Slower growth in store

Pan­demic is threat­en­ing to halt progress made so far

The Star Malaysia - StarBiz - - Insight - By NOAH SMITH

RE­CENT decades have been glo­ri­ous for de­vel­op­ing coun­tries, where rapid growth has lifted mil­lions of their cit­i­zens out of crush­ing poverty. But the coro­n­avirus pan­demic is threat­en­ing to halt their gains. And in the long term, the de­cline of the United States may pose an even big­ger ob­sta­cle for de­vel­op­ing na­tions.

Start­ing in about 1990, poor coun­tries started catch­ing up to rich ones. South Korea, Tai­wan and some coun­tries in Europe reached a fully de­vel­oped state.

China has pow­ered ahead with one of the most im­pres­sive and rapid in­dus­tri­al­i­sa­tions in world his­tory.

And coun­tries such as Turkey, Poland, Ro­ma­nia and Thai­land have also reached the cusp of de­vel­oped sta­tus.

Other na­tions like Bangladesh, Ethiopia and Viet­nam are start­ing out on the path to in­dus­tri­al­i­sa­tion, while poor coun­tries that mainly ex­port nat­u­ral re­sources have ben­e­fited from a boom in de­mand.

This world­wide growth has co­in­cided with a wave of mi­grant re­mit­tances. To­gether, growth and re­mit­tances have cut global ex­treme poverty dra­mat­i­cally, low­er­ing global in­equal­ity

Un­for­tu­nately, this happy trend is in dan­ger.

In the short term, the big­gest threat by far is the coro­n­avirus pan­demic.

The virus has sent the world into an eco­nomic tail­spin; the In­ter­na­tional Mone­tary Fund (IMF) ex­pects global eco­nomic out­put to fall 4.9% in 2020, the largest drop since be­fore World War II. And with many mi­grants out of work, re­mit­tances have plunged.

Although the IMF pre­dicts a rapid re­turn to growth in 2021, there are many rea­sons that might not hap­pen. For one thing, even if an ef­fec­tive vac­cine ar­rives in early 2021 – the most op­ti­mistic sce­nario – it will take a long time to get it to ev­ery­one in the world who wants it.

That means some coun­tries will con­tinue to see their economies hob­bled by so­cial dis­tanc­ing. In­ter­na­tional travel will be dif­fi­cult and dan­ger­ous, crimp­ing trade re­la­tion­ships fur­ther. And once those trade re­la­tion­ships de­te­ri­o­rate, it could take a while for them to build back up again, es­pe­cially with much of the world edg­ing to­ward pro­tec­tion­ism.

The piv­otal re­la­tion­ship be­tween the US and China has al­ready par­tially un­wound since 2016. The World Trade Or­gan­i­sa­tion pre­dicts a 32% fall in global trade in 2020, with only an in­com­plete re­bound next year.

Dis­rupted trade re­la­tion­ships will make it hard for in­dus­tri­al­is­ing coun­tries like Turkey and Thai­land to con­tinue their strat­egy of ex­port-led growth.

Th­ese coun­tries now ex­port a lot of elec­tron­ics, ve­hi­cles and other man­u­fac­tured goods, of­ten to de­vel­oped mar­kets. In ad­di­tion to de­press­ing sales, crimp­ing pro­duc­tion and in­hibit­ing travel, coro­n­avirus may cause those de­vel­oped coun­tries to reeval­u­ate their sup­ply-chain strate­gies.

Al­ready, US pres­i­den­tial can­di­date Joe Bi­den is promis­ing to con­sol­i­date sup­ply chains within the coun­try to pro­tect against na­tional se­cu­rity threats. If this be­comes the norm, it could make it more dif­fi­cult for in­dus­tri­al­is­ing na­tions to pro­mote ex­ports to grow and raise pro­duc­tiv­ity lev­els.

A gen­eral re­treat of world trade could end up look­ing like the Great De­pres­sion, with pro­tec­tion­ist poli­cies and eco­nomic stag­na­tion re­in­forc­ing each other for years to come.

But whether in one year or five, even­tu­ally economies will re­cover from coro­n­avirus. As con­fi­dence re­turns and the mem­ory of the pan­demic fades, na­tions and com­pa­nies will once more look to­ward ex­pand­ing global trade.

The prob­lem is that at that point, de­vel­op­ing coun­tries will face a new prob­lem – the di­min­ished global role of the US.

The US has tra­di­tion­ally func­tioned as a buyer of last re­sort for coun­tries that wanted to en­gage in ex­port-led growth. It bought large amounts of man­u­fac­tured prod­ucts from Ger­many, Ja­pan, South Korea and Tai­wan, help­ing those coun­tries grow.

The US main­tained open cap­i­tal mar­kets, al­low­ing the dol­lar to be­come the re­serve cur­rency, even though this con­trib­uted to do­mes­tic trade deficits. And it pushed for free-trade agree­ments, in­clud­ing China’s en­try into the WTO. Re­cently, coun­tries such as Viet­nam had cur­ren­cies that were cheap against the dol­lar, help­ing their busi­nesses sell to the US.

Fur­ther­more, the US’ open­ness has al­lowed de­vel­op­ing na­tions to ab­sorb first­world tech­nol­ogy and man­age­ment prac­tices via joint ven­tures, over­seas study and sup­ply chains, thus boost­ing those coun­tries’ pro­duc­tiv­ity.

But the US is a na­tion in de­cline. It has had the worst coro­n­avirus re­sponse among de­vel­oped na­tions, ex­pos­ing deep in­sti­tu­tional de­cay. It’s also suf­fer­ing from bit­ter di­vi­sions and con­tin­ued un­rest. And it con­tin­ues to lose eco­nomic ground to China in terms of eco­nomic size, ex­ports and high­tech ex­port in­dus­tries. The dol­lar’s sta­tus as the re­serve cur­rency also may be on shaky ground.

That could pose a huge prob­lem for de­vel­op­ing na­tions. In a newly closed-off, com­pet­i­tive world, it prob­a­bly will be harder for the un­der­dogs to catch up. — Bloomberg

Views ex­pressed here are the writer’s own.


Slow trend: An ex­te­rior view of the In­ter­na­tional Mone­tary Fund build­ing in Wash­ing­ton. Although it has pre­dicted a re­turn to growth in 2021, there are rea­sons that might not hap­pen.

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