Across the globe, macroeconomic challenges are mounting, ranging from rising inflation to growing shortages of goods and labor.
The impact on advanced economies and China has been the subject of much debate. However, less attention has been paid to the vulnerability of a large group of developing countries.
It goes way beyond the short term. When combined with other forces at play, the most exposed developing countries risk being overthrown by an age-old process of global convergence that many actors in development economics and finance have since taken for granted. years.
A growing number of economists and policymakers are internalizing the new reality of high and more persistent inflation, after too many months of viewing the phenomenon as “transitory”.
We no longer live in a world where the main macroeconomic challenge is that of weak aggregate demand. Instead, an insufficient supply causes “shortages of everything”.
Combined with both energy uncertainties and labor market frictions to match workers with plentiful demand, this pushes up both cost and price inflation. It can no longer be assumed that technological innovation will permanently reduce costs and increase the responsiveness of the offer. This is especially the case given current supply chain issues.
The emphasis on what all of this means for advanced economies and China is understandable. They are a large part of the engines of growth and capital flows in the global economy, and they determine what is seriously pursued on the multilateral agenda.
Yet the implications for commodity-importing developing countries in general, and low-income economies in particular, are far greater.
Combined with the wider impact of Covid-19, the current problems risk derailing the longer-term process in which more countries steadily climb the economic development ladder, lift citizens out of poverty and establish financial and institutional resilience.
As growth slows in China and the United States in the face of stagflationary winds blowing through the global economy, the challenges to the well-being and financial sustainability of these countries are increasing. The pressures come as the classic growth model for them – that of labor-intensive manufacturing focused on exports – has already lost its force.
As net food importers, many developing economies face higher import costs which also fuel food insecurity. Higher energy costs threaten to lead to blackouts that would cripple industrial production.
Developing economies are also likely to be the target of disruptive trends in financial markets. In recent years, the prolonged pursuit of ultra-accommodative monetary policies in the United States and Europe had “pushed” substantial capital into the developing world in search of higher returns.
If the US Federal Reserve continues to lag behind the realities of inflation and is subsequently to be forced into a sudden tightening of policy, the greater the likelihood of large cash outflows and rising costs of the economy. capital is great.
There is no miracle solution to ensure an immediate and substantial reduction of these risks. Instead, what is needed is a multi-measure approach. This should be focused on increasing the supply of Covid vaccines. As IMF research director Gita Gopinath said last week, 96% of the population in low-income countries is still unvaccinated.
The crippling debt service problems should also be prevented through early and orderly restructuring that involves equitable burden sharing between public and private creditors. In addition, the flow of concessional finance from multilateral sources needs to be increased.
Such measures must be combined with credible and local efforts to revitalize national growth models in developing countries and increase internal financial resilience.
Advanced economies should note that problems in the developing world will affect them as well. The more developing countries are at risk of being excluded from the convergence process, the greater the likelihood of migratory surges, global financial instability and geopolitical threats.
There are also implications for investors. Successful investing in emerging markets is less and less about riding the wave of global liquidity using passive products. Instead, investors increasingly need to go back to detailed credit analysis, smart structuring, proper pricing of liquidity and, for some, an understanding of the risk of debt rescheduling.
The longer they delay making this fundamental transition, the more likely they are to be shocked by portfolio adjustments that fuel contagion in the markets. It would also complicate an already contested prospect for global prosperity and social well-being.