Monetary policy tightens US Federal Reserve, to combat higher inflation within the country, may deepen this divide.
As Chinese President Xi Jinping tell the World Economic Forum Last week, if the rich world “hit the brakes” on monetary stimulus, it risked spreading to vulnerable low- and middle-income countries and eventually sparking a crisis that would affect the rich world. Many of these countries have been permanently traumatized by the pandemic as governments struggle to deploy the same fiscal firepower as advanced economies to keep workers employed and businesses open through lockdowns.
The result is a “dual-track” global recovery: output in advanced economies is projected to return to 2019 levels by 2023, while output in emerging economies remains well below pre-pandemic trends. A fairer recovery from the pandemic and the recession it has caused requires global cooperation.
The first task is to ensure equal access to vaccines. These, perhaps more important than stimulus measures, are crucial to getting economic activity back in rich countries. But getting economic growth back to the level it needs will also require what the World Bank politely calls “financial resources.”
As major central banks tighten monetary policy, Financing conditions in emerging economies will only get worse. At a time when there may be a reversal in cross-border capital flows, many poorer countries are likely to seek fiscal austerity to preserve their access to bond markets. Middle-income countries that use decades of cheap money to reform and shore up foreign exchange reserves will be in a better position than countries like Turkey that encourage credit to fuel prosperity.
The poorest countries are most at risk. Finding a way to deliver aid should be an urgent global priority. Efforts to date have included lackluster goodwill statements and half-hearted steps to build mediocre debt solutions. The current “common framework” for addressing debt, set by the G20 in November 2020, is not fit for purpose: private creditors have little incentive to engage in its cumbersome and unclear process. Few countries are willing to engage with it for fear that they will be designated as a “basket”.
Granted, it has become more difficult to formulate effective debt solutions these days. The presence of new lenders in frontier markets, while welcome, has made it more difficult to get all creditors to the negotiating table. But even the most optimistic vision shows no real global effort to tackle the debt problems of poor countries with the seriousness it deserves.
While advanced economies seeking to emerge from the pandemic face their own complex problems, the inequitable global recovery — and its relationship to existing debt burdens — cannot be ignored either. Doing so would recklessly jeopardize decades of poverty reduction. Self-interest alone should convince rich countries to act: once again the consequences of poverty, like viruses, are rarely confined to national borders.