The New York Times is reporting this week that there is a danger that emerging markets will fall far behind their advanced counterparts and become “the whole world's problem.”
The Times argues that the global economy is rebounding faster than previously expected, largely thanks to the strength of the United States. The global dynamic appears to be following a “K-shaped” pattern worldwide, NYT says. While many wealthy nations are poised for a major economic expansion this year, others could end up reversing decades of progress in fighting poverty. Top international economic officials are now warning that this divergence, which is being amplified by sluggish deployment of vaccines in developing countries, is a threat to stability and long-term growth.
“Economic fortunes within countries and across countries are diverging dangerously,” Kristalina Georgieva, managing director of the IMF, said at a panel discussion on Tuesday during the annual spring meetings of the fund and the World Bank.
U.S. Treasury Secretary Janet Yellen emphasized that point, saying that the inability of low- and middle-income countries to invest in robust inoculation programs could result in “a deeper and longer-lasting crisis, with mounting problems of indebtedness, more entrenched poverty and growing inequality.”
Fears over rising inequality were underscored on Tuesday as the IMF said it was upgrading its global growth forecast for the year thanks to vaccinations of hundreds of millions of people, efforts that are expected to help fuel a sharp economic rebound.
The wealthiest countries are leading the way out of the crisis, particularly the United States, whose economy is now projected to expand by 6.4% in 2021. The euro area is expected to expand by 4.4% and Japan is forecast to expand by 3.3%.
Among emerging market and developing economies, China and India are expected to drive growth. China's economy is projected to expand by 8.4%, offering its own significant boost to overall global growth, and India's is expected to expand by 12.5%.
But within advanced economies, low-skilled workers have been hit the hardest and those who lost jobs could find it difficult to replace them. And low-income countries are facing bigger losses in economic output than advanced economies, reversing gains in poverty reduction and risking long-lasting pandemic-era scars.
Emerging market economies in many cases have fewer resources for fiscal stimulus, vaccine investments and labor force retraining--factors that put them at risk of falling behind and getting stuck as the world starts its rebound.
If their growth lags badly, the fact that big economies like the United States are accelerating could compound the pain. A stronger American growth outlook already is pushing up market-based interest rates on U.S. government debt. As that happens, it attracts capital from abroad, making borrowing more expensive in already-weak economies and risking currency volatility.
Researchers at the IMF pointed out recently that it is important that rates on U.S. debt are rising because of a strengthening economic outlook, one that will benefit many economies by stoking demand for their exports. Still, “countries that export less to the United States yet rely more on external borrowing could feel financial market stress.”
Most U.S. officials have focused on how stronger domestic growth could actually help the rest of the world as American consumers buy foreign goods and services. “This year the U.S. looks like it's going to be a locomotive for the global economy,” Fed Vice Chair Richard Clarida said.
Yellen made a similar argument on Tuesday during a panel discussion at the IMF, at which she urged countries not to let up on fiscal support. “Stronger growth in the U.S. is going to spill over positively to the entire global outlook and we are going to be careful to learn the lessons of the financial crisis, which is 'don't withdraw support too quickly,'” she said.
“There's a race right now between these variants of concern and vaccines,” she said on Tuesday. Yellen urged “global cooperation and attention” to how disparities in vaccine distribution affect inequality and economic recoveries.
The IMF agrees. Vitor Gaspar, the fund's director of fiscal affairs, said that the virus cannot be eradicated anywhere until it is eradicated everywhere. “Global vaccination is probably the global public investment with the highest return ever considered,” Gaspar said in an interview. “Vaccination policy is economic policy.”
“We think market participants underestimate the likely pace of improvement in both the public health situation and economic activity in the remainder of 2021,” Jan Hatzius at Goldman Sachs said. Vaccinations are high or progressing in Canada, Australia, Britain and the euro area. In emerging markets, he noted that Goldman economists expect 60% to 70% of the population to have “at least some immunity” by the end of the year when counting prior coronavirus infection and vaccine proliferation.
From the Fed to the European Central Bank and Bank of Japan, monetary authorities have employed a mix of rock-bottom rates, huge bond purchases and other emergency settings to try to cushion the pandemic's fallout. Organizing bodies have echoed Yellen's comment: They argue that it's important to see the recovery through, rather than pulling back on economic help early.
So, we will see. The vigorous global reductions in virus cases and sighs of economic recovery will be very welcome. Efforts to widen the recovery will be welcome, but difficult to manage -- trends producers should watch closely as they emerge, Washington Insider believes.