By Adam Triggs*
The world economy is facing a two-speed recovery. The rich world is overheating. The poor world is stagnating, with Asia’s developing countries at its centre. Left to fester, both worlds will soon start exporting problems to each other, creating a dangerous feedback loop.
Addressing this two-speed global economy should be the top priority of G20 leaders when they meet in Italy on 30 October. But early indications suggest it’s not. The G20’s agenda is too focused on rich world problems. If it wants to be relevant, the G20 needs to stop recycling the G7’s agenda. It needs to deal with the challenges facing Asia’s developing economies and the developing world before it’s too late.
The International Monetary Fund’s (IMF) latest forecasts reveal just how divided the post-COVID-19 economic recovery will be. Rich countries are expected to reach their pre-pandemic level of output by 2024, while poor countries will remain 5.5 per cent behind their pre-pandemic levels.
These forecasts are stark, but not surprising. Weak healthcare systems, weak social safety nets and limited fiscal and monetary policy space meant that COVID-19 was always going to devastate developing countries. The rich world did the bare minimum to help. Most rich world financial supports, like currency swap lines, went to other rich countries. Support from the multilateral institutions was too small and too hard to get. Debt forgiveness was a drop in the ocean.
Nor have any lessons been learned. The vaccine roll-out in the developing world has been dismal. Almost 60 per cent of the population in advanced economies are fully vaccinated. Many are now receiving their booster shots. In poor countries, more than 95 per cent of the population remain unvaccinated.
This two-speed global economy is not just a moral problem.
The rich world will soon start exporting financial turbulence towards the developing world. Many rich world central banks have already begun tapering quantitative easing programs and raising interest rates. If inflationary pressures persist, more will follow.
This risks another ‘taper tantrum’. The end of low interest rates in 2013 saw financial capital sharply reverse out of emerging economies. Asset prices crashed and investment plummeted. As exchange rates fell, the stocks of foreign currency-denominated debts spiked, creating a vicious downward spiral.
The financial vulnerabilities in Asia’s developing countries aren’t as big today, but they are still there. Dollar-denominated debt in Indonesia was 28 per cent in 2013. Today it is 21 per cent. External debt as a percentage of foreign exchange reserves in developing countries is smaller than in 2013, but still more than double what it was in the 2000s.
Rich countries won’t be the only ones exporting problems. The longer developing countries are left with unvaccinated majorities, the more likely it is that new variants of COVID-19 will emerge.
The combination of these two forces risks a dangerous feedback loop. Financial pain from the rich world weakens the health responses in the poor world. This not only hobbles the world’s major source of economic growth, it has the potential to spread new COVID-19 variants to the rich world, undermining their own fragile economic recoveries.
Putting aside non-committal rhetoric, the practical actions on the G20’s agenda this year focus on international corporate tax rates, multinational tax avoidance, digital transformations, climate change, and infrastructure.
These are all important issues. They are certainly relevant to Asia’s developing countries. But they are hardly their top priorities. Getting these countries back on their feet by exponentially increasing vaccination rates, boosting fiscal space and supporting health systems are the top priorities. None of the other issues on the G20’s agenda can be achieved without first addressing these problems.
The G20 hasn’t ignored these issues. But their actions have been inadequate. The commitments to supply vaccines were too small and still haven’t been fulfilled. The commitments to debt forgiveness resulted in a paltry US$4.6 billion of debt service deferral in 2021. US$44 billion of potential assistance from the international financial institutions is a drop in the ocean in a world where governments, corporations and households amassed US$27 trillion of new debt in 2020 alone.
The G20 needs to pivot to the developing world’s priorities. Indonesia will be G20 Chair in 2022, followed by India and Brazil. Developing country priorities will shift up the agenda then. But genuine vaccination support is needed now. This means ambitious quantified commitments and clear timelines and milestones for achieving them, with a focus not only on the vaccines themselves but also the logistics needed to get them into arms.
The G20 should support the fiscal space and health spending of developing countries by buttressing their financial stability. It should revise its debt forgiveness program to remove the stigma of access. It should improve access to financial assistance through the facilities developing countries prefer to use — currency swap lines and credit lines through development banks — while reducing the conditionality of the facilities they prefer to avoid: the IMF.
The longer the two-speed global economy is left unchecked, the bigger the problems that come from it will be. The G20 best act now.
*About the author: Adam Triggs is a Director within Accenture Strategy. He is a visiting fellow at in the ANU Crawford School of Public Policy at The Australian National University and a non-resident fellow at the Brookings Institution in Washington, D.C.
Source: This article was published by East Asia Forum