This is Eve. Many here are probably familiar with this issue, but it’s worth repeating: The United States is implementing a highly stimulative fiscal policy for the all-too-obvious purpose of securing a second term for Biden, even as the Federal Reserve and other central banks keep interest rates high to tame inflation. As the seminal INET paper showed,Under Biden, real income growth is negative even at the top. This contradicts the neoliberal story that this inflation is the result of excess demand. Supply chain problems remain, partly due to sanctions and partly due to efforts to get out of the way. Companies are raising prices because they can. Profits as a percentage of GDP are still very high, and publicly traded companies still unfairly use it to fund stock buybacks. So the Fed’s solution of squeezing workers’ wages with interest rates is reducing workers’ purchasing power without curbing inflation. Meanwhile, as Jomo explains, countries in the global south are living with it.
Jomo Kwame Sundaram, former United Nations Under-Secretary-General for Economic Development. Originally published in Jomo’s website
The World Bank predicts that in 2024 the global economy will experience its worst slowdown in four decades, driven primarily by macroeconomic and geopolitical austerity policies from powerful Western countries.
A bleak outlook
According to the World Bank’s latest World Economic Prospects report, global economic growth will be at its weakest by the end of 2024. Statistically, only the strength of the U.S. economy can prevent a global recession.
Global economic growth was expected to slow to 2.4% in 2024. But even the US-controlled World Bank admit Rising geopolitical tensions pose a major threat.
The medium-term outlook for most developing countries has worsened due to slowing growth in most major economies, exacerbated by tighter monetary policy and credit, and slower trade and investment growth.
2024 will be the third year of economic slowdown due to tight monetary policy aimed at taming inflation. The central bank is adamant about keeping inflation below its 2% target by tightening credit.
Global growth is expected to slow to 2.4 percent in 2024 from 2.6 percent in 2023, well below the average for the 2010s. Developing economies will grow just 3.9 percent in 2024, more than a percentage point below the average of the past decade.
Indermit Gill, the World Bank’s chief economist, fears that “growth will remain weak in the near term and many developing countries, especially the poorest, will be trapped with paralyzing debt levels and food insecurity for almost one in three people.”
A bleak outlook
The World Bank projects that developed economies will slow while most developing economies outside Asia recover, and acknowledges that a sharp rise in debt costs leaves vulnerable developing economies with uncertain prospects.
Towards the end of 2023, we expect the situation to worsen due to the Gaza invasion and related pressures on commodity markets, financial stress, rising debt, higher borrowing costs, continued inflation, a weak Chinese recovery, trade disruptions and climate disasters.
The United States’ reluctance to broker a ceasefire in Ukraine, stop the massacre in Gaza, or militarize the South China Sea has exacerbated geopolitical risks and prospects for recovery, diverting even more resources to the war.
Financial stress and rising interest rates are exacerbating inflation and recession, while a new Cold War is exacerbating the “trade decoupling” and global warming, slowing growth in China and much of Asia.
The World Bank urges multilateral cooperation, especially on debt relief for the poorest countries, addressing global warming, achieving the energy transition, restoring trade integration, responding to climate change, and reducing food insecurity.
The world economy is lost $3.3 trillion since 2020. But instead of strengthening recovery in developing countries, the World Bank continues to encourage austerity and financialization.
A quarter of developing countries and two-fifths of low-income countries (LICs) will be worse off in 2024 than they were in 2019, before the pandemic. Developing countries with low credit ratings are particularly at fault, as they have limited fiscal space.
Developed economies’ economic growth is expected to slow to 1.2% in 2024 from 1.5% last year, further weakening demand for primary commodities. Despite other gloomy forecasts, the World Bank has optimistically projected 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 make the situation worse by suppressing demand and ignoring the “supply-side disruptions” that are causing inflation.
Financial folly?
For decades, the Washington-based Bretton Woods institutions have been pushing developing countries to become more open and market-oriented. Not surprisingly, countries in the global South are now facing problems because of their previous pro-cyclical policies.
The report advises commodity exporters, which account for two-thirds of developing countries, on how to deal with price volatility. In a break with previous advice, the World Bank called for a more countercyclical fiscal policy framework.
Fiscal policies over the past few decades have been highly pro-cyclical, causing economies to overheat and deepening recessions. The World Bank has found that fiscal policies in resource-exporting countries are 30% more pro-cyclical and 40% more volatile than other developing countries.
The report argues that fiscal policies in commodity-exporting countries exacerbate price volatility. It estimates that in cases where higher commodity prices boost growth, higher government spending could boost growth by an additional fifth.
Cyclical and volatile fiscal policy will amplify business cycles and undermine economic growth in resource-exporting developing countries.
The World Bank argues that this problem should be addressed with a “fiscal framework that helps discipline government spending by adopting flexible exchange rate regimes and avoiding restrictions on international capital movements.”
The report claims: Such policy measures It would help boost per capita growth in resource-exporting developing countries by about 0.2 percentage points per year.
The bank misrepresents statistical correlations to urge loosening restrictions on international capital flows, arguing that this would “help reduce both pro-cyclical effects of finances and financial instability.”
The report ignores the experience of developing countries and urges the adoption of developed country “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 that fiscal austerity and capital account openness have exacerbated business cycle flexibility and volatility.
Clearly, the World Bank’s advice has not changed much since the 1980s, when such policy recommendations exacerbated lost decades in Latin America and Africa.
