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International macroeconomics and development in 2023: four priority actions

Written by Dirk Willem te Velde

Low and middle income countries have been affected by a range of macro-economic and other crises: Covid-19, supply chain disruptions, protectionism, rising interest rates, climate related disasters and the impact of the Russia-Ukraine war. The result has been slower growth, rising debt, greater poverty, and growing food insecurity. We should consider:

  • The number of people in poverty increased by an estimated 70 million in 2020, partly owing to the Covid crisis. Some 600 million people are now expected to remain in poverty by 2030.
  • Global economic growth is slowing from 2.9% in 2022 to reach 1.7% in 2023. One third of the global economy will be in recession in 2023.
  • Persistent inflation seems to have returned, with global inflation forecast still to be 5.2% in 2023.
  • Large declines in bond issuance in low and middle income countries, with selected defaults on foreign debt obligations in economies such as Ghana, Sri Lanka and Zambia.
  • The number of food insecure people in low income countries has doubled from 2019 to 2022, to around 100 million people.

These crises need strong action internationally to create the conditions for the resumption of sustainable, equitable growth and for the achievement of the sustainable development goals (SDGs), but crucially they need complementary trade and economic transformation policies at country-level. There are four priorities:

  1. Promoting capital flows to low-income countries amidst high but falling global inflation and monetary tightening.
  2. Promoting inclusive economic transformation whilst resolving sovereign debt and foreign exchange crises
  3. Building resilience and addressing food security.
  4. Facilitating trade and industrialisation in Africa and the least developed countries (LDCs).

These four priorities will now be discussed.

Promoting capital flows to low-income countries amidst high but falling global inflation and monetary tightening

High inflation has led to the strongest monetary tightening since the 1980s. Whilst energy and food price pressures (which were exacerbated by Covid stimulus packages and the Russia- Ukraine conflict) will ease significantly this year, there are some general wage and price increases, leading to persistent inflation. Climate crises have led to further food price increases, which threaten food affordability and security.

Aggressive monetary tightening in high income and emerging economies have already led to plummeting capital outflows and bond issuances in poorer economies. Inflation in low and middle income countries was nearly 10% in 2022 due to demand and supply side pressures, but both will ease during 2023. Slower growth and reduced demand side stimulus packages will lower pressures, but supply side challenges still exist, whilst lower forex reserves and currency depreciation in many low-income countries may still be feeding inflation.

Increased attention by the G20, the World Bank Group, and others, for the June 2023 Financing Summit in Paris meeting around the Bridgetown agenda, combined with other approaches towards climate finance and blended finance could support capital flows to the poorest countries in 2023. There are some very important proposals on the table. And these include turning natural resources into an asset class. Or, requiring development banks to take increased risks and stretch their balance sheets.

Equally important is the observation that international capital flows depend on (i) the development of profitable development projects; (ii) effectiveness of targeted mechanisms for channeling finance (e.g. to leverage institutional investors in the City of London), which complements capital markets; and (iii) targeted complementary policies as argued in my SOAS lecture. Doing this well will help to attract capital and could justify stretching the balance sheets of development banks, rather than the other way around. It is important to avoid a situation of higher debt that does not lead to economic transformation (which has been a problem over the past decade in many low income countries).

Promoting inclusive economic transformation whilst resolving sovereign debt and foreign exchange crises

An increasing number of countries have defaulted, or are close to defaulting in 2023, on their foreign debt obligations. This requires solutions that involve debt relief and restructuring through, for instance, haircuts on the principal of bond holders, Chinese debt relief, as well as other debt relief and restructuring programmes. Such sensitive negotiations will need to be followed by the drafting and operationalising of plans to promote inclusive growth which staves off social unrest but also leads to transformational change. In 2023, Zambia, Ghana, Ethiopia and Sri Lanka will not be the only countries facing such issues. Recent discussions at ODI on Sri Lanka illustrate the issues around coordinating private bondholders, traditional donors and new donors, in the context of addressing suffering today whilst also promoting inclusive growth in the near future. More debt relief and better economic transformation plans are essential.

Building resilience and addressing food security during macroeconomic crises

In some periods, the global economy appears relatively stable, but right now it looks particularly volatile. On top of this, low-income countries will also be faced with food price volatility capital outflows, devaluations, climate change, natural resource degradation and other shocks.

Multiple crises (climate, war, Covid-19) affect different countries in different ways, depending in large part on resilience. Past financial crises have taught us that vulnerability is the sum of exposure (to such crises) minus resilience (the ability to do something about it). In previous work, we emphasised how increased resilience can also lead to higher and better growth paths. We need to be better at identifying the different social, economic and governance components of general and shock specific resilience, building on analysis undertaken globally, extending our recent work with the IDRC, and analysing and informing better crises responses. Resilience is a core theme of the IMF/WB meetings in Marrakesh in October 2023.

Large areas of the horn of Africa face multiple crises and hunger. We are currently examining private sector solutions and DFI support to support food systems along the value chains (for reference, see these examples by BII and IMF/FMO). Essential support could come from financing production or trade using different types of instruments.

Facilitating trade and industrialisation in Africa and the LDCs remains essential during crises

Economic transformation policies, such as trade and industrialisation policies, can help a country and its people to grow out of a crisis. Exporting remains crucial in times of low reserves and devaluations, and (regional) exporting also increases productivity. The recently announced AfCFTA could become a major game changer in terms of the African economic policy landscape.

ODI is supporting the negotiations and implementation of AfCFTA in various ways. For example, through short and long term experts, convening, surveying and studies, it supported the development of phase II protocols, which are expected to be formally adopted by the African Union (AU) Heads of State meeting in February 2023. ODI has also supported an audit of Ghanaian firms- some of whom have already started trading under AfCFTA rules following the guided trade initiative. The year 2023 is the year of acceleration of implementation of AfCFTA. The upcoming February Heads of State meeting will set the tone. This could be followed by ratification and implementation of protocols on investment, intellectual property rights, competition and the negotiation of the digital trade protocol. Further action on trade facilitation, such as by TradeMark East Africa (TMEA), would also be required across an Africa-wide scale.

The UK is yet to articulate a renewed trade and development strategy, which has traditionally had cross-party support, and which now needs renewal. A new trade preference scheme is one step, but it is not enough. The UK also needs an import policy, a step up in Aid for Trade, and arrangements for “friend shoring”, which could see Africa replacing other countries, such as Russia, in supplying critical good and services to the UK.

At a European level, the introduction of a Carbon Border Adjustment Mechanism (CBAM) needs complementary policies, or it could risk making African countries worse off. The global gateway could be implemented to raise capital flows.

Globally, 2023 could also be the year in which donors collaborate to bring together an ambitious package of support for the world’s poorest economies, the Least Developed Countries, during the UN LDC V Conference which focuses on investing in people, leveraging the power of science and technology, structural transformation, trade and regional integration.

Conclusion

Global action is urgently required around designing and promoting mechanisms to channel more and higher quality finance to low and middle income countries, to find negotiated country-specific agreements on debt relief and restructuring, to support resilient building, and promote an ambitious trade and development package.

All of this needs to be supported by appropriate trade and economic transformation at the country level. The quest for accelerated industrialisation in Africa remains a core priority. It is only with targeted, pragmatic and coordinated efforts that African countries may see industrialisation goals become a reality. The burden of crises makes this undoubtedly challenging, but does not reduce the importance of advancing and building resilience in low and middle income countries.