Yves here. Although many here are well aware of this story, it bears repeating. The United States is running an accommodative monetary policy, with the most obvious goal of getting Biden a second term in office, as the Fed and other central banks keep interest rates high to try to stifle inflation. Remember, as an important INET paper pointed out, real income growth, even higher, was worse under Biden. That contradicts the neoliberal narrative, that this inflation is the result of too much demand. We still have supply chain problems, now partly due to the impact of sanctions or attempts to get out of their way. We have companies raising prices because they can. We still have a very high level of profit share of GDP, and public companies are still using that inappropriately to fund procurement. So the Fed’s solution, to use interest rates to squeeze workers’ wages, is already reducing their spending power without reducing inflation. At the moment, as Jomo explains, countries in the global South are taking it on the chin.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published on Jomo’s website
The World Bank expects the global recession to be the worst in more than four decades by 2024. This is due to the policies of the Western world which are diminishing in terms of macroeconomics and world politics.
A disappointing outlook
According to the Bank’s latest Global Economic Prospects report, global economic growth will be very weak at the end of 2024. Only the strength of the US economy will statistically prevent a global recession.
Global economic growth was expected to slow to 2.4 percent in 2024. But even the US-controlled World Bank admits that the country’s economic growth is the biggest risk.
Medium-term prospects for many developing economies have worsened due to slow growth in many major economies. This has been exacerbated by the tightening of monetary and credit policy, loose trade and investment growth.
The year 2024 will be the third year of recession due to the tightening of monetary policies that are supposed to contain the power of money. Central banks are determined to bring inflation below their two percent target by tightening credit.
Global growth was expected to slow from 2.6% in 2023 to 2.4% in 2024 – well below the 2010 average. Developing economies will grow by only 3.9% in 2024, more than a percentage point below the average of the last decade.
World Bank Chief Economist Indermit Gill fears, “Near-term growth will remain fragile, leaving many developing countries – especially the poorest – trapped: with crippling levels of debt and poor access to food for almost three people. “
Dark Hopes
The Bank predicted that advanced economies will slow as many developing countries outside Asia recover. It also acknowledges strong prospects for emerging economies that are vulnerable to the high cost of debt financing.
By the end of 2023, the Bank expected things to worsen due to the Gaza offensive, related asset market pressures, financial stress, more debt, higher borrowing costs, continued inflation, China’s weak recovery, trade disruptions, and climate disasters.
The unwillingness of the US to sell a ceasefire in Ukraine or to stop the carnage in Gaza or the war in the South China Sea has increased the country’s vulnerability and prospects for recovery while diverting many military resources.
Financial stress and high interest rates have fueled inflation and stagnation. Meanwhile, the new Cold War slowed growth in China and much of Asia by exacerbating the ‘trade divide’ and global warming.
The Bank calls for international cooperation to provide debt relief, especially for the poorest countries, tackle global warming, enable the energy transition, renew trade integration, address climate change, and reduce food insecurity.
The world economy lost 3.3 billion as of 2020. However, instead of strengthening the stability of developing countries, the Bank is still promoting monetary and fiscal consolidation.
A quarter of developing countries and two-fifths of low-income countries (LICs) will be worse off in 2024 than in 2019, before the pandemic. With limited financial space, developing countries with low credit ratings are highly disadvantaged.
With the rich economy expected to shrink from 1.5% last year to 1.2% in 2024, demand for basic goods will decrease. Barring some negative projections, the Bank wishes LICs to grow by 5.5% in 2024!
But instead of prioritizing economic recovery, finance ministers and central bank governors agreed to continue policies that worsened the situation by suppressing demand and ignoring the ‘asset disruption’ that causes inflation.
Fiscal Follies?
For decades, the Washington-based Bretton Woods institutions have encouraged developing economies to become more open and market-oriented. Unsurprisingly, the global South is now facing problems due to previous procyclical policies.
The report advises exporters – two-thirds of which are from developing countries – on how to deal with price fluctuations. Breaking with previous advice, the Bank is now seeking a counter-cyclical monetary policy framework.
Monetary policies in recent decades have tended to be procyclical, overheating economies and deep recessions. The Bank found monetary policy in exporting countries 30% more procyclical and 40% more volatile than in other developing economies.
It argues that the financial policies of commodity traders have caused price volatility to deteriorate. It estimates that while asset price increases boost growth, an increase in government spending can increase growth by an additional one-fifth.
Fiscal policy’s pro-cyclicality and volatility exacerbate business cycles, harming economic growth in developing exporting economies.
The Bank argues that this should be addressed “with a financial framework that helps to guide government spending, by adopting flexible exchange rate rules, and avoiding restrictions on international financial flows”.
The report says that these policy measures will help developing countries’ exports to increase per capita growth by about 0.2% per year.
Misrepresenting the statistical correlation, the Bank is calling for an easing of restrictions on foreign capital flows, saying this “will help reduce both financial efficiency and financial volatility”.
Ignoring the experience of developing countries, it advocates the adoption of developed economies’ “principles of trade, [lack of] restrictions on cross-border financial flows, and … financial regulations” as part of a “firm commitment to financial discipline.”
This report ignores the overwhelming evidence that fiscal austerity and capital account opening increase procyclicality and volatility.
Clearly, the Bank’s advice has not changed much since the 1980s, when such policy recommendations were particularly dire for Latin America and Africa in the lost decades.
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