Coronavirus, with its universal threat of disease and death, may have demonstrated exactly what the whole world has in common. The economic recovery is doing the opposite. As a World Bank Report made clear this month, the legacy of the pandemic is a wider gap between those living in the rich world and those elsewhere. Stricter monetary policy of the Federal Reserve, to combat higher inflation within its own borders, is likely to widen this gap.
As China’s President Xi Jinping told the World Economic Forum last week, when the rich world “brakes” on monetary stimulus, it runs the risk of spilling over to vulnerable middle- and lower-income countries and eventually causing a crisis that in turn affects the rich world. Many of these countries have already suffered permanent blemishes from the pandemic as governments have struggled to deploy the same fiscal firepower as advanced economies to keep workers employed and businesses open by lockdown.
The result was a “two-track” global recovery: output in advanced economies is forecast to return to 2019 levels by 2023, while in emerging economies it remains well below pre-pandemic trends. Progress towards a more equitable recovery, both from the pandemic and the recession it caused, will require global cooperation.
The first task is to ensure equal access to vaccines. These, perhaps even more than stimulus efforts, were necessary to resume economic activity in the rich world. But getting economic growth back to where it needs to be will also require what the World Bank politely calls “financial resources.”
With large central banks tightening monetary policy, financing conditions for emerging economies will only get worse. Many poorer countries are likely to pursue fiscal retrenchments to maintain their access to bond markets, only at the moment when cross-border capital flows can be reversed. Middle-income countries that have used the decades of cheap money to pursue reform efforts and strengthen their foreign exchange reserves will be in a much better position than those, such as Turkey, which have encouraged credit-driven upswings.
The position of the very poorest countries is the most difficult. Finding a way to offer help should be an urgent global priority. Attempts so far have consisted of flawed declarations of benevolence and half-hearted steps towards the establishment of mediocre debt relief programs. The current “common framework” set up by the G20 in November 2020 to deal with the debt problem is unsuitable: private creditors have little to no incentive to participate in its processes, which are cumbersome and unclear. Almost no nation was willing to get involved with them for fear that they would be named “basket cases”.
Granted, creating effective debt resolution programs has become more difficult lately. The emergence of new lenders to frontier markets, although welcome, has made it more difficult to bring all creditors to the table. But not even the most rosy vision reveals any real global attempt to confront the issue of debt in poor countries with the degree of seriousness it deserves.
Although advanced economies trying to emerge from the pandemic face their own complex problems, the issue of unfair global recovery – and its relationship with existing debt burdens – cannot be ignored. Doing so would recklessly endanger decades of poverty reduction. Self-interest alone should persuade richer countries to take action: the effects of emerging poverty, much like viruses, are rarely confined to national borders.