Disparities in economic recovery

Mahmoud Mohieldin
Tuesday 16 Apr 2024

While the US and Japan have seen signals of economic recovery, other countries are mired in meagre financing, increasing debt, declining investment, and geopolitical conflicts, writes Mahmoud Mohieldin

 

The International Monetary Fund (IMF) and the World Bank Group have just kicked off the first of their semiannual meetings in Washington, which will be followed by another series of meetings at the UN in New York on financing development.

The reports to be discussed by the delegations from around the world participating in the meetings attempt to monitor and forecast the state of the global economy, especially in terms of growth and inflation. However, out of the need to promote a sense of recovery, some of the circulated reports pay scant attention to the overall weak growth and the disparities in its rates among the world’s economies.

They also ignore how inflationary factors continue to defy monetary tightening and the high for longer interest-rates. The developed and developing countries alike are feeling the strains of geopolitical conflicts and protectionist measures that have fragmented the global economy and prevented trade and investment mechanisms from doing their part in driving up growth from the current 3.2 per cent it settled at last year, which it is expected to remain during this year and next.

The disparity in economic performance among the developed countries is impossible to ignore. The US economy is improving relative to other economies due to labour-market flexibility and increased productivity. Japan has shifted from negative to positive monetary policies, raising interest rates for the first time in 17 years to between zero and 0.1 per cent and boosting the average wage above the consumer price index. At the same time, the Japanese stock market is experiencing the highest volume of trading it has seen in more than three decades.

By contrast, the European economies are not faring so well. UK economic indicators point to an extended period of low growth and continued inflation driven by fiscal constraints and expectations of major political changes. In the Eurozone, growth last year and this has fluctuated between 0.4 and 0.8 per cent.

The German economy has departed from the customary robustness it experienced before this decade and the onset of successive crises, including the war in Ukraine. This downward trajectory is the product of the German economy’s dependency on external factors. Above all, it has relied on cheap energy from Russia, inexpensive production inputs from China, and exports of finished or intermediate manufactured products at competitive rates.

Recent geopolitical conflicts and protectionist restrictions have disrupted such advantages, which explains the urgency of German Chancellor Olaf Scholz’s visit to Beijing this week to boost investment and trade. China has been Germany’s top trading partner for the past eight years.

Meanwhile, the Chinese economy is trying to escape the “middle-income trap.” After 30 years of high annual growth rates of close to 10 per cent until the end of the 2010s, growth in China has now fallen to between half and one-third of that rate. Economist Nouriel Roubini, who recently took part in this year’s China Development Forum in Beijing on the theme of “The Continuous Development of China,” attributes the slowdown to domestic factors such as the rapid ageing of the population, problems in the real estate sector, and mounting public and private debt.

“In this new period of deglobalisation and protectionism, China appears to have hit the limits to export-led growth. The West’s geopolitically motivated technology sanctions are constraining the growth of its high tech sectors and reducing inflows of foreign direct investment (FDI); and the combination of a high domestic household savings rate and low consumption rates is further hampering growth,” he said.

During her recent trip to China, US Treasury Secretary Janet Yellen urged Beijing to downscale its economic growth strategy. The Chinese economy, she said, was operating at “overcapacity” and its surplus production would “lead to significant risk to workers and businesses in the United States and the rest of the world.”

That surplus will probably be met with more trade restrictions based on an interpretation that reads it as the product of Chinese government support for certain industries rather than a lack of domestic demand due to increased domestic savings. This is the view of prominent Chinese economist and Beijing University professor Yao Yang, who has suggested that China should channel these savings into investment abroad, including in the US.

China has encountered other suggestions and demands from abroad to change its growth model away from its reliance on foreign investment and exports and towards greater dependence on domestic production and consumption and a greater share of the service sector in the economy. Nevertheless, participants in the forum in Beijing have continued to stress the importance of boosting industrial production.

This is also the view of Zheng Shanjie, chairman of China’s National Development and Reform Commission (NDRC), who has called for the faster upgrading of traditional industries and the fostering of emerging ones by boosting technological innovation, which requires intensive investment in digital transformation and biomanufacturing.

Growth remains high in the Indian economy, an emerging market in the G20 group of countries. It is followed by Indonesia and then by some Latin American economies, where growth may have exceeded projections, though it is still relatively low.

The performance of the rest of the economies of the Global South, apart from the high-income countries, remains weak and stirs little concern for their declining growth, rising debt, and plummeting foreign investment flows. It is sufficient to note that the funding gap for attaining the UN Sustainable Development Goals (SDG) for the developing countries has now approached $4 trillion a year. This has been accompanied by a steep decline in the net financial flows to low-and middle-income countries, while the foreign debt-servicing burden borne by these countries exceeds their spending on education, healthcare, and basic public services combined.

The situation is so grave that the latest UN report on financing for development warned of missing the last chance to achieve the SDGs, which are becoming increasingly out of reach as the 2030 target date approaches.

The economic recovery touted by some runs up against the realities of the meagre financing for development, the prevailing debt crisis, declining investment rates, and obstructions to trade due to geopolitical conflicts. The development crisis afflicting the countries of the Global South will also not spare those who imagine that their modest growth indicators or increasing stock market indices have made them immune to this situation.

 

This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 18 April, 2024 edition of Al-Ahram Weekly

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