As Global Growth Slows, Developing Economies Face Risk of ‘Hard Landing’

As coronavirus-weary countries enter the third year of the pandemic, global growth is expected to slow sharply. Against this difficult backdrop, a variety of economic challenges mount for emerging market and developing economies (EMDEs)—including continued COVID-19 outbreaks, elevated inflation, record debt levels, and rising income inequality.

The latest Global Economic Prospects report predicts that global growth will decelerate from 5.5 percent in 2021 to 4.1 percent in 2022 and 3.2 percent in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world. The rapid spread of the Omicron variant, moreover, indicates that the pandemic will likely continue to disrupt economic activity in the near term. Among EMDEs, growth is expected to drop from 6.3 percent in 2021 to 4.6 percent in 2022 and 4.4 percent in 2023.

The outlook poses particular dangers for EMDEs. First, the notable deceleration in major economies—including the United States and China—will reduce external demand for goods and services for many EMDEs. Moreover, the slowdown is occurring just when governments in many of these economies are running out of policy space to respond, if necessary, to the emerging challenges: new COVID-19 outbreaks, persistent supply-chain bottlenecks and inflationary pressures, and elevated financial vulnerabilities in large swaths of the world. The combination of these threats could increase the risk of a hard landing in these economies.

“Advanced economies and emerging market and developing economies are on two different flight paths,” said Ayhan Kose, Director of the Prospects Group at the World Bank. “While slowing, advanced economies are still flying high, and their combined output is expected to go back to the pre-pandemic trend by 2023. Emerging and developing economies, however, are flying low—and they do not have much gas left to use in terms of policy space if they encounter headwinds. That’s why we’re worried about a hard landing.”

Income Inequality on the Rise

The COVID-19 pandemic increased global income inequality, partly undoing two decades of progress in lowering inequality and disproportionately affecting vulnerable groups and EMDEs, where income inequality is considerably higher than in advanced economies.

Significant increases in between-country inequality are the result of the two-track pandemic recovery, while a moderate increase in within-country inequality in EMDEs reflects the severe income losses and employment disruptions experienced by vulnerable groups: lower-income households, low-skilled and informal workers, and women. Within-country inequality remains particularly high in Latin America and the Caribbean and Sub-Saharan Africa, where about two-thirds of the world’s extreme poor lives.

But inequality spans more than income, particularly in EMDEs and low-income countries. Vaccine coverage remains highly uneven across the world. Troubled by procurement obstacles, just 8 percent of the population in low-income countries has received at least one dose—a rate that will result in only about one-third of the population receiving one vaccine dose by the end of 2023 at current rates. About 55 percent of the total population of EMDEs is vaccinated, compared with more than 75 percent in advanced economies.

Pandemic containment measures have severely disrupted children’s learning, intensifying educational inequality. Telecommuting and digital opportunities such as remote education have not been equally accessible to low-income households. Gender inequality has also increased and informal workers have suffered particularly large job and income losses.  

Over the long term, within-country inequality could continue to rise, as countries face rising inflation—especially food price inflation—and pandemic-related disruptions to education.

Commodity-Price Cycles: An Opportunity for EMDEs

Nearly two-thirds of EMDEs rely on commodity exports for growth and development—and more than half the world’s extreme poor live in commodity-exporting EMDEs. These countries are increasingly buffeted by boom-and-bust commodity cycles, the causes of which are often beyond their control.

Commodity prices soared, with prices of several commodities reaching all-time highs last year. That followed a steep and broad-based slump in 2020, a result of the COVID-19 shock. Both the plunge in 2020 and their subsequent rebound were stronger than after any previous commodity cycle during global recessions in the past half-century.

These types of commodity cycles could constitute an opportunity for EMDEs as documented in the latest Global Economic Prospects report: over the past 50 years, commodity-price booms were often larger than busts. On average prices increased 4 percent per month compared with an average decline of 1 percent during slumps. The average boom-bust cycle was about six years.

That means, governments in EMDEs can use booms to gain a stronger footing to cope with economic shocks. For example, oil exporters could use the opportunity afforded by currently higher oil revenues to rebuild fiscal space and direct spending toward addressing longer-term challenges. Countries can also take measures to reduce reliance on commodities by diversifying exports and national asset portfolios. Those assets include physical as well as human capital: countries can use such revenues to increase investment in health, education, and digital infrastructure, for example.

Debt Challenges: Not Repeating the Same Mistakes

Global debt levels skyrocketed as a result of the pandemic: at a total 263 percent of GDP, total global debt has reached its highest level in 50 years.

The increase spanned government as well as private debt. It manifested in external as well as domestic debt, and in advanced economies and EMDEs alike. This surge in debt, along with the COVID-induced economic global recession, has increased debt vulnerabilities in EMDEs—especially in low-income economies. More than half of the poorest countries are already in debt distress or at high risk of it.

Debt relief and debt-restructuring initiatives will require greater debt transparency—because the current lack of clarity about debt commitments can impair debt sustainability analysis and delay relief until the country’s full debt is known.

The G20 Common Framework process is an agreement between G20 and Paris Club countries to work together on debt treatments for many low-income economies. The structure of the framework, which continues to evolve, could be improved to provide more timely relief, the report says. The experience of past coordinated debt relief initiatives suggests that debt stock reductions may reduce the output losses associated with debt distress more than debt service relief.

Decisive Policy Action Can Make a Difference

To strengthen the global recovery, comprehensive policies are needed—along with aggressive global cooperation on vaccination, debt, and climate to promote a green, resilient and inclusive recovery.

Policymakers can prioritize expenditures on projects that boost longer-term growth prospects, including those that help narrow sizable investment gaps. Stronger domestic revenue mobilization can help replenish fiscal buffers depleted by the pandemic-related collapse in revenues. It can also support an increase in public spending.

A comprehensive approach is also necessary to reverse the COVID-induced surge in global inequality. A first step should be to speed up the global rollout of vaccinations in EMDEs, the report says. But productivity-enhancing reforms are needed to boost per capita incomes. To prevent the pandemic-induced increase in inequality from becoming entrenched, fiscal-support measures should focus on the most vulnerable segments of the population.

Many of these policy recommendations will require significant fiscal resources to implement—not easy in an era of record high debt. That means stronger global cooperation will be necessary to expand the fiscal resources available to lower income developing economies. It also means bolstering rules-based global trade and facilitating an investment climate that nurtures faster productivity growth.