Storm clouds are brew­ing for the global econ­omy

The Herald (Zimbabwe) - - Opinion & Analysis - Kristalina Ge­orgieva

THE out­look for the global econ­omy in 2019 has dark­ened. In­ter­na­tional trade and in­vest­ment have soft­ened. Trade ten­sions re­main el­e­vated. Sev­eral large emerg­ing mar­kets un­der­went sub­stan­tial fi­nan­cial pres­sures last year.

Against this chal­leng­ing back­drop, growth in emerg­ing mar­ket and de­vel­op­ing economies is ex­pected to re­main flat in 2019. The pick-up in economies that rely heav­ily on com­mod­ity ex­ports is likely to be much slower than hoped for. Growth in many other economies is an­tic­i­pated to de­cel­er­ate.

In ad­di­tion, risks are grow­ing that growth could be even weaker than an­tic­i­pated, the World Bank’s Jan­uary 2019 Global Eco­nomic Prospects re­ports.

Ad­vanced-econ­omy cen­tral banks will con­tinue to re­move the ac­com­moda­tive poli­cies that sup­ported the pro­tracted re­cov­ery from the global fi­nan­cial cri­sis ten years ago. Also, sim­mer­ing trade dis­putes could es­ca­late. Higher debt lev­els have made some economies, par­tic­u­larly poorer coun­tries, more vul­ner­a­ble to ris­ing global in­ter­est rates, shifts in in­vestor sen­ti­ment, or ex­change rate fluc­tu­a­tions.

In ad­di­tion, more fre­quent weather events raise the pos­si­bil­ity of large swings in food prices, which could deepen poverty. Be­cause eq­ui­table growth is es­sen­tial to al­le­vi­at­ing poverty and in­creas­ing shared pros­per­ity, emerg­ing mar­ket and de­vel­op­ing economies need to face this chal­leng­ing eco­nomic cli­mate by tak­ing steps to sus­tain eco­nomic mo­men­tum, ready­ing them­selves for tur­bu­lence, and foster long-term growth. Re­build­ing bud­get and cen­tral bank buf­fers; nur­tur­ing hu­man cap­i­tal; pro­mot­ing trade in­te­gra­tion; and ad­dress­ing the chal­lenges posed by some­times large in­for­mal sec­tors, are im­por­tant ways to do this.

“At the be­gin­ning of 2018 the global econ­omy was fir­ing on all cylin­ders, but it lost speed dur­ing the year and the ride could get even bumpier in the year ahead,” said World Bank Chief Ex­ec­u­tive Of­fi­cer Kristalina Ge­orgieva. “As eco­nomic and fi­nan­cial head­winds in­ten­sify for emerg­ing and de­vel­op­ing coun­tries, the world’s progress in re­duc­ing ex­treme poverty could be jeop­ar­dised. To keep the mo­men­tum, coun­tries need to in­vest in peo­ple, foster in­clu­sive growth, and build re­silient so­ci­eties.”

The World Bank pro­duces the GEP twice a year, in Jan­uary and June, as part of its in-depth anal­y­sis of key global macroe­co­nomic devel­op­ments and their im­pact on mem­ber coun­tries. Pro­mot­ing eq­ui­table and sus­tain­able eco­nomic growth is cen­tral the World Bank’s goals of end­ing ex­treme poverty and boost­ing shared pros­per­ity. The GEP pro­vides in­valu­able in­tel­li­gence in sup­port of achiev­ing these aims and is a trusted re­source for clients, stake­hold­ers, civil or­gan­i­sa­tions and re­searchers.

Bur­dened by debt

Ad­dress­ing high lev­els of debt looms as an in­creas­ingly im­por­tant con­cern.

In re­cent years, many low-in­come coun­tries have gained ac­cess to new sources of fi­nance, in­clud­ing pri­vate sources and cred­i­tors out­side the Paris Club of ma­jor cred­i­tor coun­tries. This has al­lowed coun­tries to fund im­por­tant devel­op­ment needs. How­ever, it has also con­trib­uted to grow­ing pub­lic debt.

Gov­ern­ment debt lev­els among low-in­come coun­tries have risen from debtto-GDP ra­tios of 30 per­cent to 50 per­cent over the last four years. Low-in­come coun­tries are us­ing an in­creas­ing pro­por­tion of gov­ern­ment rev­enues to make in­ter­est pay­ments. Such debt ser­vice pres­sures will only grow fur­ther if bor­row­ing costs rise as ex­pected in com­ing years.

Un­der these cir­cum­stances, were fi­nanc­ing con­di­tions to tighten abruptly, coun­tries could ex­pe­ri­ence sud­den cap­i­tal out­flows and strug­gle to re­fi­nance debts.

Ideally, pub­lic debt should be sus­tain­able and ser­viced un­der a wide range of cir­cum­stances at rea­son­able costs. By in­creas­ing the ef­fec­tive­ness of re­source mo­bil­i­sa­tion, pub­lic spend­ing, as well as strength­en­ing debt man­age­ment and trans­parency, low-in­come coun­tries can re­duce the pos­si­bil­ity of costly debt stress, sup­port fi­nan­cial sec­tor devel­op­ment, and re­duce macroe­co­nomic volatil­ity.

When in­for­mal is nor­mal

An­other av­enue to­ward stronger eco­nomic per­for­mance may lie in ad­dress­ing the chal­lenges as­so­ci­ated with a large in­for­mal sec­tor.

Em­ploy­ment and busi­ness out­side reg­u­la­tory, le­gal and fi­nan­cial struc­tures is wide­spread in many emerg­ing mar­ket and de­vel­op­ing economies.

About one-third of GDP in emerg­ing mar­ket and de­vel­op­ing economies comes from the in­for­mal sec­tor, and about 70 per­cent of em­ploy­ment in these economies is in­for­mal. In some coun­tries in Sub-Sa­ha­ran Africa, in­for­mal em­ploy­ment ac­counts for more than 90 per­cent of em­ploy­ment and in­for­mal sec­tor pro­duces as much as 62 per­cent of GDP. The liveli­hoods of the poor of­ten de­pend on in­for­mal ac­tiv­ity.

The in­for­mal sec­tor thrives in cer­tain en­vi­ron­ments: high preva­lence of in­for­mal­ity is as­so­ci­ated with eco­nomic un­der-devel­op­ment, high lev­els of tax­a­tion and heavy-handed reg­u­la­tion, and cor­rup­tion and bu­reau­cratic in­ef­fi­ciency. Yet, while some­times of­fer­ing ad­van­tages in terms of flex­i­bil­ity and em­ploy­ment, a large in­for­mal sec­tor is of­ten as­so­ci­ated with lower pro­duc­tiv­ity, re­duced tax rev­enues, and greater poverty and in­equal­ity.

In­for­mal firms are one-quar­ter as pro­duc­tive as com­pa­nies in the for­mal sec­tor. In fact, firms in the for­mal sec­tor that face in­for­mal com­pe­ti­tion are only three-quar­ters as pro­duc­tive as those that do not, new World Bank re­search shows. Work­ers in the for­mal econ­omy earn on av­er­age 19 per­cent more than those in the in­for­mal econ­omy. Coun­tries with the largest in­for­mal sec­tors have gov­ern­ment rev­enues that are 5 to 10 per­cent­age points of GDP lower than those with the low­est lev­els of in­for­mal­ity.

Pol­i­cy­mak­ers can de­sign com­pre­hen­sive devel­op­ment strate­gies that, as a col­lat­eral ben­e­fit, re­duce in­for­mal­ity. In ad­di­tion, they must take care to avoid un­in­ten­tion­ally mov­ing work­ers to the in­for­mal sec­tor.

The right pol­icy mix would bal­ance re­forms such as im­prov­ing tax ad­min­is­tra­tion, mak­ing the labour mar­ket more flex­i­ble, and strength­en­ing reg­u­la­tory en­force­ment with im­proved pro­vi­sion of pu­bic goods and ser­vices along­side more ro­bust social se­cu­rity sys­tems.

Com­mod­ity of er­rors

Seek­ing to shield vul­ner­a­ble pop­u­la­tions from food price spikes may re­quire a shift in pol­icy em­pha­sis away from trade poli­cies.

Au­thor­i­ties have in the past in­ter­vened with trade mea­sures to dampen the im­pact of fluc­tu­a­tions in the prices of key food com­modi­ties, in­clud­ing rice, wheat and maize.

But while in­di­vid­ual coun­tries can suc­ceed in the short term at buffer­ing do­mes­tic mar­kets from price fluc­tu­a­tions, col­lec­tive ac­tion around the world can ex­ac­er­bate food price volatil­ity and push prices higher — hurt­ing those with the thinnest mar­gins of se­cu­rity. Poli­cies in­tro­duced in 2010-2011 may have ac­counted for 40 per­cent of the in­crease of the world price of wheat and one-quar­ter of the price rise for maize. It is es­ti­mated that the food price jump of that pe­riod pushed 8,3 mil­lion peo­ple into poverty.

While food prices have de­clined since peaks at the turn of the decade, world hunger and food in­se­cu­rity have risen be­tween 2014 and 2017. The num­ber of un­der­nour­ished peo­ple rose 5 per­cent to 821 mil­lion dur­ing that pe­riod, and food se­cu­rity chal­lenges have re­cently been recog­nised as an ur­gent pri­or­ity by the G20.

Fur­ther, food price spikes of the kind ex­pe­ri­enced in 2010-11 could oc­cur again as ex­treme weather events raise the pos­si­bil­ity of dis­rup­tion to food pro­duc­tion — World Bank.

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