The International Monetary Fund (IMF) and World Bank have just concluded their semi-annual meetings for the Spring of 2024. 

The meetings of ministers and central bank governors from 190 countries took place against a backdrop of tragic wars, slow economic recovery, and widening inequality. They endorsed an agenda that diagnosed vulnerabilities and prescribed solutions based on extensive analytical work and discussions. But how can both the high-income and developing countries become more effective in implementing this agenda to successfully address global and national economic challenges, especially in the context of today’s geopolitical rifts?

Economic growth is slowing and diverging. The 2024 global growth outlook has been downgraded to about three per cent in real terms. After accounting for the increase in population, growth in per capita income would be close to two per cent. This is about a third less than the annual growth achieved in the two decades preceding the Covid-19 pandemic. And actual growth may be even more modest if official measures of inflation are underestimating the increases people are observing in their day-to-day cost of living. 

What is worse is the divergence in economic fortunes within and across countries. In the developing countries, most of the growth is accruing in India and China. Among the advanced economies, the US has fared much better than Europe and Japan, and the trend of wealth concentration has continued.   

Public debt has reached very high levels virtually everywhere. Against a background of persistent inflation, this is commanding high interest rates globally, which have raised the cost of servicing public debt, including for low-income countries. 

The investments they need to raise their living standards have now become more expensive. The continued increase in the size and influence of mega-corporations has also contributed to inflation, as it has allowed them to maintain high product prices despite gains from remarkable advances in technology and a significant easing of supply chain bottlenecks. Profits and stock prices have soared. 

Real estate prices have also continued to increase, partly due to the large fiscal handouts in the advanced economies during the pandemic. These support packages have contributed to both the buildup of financial vulnerabilities and the increase in public debt. The developing countries are now paying the price for the policies of the advanced economies, largely due to the increase in global interest rates. 

High interest payments to service the poor countries’ public debt are crowding out spending on education, healthcare, and social support. Furthermore, the increased external debt-servicing has weakened the exchange rates of many of the developing countries’ currencies, making essential imports unaffordable with serious repercussions for nutrition and the availability of basic medicines. 

Young people in the advanced economies will also bear some of the cost, as they will eventually have to pay back the debt. The fiscal-support packages introduced in these economies were essential to keep the world going and mitigate the pandemic. The problem has arisen from their magnitude and imprecise targeting.  

The IMF agenda recognises much of the above, although it could have acknowledged more explicitly that much of the poor’s pain was a consequence of actions originating in the advanced economies. The global powers should take more responsibility for the spillovers of their policies. They are now making an effort to better coordinate their policy actions, give more attention to global spillovers, and increase concessional financing for the developing countries. This is a good start, but more progress is needed.

There is also an urgent need to reverse the increasing geopolitical polarisation that is exacerbating the world’s economic challenges. The tragic conflicts we are witnessing around the world are creating unacceptable human suffering. They are also creating new supply chain bottlenecks and future liabilities in terms of rebuilding and relocating expenses. The world will eventually have to bear these costs and take responsibility for its inexcusable inaction. 

The widening geopolitical rifts between the world’s major powers have allowed these horrific conflicts to continue. They are also fuelling the ongoing global economic fragmentation. Their weaponisation of international trade and payment systems by imposing tariffs and bans is leading to reciprocal retaliation and escalation. 

Economic sanctions can be useful in penalising and deterring bad behaviour, although they typically hurt innocent populations more than the autocrats who rule them. Another unintended side effect of sanctions is that they raise third-party fears that they may become subject to them in the future at times of political disagreements. Such fears are already incentivising the development of parallel networks of trade, payment systems, and alternative reserves that are less susceptible to international confiscation. 

The evolution of such parallel networks is reversing some of the benefits of global integration and reducing its useful role in cementing international security. Reassuring the international community that sanctions will only be used in exceptional circumstances would help preserve global integration and collaboration. 

Enhancing global collaboration can also be facilitated by more equitable representation in international financial institutions like the IMF and World Bank. The voting power of each member country in these two institutions is proportional to its role in the global economy, giving the major economies a large share of the voting power. 

While this is a practical necessity in order for these institutions to remain relevant, it is also important to update the weights of the voices of the developing and emerging economies in them to better reflect their steadily increasing role in the global economy. There has been some, albeit still insufficient, progress in this regard. The share of China in these institutions has been gradually increasing, and an additional African director will join the IMF Executive Board in November. 

There are two other ways that should be considered to further advance equity of representation. One is increasing the relative size of the basic voting rights that are granted to each member country regardless of the size of its economy. A more transformative change would be creating a fully equitable voting system that could be non-binding or limited to certain decisions. 

Such increased equity would enhance the global ownership of the agenda and support its implementation. It would also help to augment the voice of the developing countries and partly compensate for the colonial legacies that have held them back and have allowed most of today’s advanced economies to accumulate the physical and human capital that largely determines their present-day dominance. 

Mending geopolitical rifts is a challenging and lengthy process and is beyond the control of the developing countries. So, what should they do to improve the livelihood of their citizens?

Economic reforms should not await improved policy coordination among the global powers or a more equitable representation of global decision making. Notwithstanding adverse external factors, individual countries should still hold themselves accountable for their performance. Countries that managed their economies well, did not take uncalculated risks, and exercised good governance were able to do much better in protecting their populations from global shocks and positioning their economies to benefit from opportunities. 

The Spring Agenda provides several valuable recommendations for developing countries on how they can consolidate their fiscal balances while protecting the poor, dealing with balance-of-payments shocks, and introducing structural reforms to boost inclusive growth, and these can be adapted to suit domestic conditions. 

While domestic reforms and sound economic management are key, enhancing global collaboration will create a more enabling environment that will support domestic efforts to help bring about a better world free of poverty and conflict. 

* The writer is former IMF mission chief to various advanced and developing economies and a former senior adviser to the dean of the IMF Executive Board.

* A version of this article appears in print in the 25 April, 2024 edition of Al-Ahram Weekly