The spring meetings of the World Bank and International Monetary Fund typically provide a platform for various organizations, policymakers, and commentators to reflect on the state of the global economy, provide assessments of developments over the past year, and make forecasts for the future. This year’s meetings, held in Washington in April, were accompanied by dire forecasts that underscored the growing likelihood of a prolonged global recession.
While many analysts had previously assumed that the confluence of crises the world has faced over the past three years – the COVID-19 pandemic, supply chain disruptions, the war in Ukraine and the resulting inflationary crisis and financial turmoil – would have a significant impact but ultimately have a temporary impact on the global economy, new data suggest the current economic upheaval may last longer than first anticipated.
The IMF’s World Economic Outlook and Global Financial Stability Report point to a difficult road ahead, warning that “the fog has thickened around the world economic outlook”. The rapid succession of large rate hikes by the US Federal Reserve and other major central banks has pushed public and private sector debt to the highest levels in decades, raising the risk of financial instability. The world’s advanced economies, which grew 2.7% in 2022, are expected to grow just 1.3% this year. While the IMF expects Asia’s emerging and developing economies to grow by 5.3% in 2023 (vs. 4.4% a year earlier), the growth forecast for India has been revised down to 5.9% (vs. a growth rate of 6.8 % in 2022) revised downwards.
A new World Bank book is even more pessimistic, warning that the global economy could be on the brink of a “lost decade”. Based on a comprehensive database of estimates of potential growth in 173 countries, the authors forecast annual global growth to fall to a three-decade low of 2.2% and remain weak for the rest of the decade. While the rich may have the means to weather the storm, the same cannot be said of the world’s poor and lower-middle class, who will be hit hardest by the coming recession.
To understand the full impact of the present moment, we need to look beyond the immediate aftermath of COVID-19 and the war in Ukraine, and confront the underlying issues that have been smoldering for decades, including climate change and the social and political disruptions caused by it the rapid technological development are caused innovation. Finding our way out of today’s “polycrisis” and restoring global growth, while possible, will be challenging for two main reasons.
First, as the World Bank report highlights, many countries are experiencing an alarming trend of declining investment. While fiscal and monetary policy certainly play a role, I believe the root cause of weak investment lies in the increasing politicization of economic policies, leading to a widespread loss of confidence in governments and their ability to solve the problems that really matter , has undermined.
India is a case in point. Since 2012, private sector investment as a share of India’s GDP has steadily declined. The World Bank and other experts attribute this trend to political polarization and a growing loss of confidence. Although public investment has increased dramatically over the past decade, this can be a dangerous trend: when the government has disproportionate control over investment, it often leads to a rise in cronyism. Russia, where an oligarchy quickly sprang up by courting favors with political leaders in exchange for lucrative contracts and sweet privatization deals, offers a stark example.
The second challenge is that putting in place corrective policies would require a concerted effort by several countries. The interconnectedness of global supply chains means that any disruption has far-reaching and powerful repercussions, and the increasing use of economic sabotage as a tactic of war underscores the urgency of multilateral cooperation on an economic asset protection treaty.
Achieving a prosperous, peaceful world also requires stepping up efforts to meet climate targets and curbing the rise in economic inequality within and between countries. Due to advances in digital technology and the globalization of supply chains, such challenges are beyond the reach of individual countries acting alone. To address these global problems, governments need to coordinate their monetary, fiscal, and security policies. Of course, that won’t be easy. But the alternative – a future of sluggish growth, political instability and environmental disasters – is just too bleak to contemplate.
Kaushik Basu, former World Bank Chief Economist and Chief Economic Adviser to the Government of India, is Professor of Economics at Cornell University and Non-Resident Senior Fellow at the Brookings Institution.
©Project Syndicate
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