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Avoiding a two-track economic recovery

Coronavirus, with its universal threat of illness and death, may have demonstrated exactly what the whole world has in common. The economic recovery is doing the opposite. As a World Bank report made clear this month, the legacy of the pandemic is a widening gap between those living in the rich world and those elsewhere. Tighter monetary policy from the Federal Reserve, to combat higher inflation within its own borders, is likely to deepen this divide.

As China’s president Xi Jinping told the World Economic Forum last week, if the rich world “slams on the brakes” on monetary stimulus, it risks spilling over to vulnerable middle- and lower-income countries and eventually causing a crisis that, in turn, affects the rich world. Many of these countries have already suffered permanent scarring from the pandemic, as governments struggled to deploy the same fiscal firepower as advanced economies to keep workers employed and businesses open through lockdowns.

The result has been a “two-track” global recovery: output in advanced economies is predicted to return to 2019 levels by 2023, while in emerging economies it remains well below pre-pandemic trends. Progress towards a more equitable recovery, both from the pandemic and the recession it induced, will need global co-operation.

The first task is ensuring equal access to vaccines. These, perhaps even more than stimulus efforts, have been vital to allowing economic activity to resume in the rich world. But getting economic growth back to where it needs to be will also require what the World Bank politely calls “financial resources”.

With major central banks tightening monetary policy, financing conditions for emerging economies will only get worse. Many poorer countries are likely to pursue fiscal retrenchment to preserve their access to bond markets, just at the moment when cross-border capital flows may go into reverse. Middle-income countries that have used the decades of cheap money to pursue reform efforts and shore up their foreign exchange reserves will be far better placed than those, such as Turkey, that encouraged credit-fuelled booms.

The position of the very poorest countries is the most precarious. Finding a way to offer assistance should be an urgent global priority. Efforts so far have consisted of lacklustre statements of goodwill and halfhearted steps towards the establishment of mediocre debt resolution programmes. The current “common framework” drawn up by the G20 in November 2020 to deal with the debt problem is unfit for purpose: private creditors have little to no incentive to participate in its processes, which are cumbersome and unclear. Almost no nation has been willing to engage with it for fear they will be designated as “basket cases”. 

Granted, the creation of effective debt resolution programmes has become more difficult in recent times. The appearance of new lenders to frontier markets, while welcome, has made it harder to bring all creditors to the table. But not even the most rose-tinted vision reveals any real global effort to confront the issue of poor-country debt with the degree of seriousness it deserves.

Even though advanced economies seeking to emerge from the pandemic face their own complex problems, the issue of inequitable global recovery — and its relationship to existing debt burdens — cannot be ignored. To do so would recklessly endanger decades of poverty reduction. Self-interest alone should convince richer countries to act: the consequences of re-emergent poverty, much like viruses, are rarely confined to national borders.

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