As the world nears the midpoint of what should’ve been a transformative decade for development, the global economy is set for the weakest half-decade performance in 30 years, according to the latest edition of the World Bank’s Global Economic Prospects report. By one measure, the global economy is in a better place than it was a year ago, but mounting geopolitical tensions could create fresh near-term hazards for the world economy.
What will this mean as we look at the year ahead? Can boosting investment and strengthening fiscal policies help us turn the tide, or are we too late? Ayhan Kose, the World Bank’s Deputy Chief Economist, joins Expert Answers to discuss.
Timestamps
00:00 Welcome: Introducing the topic and the expert
00:56 Main insights: Global Economic Prospects report, January 2024
03:04 Global slowdown and developing economies
05:32 Generating a sustained investment boom
07:29 Boom-bust cycles and commodity-exporting developing economies
09:54 Ensuring developing economies are making significant progress
12:04 Implications of this report for the World Bank
14:54 Thanks Ayhan for sharing your expertise!
Transcript
[00:00] WB Expert: - This decade was supposed to be a transformative one. This is going to be the weakest half decade growth since the early 1990s. (upbeat music)
Host: - On this episode of "Expert Answers," the focus turns back to the global economy as we unpack the latest in our January 2024 edition of the Global Economic Prospects report. The headline for this year, that as the world nears the midpoint of what should have been a transformative decade for development, the global economy is set for the weakest half-decade performance in 30 years. Now, what will this mean as we look at the year ahead? Can boosting investment and strengthening fiscal policies help us turn the tide, or are we too late? To answer these questions and give us a sense of what to expect, I spoke with the World Bank's Deputy Chief Economist, Ayhan Kose.
[00:56] Host: - Well, Ayhan, thank you so much for joining us back on "Expert Answers." I know we check in with you and your team every January and June for the latest edition of the Global Economic Prospects report. And when we spoke last June, you had mentioned an ongoing global growth slowdown. What is the latest, tell me what the headlines are for this year's report.
WB Expert: - So there are some good news and not so good news. Let me make three points very quickly. The first one is that the good news, the global economy has been remarkably resilient. Growth last year surprised on the upside thanks to the US economy, the strength of the US economy. But some large emerging markets like India, Indonesia, Brazil, Mexico, delivered robust growth rates. Inflation has been coming down without a major slowdown. Interest rates went up significantly, but we did not see a major financial crisis in a large economy. So all in all, there is resilience, and we should be happy about it. Having said that, you know, there are not so good news as well. The second important point, the slow down you mentioned will continue. The third year in a row, we will see weaker growth in the global economy. Growth this year will be around 2.4%. It was 2.6% last year. For emerging market developing economies, growth is going to be a tad below, around 3.9%. And the third point is that external conditions are remaining very difficult for developing economies. Geopolitical tensions are on the rise. Financial stress is a possibility because very high real interest rates. Yes, inflation is gonna continue coming down, but not to the levels central banks are comfortable with, at least in this year. That means real rates will remain high. Trade is very weak. Last year, there was almost no growth in terms of global trade. So the situation remains fragile.
[03:04] Host: - So I think in a way what you're saying is that the global economy is in a better place than it was a year ago in that global growth was better than expected and inflation has been coming down. But it seems that we're still sort of having a global slowdown. And as we're nearing the midpoint of what should be a transformative decade, it seems like we're missing some crucial development gains. So I'm curious to hear what your thoughts are on how this is impacting developing economies and some of the world's poorest and even adverse prone countries.
WB Expert: - Indeed, this decade was supposed to be a transformative one. By the end of 2030, global community wanted to reach the sustainable development goals, eliminating extreme poverty, reducing greenhouse emissions by a half. Now, 2024 is the halfway mark when we think about this decade. And when you look at the growth for the half decade, we have been going through, this is going to be the weakest half decade growth since the early 1990s. When you look at how much growth we are expecting in emerging developing economies, it's going to be a percentage point lower than what they delivered in the previous decade. In the context of low-income countries, fragile conflict states, a majority of them still having problems in terms of making progress in reducing poverty. In fact, 40% of them will see even lower per capita income by the end of this year than what they had prior to the pandemic. This is coming on top of very significant risks they have to deal with. I mentioned geopolitical tensions. We had Russian invasion of Ukraine. That's still there. But now we have a conflict in the Middle East. Escalation of these conflicts could increase energy prices with serious implications for inflation and economic growth. Financial stress is a serious threat in an environment you have record high real interest rates. Inflation could be persistent. And of course we have weaker than expected growth in China is a real possibility against the background of more frequent and more costly climate-related disasters. So all in all, it is a very difficult picture for development.
[05:32] Host: - So Ayhan, this report presents a first ever global analysis of what it'll take to generate a sustained investment boom. Talk to me more about this. What is an investment boom? And why do you think it's gonna be so critical for developing economies?
WB Expert: - So things could be worse, but they can be better. And the critical ingredient there is investment growth. There are very large investment gaps when we think about meeting sustainable development goals, delivering the type of necessary infrastructure investment in the context of climate. So countries need to increase investment growth. What we have done in this latest report, we looked at sustained rapid increase in investment in more than 100 countries over the past 70 years. So when countries increase investment to 4% per year, on average over a six-years period, they end up seeing significant dividends. Output growth goes up from 4% to 6%. Productivity growth quadruples. Poverty at the national level comes down. And all of these things happen with an increase in exports with a larger amount of foreign direct investment coming to these countries. Of course, the big issue is that there is no causation here. But the regular occurrence of these sustained investment booms and transformative changes in terms of macroeconomic outcomes and development outcomes is telling us that the type of message we are giving to developing economies in terms of pushing investment is critical for them to make progress.
[07:29] Host: - So Ayhan, roughly two thirds of these developing economies are commodity exporters. And this report also sheds light on fiscal challenges that these economies face and what they can do to avoid something called boom-bust cycles. Tell me more about this. What are boom-bust cycles? And why are they so significant for commodity-exporting developing economies?
WB Expert: - So as you said, a big chunk of developing economies are commodity exporters. They get a lot in terms of their exports, government revenues from selling commodities. Commodity prices tend to be very volatile. So when commodity prices go up, they tend to basically provide more fiscal support. So when they have a boom, that boom is amplified. But commodity prices go down, they tend to withdraw the fiscal support, so the downturn ends up being deeper. In other words, you have these boom-bust cycles because of the procyclicality of fiscal policy, how fiscal policy moves with the commodity cycle, you end up seeing even more amplified business cycles. And this is a big problem. In the context of commodity exporters, fiscal policy is 30% more procyclical. Fiscal policy is 40% more volatile than other developing economies. And this creates a huge drag on economic growth. So what they should do? It is, in a sense, simple. They need to follow the Hippocratic rule and say, first do no harm. Fiscal policy should stabilize the business cycle rather than amplifying it. For that, they need to institute well-defined, disciplined fiscal frameworks. They need to adapt the type of exchange rate regimes. They are going to have the buffer against the commodity shocks. And they need to ease the, basically, cost of transactions when it comes to the financial access. Now, is it easy to do all of these things? No. But when you look at countries, they implemented fiscal frameworks in strong institutional environments, the fiscal rules, saving funds, the sovereign wealth funds, they tend to see better growth outcomes.
[09:54] Host: - So Ayhan, from what you've been saying here today, it sounds like without a major course correction, the 2020s could really go down as a lost decade for developing economies. What do you think can be done to ensure developing economies are making significant progress in overcoming some of these challenges that they're facing? And how do you think, you know, sparking investment booms could help?
WB Expert: - So there is no question that there are significant challenges. But we can, and we should overcome these challenges. And we have good ideas how to do that. At the global level, we need to strengthen global collaboration to basically deal with the common problems the global economy is facing, providing debt relief, especially for the poorest countries, dealing with the climate problem, dealing with food insecurity. All of these things will require we use the rule-based multilateral system, and we work together. At the national level, these investment booms are critical. How countries can basically trigger these types of booms? The secret sauce is always a comprehensive policy package. They need to consolidate their fiscal and financial positions. They need to improve their fiscal, monetary, financial frameworks. They need to improve their institutions. They need to improve business climates. Doing all of these things in the context of comprehensive package is not easy. But you know, we are in a new year. New year resolutions are never easy to basically maintain. But the bottom line is that those countries' debt stuck to their resolve and deliver in terms of these policies so significant dividends. They have done before. We looked at more than 200 cases. We zoomed in 10 countries that basically made leap and bounds with investment booms, and they can do it again.
[12:04] Host:- So Ayhan, we're kind of at a critical point then for the World Bank, right? We've got the Bank's Evolution Roadmap, IDA 21 campaign underway. Before I let you go, Ayhan, I wanted to conclude with an institutional question. What are the implications of this report for the World Bank?
WB Expert: - Now, we went to the Annual Meetings in Marrakech, we went to the G20 meetings, we went to COP28. We repeatedly heard that countries are looking to the World Bank more than ever, not just for financing, but for advice and informed policy guidance. In other words, they're looking at the knowledge side of the Bank. In the context of Evolution Roadmap, in the context of IDA campaign, in the context of global priorities, the knowledge side of the Bank will play a critical role. In the context of this report, let me just talk about three things. One, think about the Evolution Roadmap. We are refocusing the priorities of the institution, trying to improve the efficiency of operations, optimize the balance sheet to have, you know, measurable development impact. All of these things we are doing to improve investment prospects. In this report, we are explaining what national governments can do to increase investment. In the context of IDA campaign, the second item, IDA countries are mostly low-income countries, lower middle-income countries. These countries are not making enough progress when it comes to elimination of poverty. A big chunk of them are still struggling in terms of delivering per capita growth to basically commercial income levels of advanced economies. The report zooms in the state of low-income countries and explains even though there has been a little bit improvement when it comes to economic growth, still growth, in general, disappointing, conflict and tensions basically impeding progress in these economies. And half of them are in serious debt distress. And think about the issue of fiscal policy. Climate change, geopolitical tensions will translate into even more volatile commodity prices. Two thirds of developing economies are commodity exporters. They need to have informed advice to formulate policy. In this report, we are providing the most comprehensive, cutting-edge assessment of procyclicality and volatility to inform the membership, and we will do to the best of our ability.
[14:54] Host: - It's really an era of polycrisis, right, that make things a lot more difficult. But Ayhan, thank you so much for joining me here today on "Expert Answers" to Talk more about this edition of the Global Economic Prospects report. I look forward to seeing you back again in June to see where things stand.
WB Expert: - Thank you.
Host: - Thank you. (upbeat music) A huge thanks to Ayhan Kose, the World Bank's Deputy Chief Economist for joining me on "Expert Answers" to talk more about the state of our global economy and what we can expect as the year unfolds. You can, of course, get your very own copy of this year's Global Economic Prospects report to read through. It's filled with analysis and data on the areas that we've touched upon here today. In particular, this edition also highlights the potential of investment booms in helping developing economies, and why it'll be so important to avoid boom and bust cycles and commodity exporters as we look ahead. Head on over to www.worldbank.org/gep to download your copy. Thanks for joining us here on this edition of "Expert Answers." I'm Srimathi Sridhar, and until next time, goodbye.
ABOUT WORLD BANK EXPERT ANSWERS
Every episode of Expert Answers sits you down with a World Bank specialist: an expert answers with expert answers. From debt relief to gender equality. From COVID-19 response to inclusive growth, and much more. Our goal is to help you understand some of the biggest issues in international development today by asking our colleagues about what works on the ground and what we can do to meet the biggest global challenges. Watch previous episodes of Expert Answers!
ABOUT THE WORLD BANK
The World Bank is one of the world’s largest sources of funding and knowledge for low-income countries. Its five institutions share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development on a livable planet.