The writer is acting governor of the Central Bank of Pakistan
The world is reeling from a confluence of historic shocks. With rich nations distracted by domestic issues and geopolitical rivalries, developing economies risk being left to their own devices. The international order may not be able to survive this neglect.
As crisis piles upon crisis, 41 countries are at risk of debt distress. This is the most universally complex policy environment of our lifetime and a consequential moment for the international community.
Under normal circumstances, these headlines from the world’s leading global trade and financial institutions would sound like a clarion call for saving the developing world. But these are far from normal times and the proclamations ring hollow.
With the attention of rich countries diverted by the Russian invasion of Ukraine and the spectre of prolonged stagflation at home, the rest of the world is falling through the cracks of the global safety net that was so painstakingly erected after the second world war.
In particular, the world is not paying nearly as much attention to the problems relating to debt and capital outflows encountered by countries in Asia, Latin America and Africa as it did to similar issues faced by several European countries a decade ago. Multilateral and bilateral donor agencies have been standoffish, leaving many countries in the lurch. It is mind-boggling that the austere balance between financing and adjustment in traditional IMF programmes, suspended in the case of Europe and Argentina more recently, remains very much in vogue. Even more so as historic food and fuel inflation threatens to rip poor societies apart.
Despite all the rhetoric of social protection and debt treatments, the tools being used to assess problems in developing countries and the policy options they are being presented by the gatekeepers of the global system remain rigid and old-fashioned. And, perhaps most damagingly, the traditional shareholders of key multilateral agencies seem highly uneasy about engaging with a new world in which China has emerged as a big investor and creditor.
This is tragic, since the severe stress that developing economies are facing today is largely a reflection of two forces beyond their control. First, big simultaneous shocks in the form of an uncertain exit from Covid, the commodity supercycle and historic tightening by the US Federal Reserve. And second, an over-reliance on debt markets as opposed to equity flows propagated by the existing global financial system, which leaves countries vulnerable to shifts in sentiment, the global interest rate cycle, and dollar strengthening of the kind we are currently experiencing.
This is exactly when the institutions at the centre of the global safety net should be springing into action and providing innovative solutions — but they are not, and the consequences could be profound. At a time when globalisation is already in retreat, forcing poor countries to choose where to turn for assistance is likely to leave lasting scars. Poor countries will not easily forget how they were let down by a system that was meant to increase their living standards and protect them in an emergency.
As a result, the world could fragment into rival blocs, which would be extremely harmful for global welfare and security over the long run. Moreover, it would leave us with no hope of addressing climate change, the gravest threat mankind has ever faced, which calls for coming together, not pulling apart.
There is still time to prevent this dangerous drift. But it cannot be done without modernising the global order. While this order has helped bind the world together for the better part of the past 80 years, it has produced mixed results in terms of supporting economic convergence across countries, ridding the world of poverty, preventing painful debt crises, and promoting the interests of ordinary citizens over those of multinational corporations. This record needs improving.
After the second world war, global leaders came together to remake the world and rehabilitate countries that had fought on opposing sides. A similar spirit is needed today, animated by four key new priorities: building a more development-friendly trading and financial system; establishing a modern safety net that does not immediately force procyclical tightening and genuinely protects vulnerable people; ensuring equitable technology diffusion; and supporting clean energy.
In some ways, this remaking should be easier to orchestrate because the world is still a relatively peaceful place. Whether it will happen is anyone’s guess. But the stakes for the world economy have never been higher.