A message for a world out of joints

Mahmoud Mohieldin
Tuesday 17 Oct 2023

Mahmoud Mohieldin writes on the main messages from Marrakesh on this year’s World Bank and International Monetary Fund annual meetings

 

The World Bank and International Monetary Fund (IMF) wrapped up their week-long annual meetings in Marrakesh on Sunday, a city that the historian Ibn Khallikan described seven centuries ago in his famous encyclopaedic work “The Deaths of Eminent Men and Accounts of the Sons of the Past” as a spacious city that combines fresh water, a temperate climate, a benevolent soil, and plentiful fruit. The Moroccan city remains like this today, with its unique charm and excellent modern capacity to serve as the perfect host of a range of major international events.

Despite the ordeal that Marrakesh and the surrounding neighborhood suffered from in the devastating earthquake several weeks ago, the city succeeded admirably in doing what was required and more to facilitate the work of the participants at the annual meetings of the two Bretton Woods institutions.

The meetings were attended by some 12,000 people from 189 Member States with  delegations led by finance, economy, and development ministers, as well as central bank governors. There was also a heavy turnout from private sector leaders and representatives of international and civil society organisations and the media.

Perhaps Morocco’s successful hosting of the meetings and the progress it has made in recovering from the earthquake are among the few bright spots that one can take comfort in during these dismal times of mounting polarisation and conflict. This is all the more the case following the outbreak of the latest catastrophe in Gaza, as though the world did not already have a surfeit of crises and disasters and a paucity of mutual trust, leaving it unmoored and bewildered, barely recovering from one shock before it finds itself reeling beneath another and watching the gains from development and progress slip away.

A recent IMF report described the global economy as “limping along,” citing projections that growth will slow from 3.5 per cent in 2022 to three per cent this year and 2.9 per cent in 2024. While the US economy has proven resilient thanks to increased investment and consumption, growth forecasts for the Eurozone have been revised downward. China, too, is looking at lower growth, and this presents risks for the global economy, not just because of the sheer size of the world’s second largest economy but also because of its dense network of links to the rest of the world’s economies as the world’s largest exporter and importer and through its extensive investments in world markets.

Economic projections for the emerging markets and developing nations predict that growth will remain steady at four per cent for this year and the next, although for the Middle East, which includes many Arab countries, growth is projected at two per cent in 2023 and 3.4 per cent next year. However, there are considerable divergencies between the countries in the region and between income brackets.

According to the report, average global inflation has fallen from 9.2 per cent in 2022 to 5.9 per cent this year, and it is anticipated to decline further to 4.8 per cent in 2023. Even so, the major central banks in the US and Europe believe that their job of driving down inflation is not over yet and as many countries will not be able to bring inflation down to target before 2025.

This helps to explain the “higher-for-longer” interest rates, we are hearing from various central banks these days. The trajectories of prices in the service sector, real estate, and basic commodities combined with labour market conditions will be among the main determinants of monetary policy in the coming period.

Unfortunately, international financial institutions’ prospects for recovery using off-the-shelf prescriptions are not sustained by political economic dynamics, the current state of political polarisation, and the fragmentation of the global economy. They propose restructuring financial-shock mitigators to reduce risk, but they have not done the work to clarify how this can be achieved in low and middle income countries whose debt-service payments consume more of their budgets than the amounts they are able to spend on education and healthcare combined.

It is also hard to understand how they can ask the developing nations to reduce their budget deficits at a time when high interest rates are adding to the costs of foreign and domestic public debt, public spending is rising due to higher commodity prices, and revenues are falling due to slower economic growth and lower net corporate revenues.

Equally odd is the international financial institutions’ call to uphold the foundations of international cooperation as a driver of economic growth and prosperity when we are well aware that the desired cooperation is at an all-time low and extremely underfunded. Moreover, they may realise that the actions of some industrialised nations regarding green initiatives fly in the face of the World Trade Organisation’s (WTO) free trade rules and increase both the risks and the costs of investing in green transformation in developing nations that are caught between the rock and the hard place of the developed nations’ protectionist measures and the generous national subsidies.

The renowned economist Dani Rodrik argues that geopolitical conflicts have caused the return to protectionism, while another respected economist Penelope Goldberg believes that the reverse is the case: the protectionist measures have fuelled geopolitical conflict. But whether due to the chicken or the egg, the world is losing its way between geopolitical conflicts and the surge of economic and commercial protectionism.

Turning to the Arab region, some of the proposals voiced at Marrakesh were summed up in the IMF Managing Director’s “Call for Action on Inclusive Growth” that was published following the meeting with ministers of finance and central bank governors from the Middle East and North Africa (MENA) region.

They include support for the private sector, reforming the social security and protection systems, creating opportunities for youth, eliminating barriers to the participation of women in economic life, and making green investment an engine for growth and job creation.

The recommendations are well-known and are supported conceptually and practically by many countries. But doing all this in low- and middle-income countries of the region and beyond has certain requirements that generally entail fighting the ills before reaping the benefits. Foremost among the ills is the increasingly severe debt burden that needs to be addressed before mounting liquidity problems lead to the brink of default. Other ills are coming to the region’s way from the repercussions of the EU’s Carbon Border Adjustment Mechanism (CBAM) and associated measures of the new industrial policies currently adopted in the US and other major advanced economies.

There are also the illicit financial flows out of the developing nations that are harming their economies and damaging the development of their societies. These and other ills have caused net financial flows to the developing countries to fall to zero or below, a problem we will discuss in more detail in a coming article.


* This article appeared in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 19 October, 2023 edition of Al-Ahram Weekly

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