The latest World Bank outlook for emerging markets and developing economies is especially significant because of the warning messages it contains. Whereas rich countries appear set to return to or even exceed their pre-pandemic growth rates, the developing world’s prospects are more mixed.
The World Bank’s Global Economic Prospects (GEP) report, published twice a year, is the most important source for evaluating the current and future outlook for emerging markets and developing economies (EMDEs). The recently released June 2021 edition is especially significant because of the warnings it contains.
Someone reading this report too quickly could easily miss the bad news, because, as with all publications by international organizations, it comes sugarcoated. That is the responsible thing for the World Bank to do: avoid causing alarm. But policymakers should heed the important cautionary messages buried in the text.
This GEP makes three key points. First, the world economy is recovering from the pandemic, but while advanced economies, with already successful or rapidly progressing COVID-19 vaccination programs, appear set to return to or even exceed their earlier growth rates, EMDEs’ prospects are more mixed.
The strongest-looking emerging-market region is East Asia and the Pacific, where the World Bank forecasts 7.7% GDP growth in 2021, ahead of South Asia’s 6.8% expansion. Within this broad region, output in China, Vietnam, and Bangladesh has now surpassed pre-pandemic levels, and the latter two countries, starting from a lower base, are well positioned for sustained high growth.
In terms of potential, Indonesia is the other economy to watch. But its experience with the pandemic thus far has been mixed. Indonesia began with an aggressive vaccination plan. Though there have been ups and downs, with 4.6% of its population now fully vaccinated, it is currently ahead of many other Asian countries, such as Sri Lanka (3.9%), India (3.8%), Thailand (3%), and Vietnam (0.1%).
Moreover, the Indonesian government has in recent years attempted some structural reforms, such as labor-market liberalization, by enacting a so-called omnibus law on job creation. Although this has been politically argumentative, other reforms appear to be yielding dividends. President Joko Widodo’s government took early steps to bring policy management for the pandemic and the economy under a common expert group, the COVID-19 Handling and National Economic Recovery Committee. This helped the government to avoid the mistake of paralyzing the economy in the name of controlling the pandemic, and ultimately faltering on both fronts, as happened in some emerging markets.
But for much of the developing world, the medium term looks bleak. The huge global disparity in vaccine access means that poorer countries are likely to face more waves of the coronavirus and its variants in the coming months and years. And they will probably have to deal with these outbreaks by locking down parts of their economies.
Even within EMDEs (emerging markets and developing economies), the poor appear to be suffering much more than the rich, and in some economies the superrich are actually better off than they were before the pandemic. The World Bank estimates that COVID-19 will cause the number of people living in poverty to increase by 143-163 million in 2021, with more than half of the newly poor in South Asia, mainly in India. The problem with India is not its economic fundamentals, which are strong, but the fact that poor management of the economy and the pandemic means, as the June GEP puts it, that “confidence remains depressed and balance sheets damaged.”
The World Bank’s second warning concerns inflation. The long chapter in the latest GEP entitled “Emerging Inflation Pressures: Cause for Alarm?” lays it all out. Anyone reading that section will realize that the question mark is there only to soften the jolt. An exclamation point would have been more appropriate.
Economists know how little they know about inflation. We compensate by being overcautious and advocating harsh preventive policy measures at the first sign of rising prices. And the current situation is worrying. Inflation usually declines during recessions. But, of the five global recessions of the last half-century, the drop in inflation during this pandemic-induced downturn has been the most muted. Furthermore, inflation has risen faster since May this year than at the end of previous recessions.
The US Federal Reserve’s line is that the recent increase in inflation is a one-time adjustment caused by large fiscal infusions. That sounds comforting but, in truth, no one knows for sure. If inflation in advanced economies persists, central banks may be compelled to tighten monetary policy. That could lead to higher capital inflows for advanced economies and the depreciation of EMDE currencies. These are big risks, with potentially devastating effects on the world’s poor.
Source: WUAB Research Department – Project Syndicate – World Bank