The World Economy Needs to Get Its Growth Back Without free-market policies that encourage dynamism, the current drift may persist for years. By David Malpass
The global economy is facing dangerously slow growth of 2% or lower. As I near the end of my term as World Bank president, I’m discouraged by the lack of resolve and action. I worry that slow growth may persist for years.
The world is digesting the huge buildup of government debt relative to gross domestic product, normalization of artificially low interest rates, and a system allocating capital away from small businesses and toward bond issuers, especially governments and the largest businesses. The result is reduced dynamism at home and fragility abroad.
The challenges are unprecedented. Government debt levels, both current and projected, are an order of magnitude larger than in previous crises, undercutting growth. The U.S. national debt is projected to grow toward 200% of GDP, not counting the excessive debt of some state and local governments and their opaque public pension liabilities. Governments in Japan and Europe also have large debt overhangs, especially troubling given their declining populations.
Excessive government debt raises doubts about whether the private economy can produce enough output and profit to carry the burden. Central banks in advanced economies have delayed the day of fiscal reckoning through postmonetarism—borrowing from the private sector to buy trillions in government bonds to flatten the yield curve. But this leaves them with monumentally oversized balance sheets and costly losses on their bonds. The distortions may delay recovery for years.
Many developing countries are at particular risk from these slow-growth policies and their own excess debt. Growth in developing countries excluding China is slowing substantially, to about 3% in 2023. This isn’t enough to keep up with population growth or narrow the gap with higher-income countries. For the poorer developing countries, the danger is acute from currency depreciation, rising debt-service costs, and the collapse of their international reserves. More than 60% of low-income countries are at high risk of debt distress or in it.
This was discussed at the Group of Seven summit in Hiroshima, Japan, this weekend, but responsibility remains with the Group of 20, which includes Russia and China and seldom makes progress. With meaningful progress on debt reduction stalled, access to global and regional funding markets has fallen sharply, causing governments to drain domestic markets and banks, crowd out the private sector and further reduce growth.
Also weighing on development, the advanced economies and China are absorbing huge additions of natural gas and coal as they diversify from Russia, shut down existing nuclear power, and backstop their electricity grids to try to stabilize the intermittency of renewables. For developing countries, the resulting high prices and reduced availability of natural gas and coal cause reductions in access to fertilizer and food, deteriorating nutrition, instability in electric grids, and rapidly increasing reliance on diesel generators, low-quality coal and heavy fuel oil. These present grave obstacles to growth and investment and contribute to the fragility on display in many developing countries.
Looking beyond the 2023 downturn, the developing world faces a stark dichotomy: Advanced economies are absorbing more capital as interest rates rise on gigantic debt burdens, the peace dividend of the 1990s expires, and their populations age. Yet for the poorer countries, access to global capital has largely dried up even as their populations grow. All the while, their resource needs for infrastructure, climate costs, human capital and debt repayment are reaching far beyond the available supply, many face attacks by insurgents using sophisticated weaponry and external backing, and China’s soft power increases.
Solutions exist. First, markets are forward-looking, so credible government spending restraint would provide immediate encouragement to growth-oriented investment. Restraint that forces debt-to-GDP ratios to stabilize and then decline (without threatening default) would allow market-based capital flows to resume. Second, central banks should put more focus on policies that encourage currency stability and supply creation, not only demand destruction. They should give up their bond holdings and reduce their massive short-term debt. Combined with distortive credit regulation, current policies concentrate capital in narrow segments of the advanced economies and slow growth elsewhere. These policies need to be replaced to restart growth. This is discussed in international meetings but rejected in favor of the status quo.
The world needs a range of strong policies that spur production to combat inflation. With no change, the likelihood is a long period of slow global growth and downward asset repricing. Capital will continue moving in the wrong direction, toward a narrow group of “sinks”—governments, big corporate borrowers, excess consumption—rather than to small businesses, working capital and forward-moving developing countries that could add to long-term global growth.
Mr. Malpass is president of the World Bank Group.
Comments are closed.
