Kristalina Georgieva is one of life’s optimists, so it was no surprise that the managing director of the International Monetary Fund found things to be cheerful about at last week’s gathering of finance ministers and central bank governors in Washington.
The two Bretton Woods institutions – the IMF and the World Bank – meet every six months, and since October, fears of a deep recession have receded. As Georgieva noted, the global economy has shown unexpected resilience. Energy prices have come down and that makes the outlook for inflation better. What’s more, the IMF chief said there was a can-do approach at the meeting.
That’s pushing it a bit. To be sure, things have turned out to be less bleak than they might have been, but that’s not saying much. In reality, the global economy is slowing, fragmenting and vulnerable to a fresh outbreaks of financial distress. A major debt crisis is a very real possibility. The IMF knows all this. Indeed, it said as much at various times last week. In the spring of 2023, the world finds itself in a very bad place.
The era of ever closer integration is clearly over. Joe Biden’s package of green subsidies, the Inflation Reduction Act, is the most obvious example of the desire to re-onshore production. Last week’s G7 communique, which talked openly of the need to build secure supply chains among like-minded nations, was another.
As Georgieva herself conceded, the world is teetering on the brink of a new cold war, with the US – and many other developed countries – determined to reduce reliance on China. Ensuring that supply will not be disrupted now matters more than cost. When George Osborne was chancellor, he thought it was in Britain’s interests to snuggle up to Beijing and so tried to forge closer economic and financial links. Jeremy Hunt, the current chancellor, takes a more hawkish view.
But fragmentation is only one of the problems finance ministers and central bankers will find themselves grappling with over the coming months and years.
The short-term problems are glaringly obvious. Will central banks in the west overdo the interest-rate pain they are administering and send their economies into recession? Will the determination to bring inflation back down result in more banks going bust? Is there a contradiction between the twin objectives of central banks: price stability and financial stability?
The fact that growth has held up better than expected over the winter is nudging central banks towards further increases in rates. It might be a different matter if there were a fear that the collapse of Silicon Valley Bank and the need to rescue Credit Suisse were – as the IMF put it last week – canaries in the coalmine, warning of a systemic crisis. In that event, the Federal Reserve, the Bank of England and the European Central Bank would be halting rate rises or even bringing borrowing costs down.
But central banks don’t think that. They believe that SVB and CS were isolated incidents, and so there is no need to fear severe financial stability repercussions from anti-inflation action. As a result, the risks of a hard landing are much higher than currently believed.
Two longer-term problems also surfaced last week. The first, highlighted by both the IMF and the World Bank, is the marked decline in trend growth rates, the level at which economies can expand over a period of years while meeting targets for inflation.
Indermit Gill, the World Bank’s chief economist, says the focus on short-term developments has meant insufficient attention has been paid to the fact that the global trend of growth has been cut from 3% to 2%. Lower growth means fewer resources to combat poverty and to tackle the climate crisis.
This segues neatly into the second issue that featured in Washington last week: the growing divide between the rich north and the poorer south, and the anger that is causing. Clearly, times are hard for many people in developed countries because higher inflation is now eroding living standards, but they are much worse in the global south.
The UN’s trade and development arm, UNCTAD, last week said developing countries were facing “another lost decade, with soaring debt levels and higher servicing costs while international support remains insufficient”. That’s true, although there wasn’t much evidence of meaningful action in Washington last week.
As one developed-country minister put it: “Poor countries are furious. They are asking why, if the US can save a bank in three days, Zambia has waited three years to get debt relief.”
So the message from the past week is that this is no longer the age of globalisation. Rather, it is the age of instability, the age of insecurity, the age of inequality and the age of illusion.
That said, the fact that not much happened in Washington last week cheered some activists. They believe the pieces are falling into place for action on the necessary scale: developing countries at breaking point, civil society mobilisation, developed countries waking up to the problem.
Crunch time is certainly here. Western governments can either get behind an ambitious development finance plan, such as the Bridgetown Initiative of Mia Mottley, prime minister of Barbados, or wait for the train crash to happen. Avinash Persaud, Mottley’s special adviser, says it is encouraging that many developed countries – including Britain – voiced support for the Bridgetown Initiative last week.
That’s welcome, because the Bridgetown Initiative might prove to do for developing countries in the 2020s what the Marshall Plan did for postwar reconstruction in Europe in the 1940s. If rich countries turn words into action, this could still prove to be the age of intervention rather than the age of impotence. But that’s the choice.
