In the opener of the first in-person meetings between the World Bank and International Monetary Fund since the beginning of the pandemic, the institutions’ chiefs warned that a series of compounding crises, such as persistent inflation and a growing risk of global recession, were threatening livelihoods and made the organizations unlikely to succeed in eliminating extreme poverty, a noted goal of both organizations.
In a “curtain raiser” on Oct. 10, which begins a weeklong set of once-a-year meetings between the two institutions in Washington, World Bank President David Malpass and IMF Managing Director Kristalina Georgieva discussed the crises and called for coordinated action in the face of what they described as an “era of volatility.”
“There’s a risk and real danger of a world recession next year,” Malpass said, kicking off the discussion, owing it to slowing economic growth in advanced economies and currency depreciation in developing countries as the primary factors behind it.
As currencies depreciate in these countries, debt levels are becoming increasingly burdensome as well, Malpass said, adding that “inflation is still a major problem for everyone, but especially for the poor.”
Malpass noted a “very concerning” 4 percent reduction in the median income, showing that poverty levels have soared across the globe.
The World Bank’s latest poverty report estimates that about 70 million people were pushed into extreme poverty in 2020, the biggest one-year increase since the agency started tracking prosperity levels in 1990. The report also said that “The world is unlikely to meet the goal of ending extreme poverty by 2030.”
In that report, Malpass said that “Adjustments of macroeconomic policies are needed to improve the allocation of global capital, foster currency stability, reduce inflation, and restart growth in median income. The alternative is the status quo—slowing global growth, higher interest rates, greater risk aversion, and fragility in many developing countries.”
He repeated this argument in his statements at the event in which he spoke of a “reversal” in development as capital has increasingly been flowing out of developing economies to more developed ones, while also noting that problems associated with food, energy and fertilizer shortages are only exacerbating the problem.
“It’s a vast array of problems,” he said.
Georgieva agreed that the risk of recession has risen. She estimated that, by the end of next year, around one-third of the world economy will have seen at least two consecutive quarters of negative growth, the common rule-of-thumb definition for a recession.
“The total amount that would be wiped out by the slowdown of the world economy is going to be—between now and 2026—$4 trillion,” she said. “This is the size of Germany’s GDP—gone.”
“The forces of disruption” are the driving forces behind this economic wipeout, including issues such as the impact of COVID-19 on supply chains and the impact of the war in Ukraine on food and energy prices.
“Inflation is stubbornly high,” she continued, and argued that it has led to a more aggressive tightening of financial conditions than previously expected.
Georgieva noted that all three major economies are beginning to experience the slowdown of economic activity. Europe has been hit hard by high natural gas prices, China has experienced housing volatility and COVID-19 lockdowns which are dragging down growth and the United States is encountering spikes in interest rates that “are starting to bite.”
The IMF chief claimed that the world was in need of actions that would tame inflation, a “dramatic tax,” as she called it, particularly on the poor.
It’s unacceptable for inflation to become a “runaway train,” Georgieva said, but cautioned that over-tightening by central banks could lead to recession fears materializing on a large scale. She argued that it would be reasonable for governments to adopt fiscal measures to help people last through the current crises, but said that any support needed to be well-targeted, “because if it is not, then we are adding fuel to the flames of inflation.”
She also called for countries to “get the big, scary danger of debt crisis under control” because all countries would be affected, not just the ones with high debt burdens.
“Not a rosy picture,” she said. “But if we joined forces, if we act together, we can reduce the pain that is ahead of us in 2023.”
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