United Nations Conference on Trade and Development (UNCTAD), a trade and development agency has downgraded its global economic growth projection for this 2022. It is largely due to shocks from the Ukraine war and changes in macroeconomic policies that put developing countries particularly at risk.
Going by a new UNCTAD report, significant slowdowns in growth are expected in parts of Western Europe and Central, South and South-East Asia.
This is coming as indebtedness is growing across most regions since the start of the pandemic. With the exception of China and some oil exporting economies, debt burdens are too high and export revenues too low across the developing world.
For almost all developing countries commodities are not a reliable source of income because their export revenues fluctuate due to frequent price swings. However, the frequently adopted approach of enhancing export potential by requiring developing countries to enter bilateral or plurilateral trade and investment agreements is no solution.
One reason is that these agreements are not negotiated in the WTO, the functioning of which at least allows developing countries to form a united front.
Another reason is that the way these agreements regulate intellectual property rights and dispute settlement limits real technology transfer, preventing developing economies from competing with countries that are already industrially developed.
Furthermore, the type of liberalization promoted by these agreements makes the global economy more vulnerable as it is mostly geared towards extreme financialisation running counter the strategic need to manage finance, especially for developing countries.
Building protection against the vagaries of global finance is critical for developing countries. It should start with a proper evaluation of sovereign and private debt burdens and repayment profiles, which affect development strategies but also crisis response.
External debt sustainability is set to remain high over the coming years, as many developing countries face a wall of sovereign debt repayments in international bond markets.
Excluding China, servicing existing sovereign debt in developing countries will generate payments of almost $1 trillion by 2030, the year earmarked for achievement of the Sustainable Development Goals (SDGs), including $571 billion in repayments of principals and $365 billion in interest.
The total amount far exceeds the estimated investment target of 2 per cent of GDP required for the green transition. Debt reprofiling and relief, including debt cancellation, are necessary.
But so far agreed measures have been mostly symbolic. The only lasting multilateral relief was provided by the IMF through the cancellation of debt service obligations in 29 countries, amounting to $727 million between April 2020 and October 2021.
The contrasting pre-pandemic experiences with debt management in the advanced and developing countries have carried over to the current crisis. Even with similar debt ratios, developed economies, especially those that issue reserve currencies, have continued to function smoothly and have seen growth pick up.
Developing countries, in contrast, face the risk of a lost decade. The pandemic offered an important test-case, in which governments of developed countries were able to enact larger spending measures than developing countries with similar or even lower debt burdens.
In the latter, domestic liquidity creation does not necessarily improve access to foreign currency, while fiscal deficits act as a deterrent to private foreign investors driven by short-term and speculative interests.
In terms of fiscal policy too, not only were developed countries able to provide much larger stimulus than developing countries, even though the actual stimulus in the former was often much smaller than initially announced.
Yet developed countries were not chastised by the bond markets for their spending announcements as developing countries were. How stringent the constraints to fiscal policy really are in all countries becomes clear when we consider the prevalence in the stimulus packages of transfers compared to direct government spending.
In many cases, government spending on goods and services contracted during the pandemic. While cash transfers have provided a critical lifeline especially in the absence of robust social protection systems (as in most of the developing world), austerity in direct spending continued to affect policy decisions even during the pandemic.
Meanwhile, the ongoing war in Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021.
UNCTAD is worried that a combination of weakening global demand, insufficient policy coordination at the international level and elevated debt burdens from the pandemic will push some developing countries into a downward spiral of insolvency, recession and arrested development.
UNCTAD is however, the UN trade and development body. It supports developing countries to access the benefits of a globalised economy more fairly and effectively and equips them to deal with the potential drawbacks of greater economic integration.
It provides analysis, facilitates consensus-building and offers technical assistance to help developing countries use trade, investment, finance and technology as vehicles for inclusive and sustainable development.