In the space of two years humanity has faced what has amounted to a perfect storm. The period started with the Covid-19 pandemic that has so far infected over 500 million people and killed 6.2 million, with the highest tolls in the US, India, Brazil, France, and Germany. The world was further shaken by economic contraction, soaring unemployment and poverty rates, mounting disparities in income and wealth, and a surge in the global debt wave.
In my recently published On Progress: Disruptives and Pathways (in Arabic), I observed that the Covid-19 pandemic has been a test of humanity’s ability to respond to major crises. “It turned out that the world greets impending pandemics with denial and neglect and then responds with panic and confusion after they hit. But what saves people, with the grace of God, is science and money,” I wrote.
Only after scientists raced to develop vaccines against Covid-19 and financial institutions helped with their production and distribution in the developed countries, after which they were made available to the less-developed ones, was there hope that 2022 would bring recovery and relief after two fraught years. Unfortunately, shocks in supply chains and a succession of geopolitical crises then precipitated shortages in basic commodities and services and spiking inflation rates and prices. Then the war in Ukraine hit and new challenges arose.
Policymakers were stymied by the unprecedented hikes in public spending and increasing national deficits in countries strained by the measures needed to fight the pandemic and offset its economic and social repercussions. The use of monetary tools to counter inflation came too late. The US Federal Reserve wasted precious time in debating whether or not the inflation that emerged was transitory and whether or not to intervene by raising interest rates. When the consequences of its wavering became clear, it announced that it would raise interest rates by increments over the short term. Then it sent out other messages to contain perceptions that threatened to drive inflation higher and necessitating more restrictive measures.
The confusion triggered sharp fluctuations in the money markets, which caused financial flows to flee from the developing nations, rocking their exchange rates and increasing risks of default. Even so, economic growth in the US still appears to be headed to recovery, albeit at a slower rate than expected. Economists predict that it will not exceed 3.5 per cent this year, although this will still be higher than in most other developed economies.
China has the economy best poised to surge ahead today, despite disruptions caused by a Covid variant that has forced the country into partial lockdown in keeping with Beijing’s “zero Covid” strategy. The consequent drop in consumer and investment demand has caused Chinese GDP to drop, and this has been reflected in global production rates because of China’s weight in the global economy, which has grown over the past two decades.
But China has more flexibility than other countries in how it deploys financial and monetary policy tools, which include paying out incentive and stimulus packages should Chinese economic decision-makers deem this necessary. Thanks to such interventions, the Chinese real-estate market has stabilised, inflation rates are lower than those in its trading partners, and despite its decline the Chinese growth rate will still be higher on average than in the emerging markets, let alone in the developed economies.
The Eurozone, by contrast, is staring at declining productivity, sharp income disparities, demographic imbalances, and direct contact with the political tensions that have escalated into military conflict in the east of the European continent, jeopardising the Eurozone countries’ national security and forcing them to wean themselves off their heavy dependence on Russian gas. The urgent measures they need to take to restructure and diversify energy sources will disrupt growth in certain industries and sectors and lead to further fluctuation, decline, and disparity in the growth rates of the 19 countries of the Eurozone.
The developing countries have been particularly hard hit by the waves of inflation, the soaring prices of fuel and food, and the challenges of managing foreign debt, all of which threaten their prospects for recovery and a return to pre-pandemic growth rates. The exception are exporters of oil and gas and other essential commodities, though they still have to navigate sharp fluctuations in the prices of their exports and how these will impact the distribution of wealth and inflation at home.
All this confirms my observation in the above-mentioned book that “whether they like it or not, nations are forced to take part in a permanent race that does not let up for a second. Moreover, this is a race that is indifferent to who comes first or last or who jumps over the hurdles or falls by the wayside. What is certain is that those countries that opt to slack off, blame the rules of the game, or denounce unfairness and manipulation do not stand a chance to come out ahead. Success in this race is a question of determination and resolve.”
Like for most other African and Arab countries, they must adopt the most prudent policies possible to respond to sharply fluctuating prices of imports, manage external debt, and reduce looming risks, while trying to stimulate economic recovery in a manner that is more comprehensive and at higher rates than predicted for most of them this year and next.
For these countries, the central challenge is the quality of growth. In other words, higher growth rates should be accompanied by higher employment rates and higher real incomes. “To handle disruptions to progress,” I wrote in the above-mentioned book, “nations must invest in human capital, infrastructure, technology, and the means to buffer against shocks. However, today we suffer from a disconnect between the ways we invest for development and what is going on in the financial markets. This is indicative of the need for a new approach to economic reform.”
Given the changing character of globalisation and the gradual shift in the centre of economic gravity towards the east, the Arab region must work to cooperate more effectively and in the manner of the ASEAN group of Southeast Asian countries. There is also no such thing as an “Arab economy.” What we have are desperate economies that vary in their degrees of performance and that are poorly interconnected. This is despite the existence of the prerequisites for growth in inter-Arab trade, investment, and the movement of labour. As I wrote in my book, “Arab cooperation is imperative to attain progress and contend with future challenges. It is facilitated by geographical unity and hampered by political disruptions.”
As we continue to be battered by today’s perfect storm, we read the obvious wisdom of international reports urging an end to the war in Ukraine. Perhaps they should also mention the intractable and bloody conflicts in other parts of the world. Naturally, they remind us to continue to fight the pandemic that set off the storm and its economic hurricanes and offer prescriptions for how to counter rising prices and inflation before they spin out of control and require austerity measures that will court stagflation and an even more devastating storm.
Then, as we have encountered more recently, we read about the need to remedy national debt problems before they escalate into fully-fledged crises and add more low and middle-income nations to the list of those teetering on the edge of bankruptcy. Meanwhile, we continue to hear cautions about ignoring climate change and the decline in investment in alternative energy sources and climate mitigation despite the failure of donor nations to live up to the pledges they made over a decade ago.
Ultimately, as the aforementioned book reminds us, “in the race of progress, the disruptives are as diverse as their consequences. They can cause crises related to epidemics, climate change, political upheavals, economic shocks, or technological inventions. What they all have in common is the need for us to be prepared for them and to have the flexibility to respond effectively. The winners are those who turn circumstances to their advantage.”
*An Arabic version of this article appeared on Wednesday in Asharq Al-Awsat.
*A version of this article appears in print in the 21 April, 2022 edition of Al-Ahram Weekly.