As the new year has started, the global economy continues to face a volatile, uncertain, complex, and ambiguous conditions. Risks abound and are diverse in nature and all countries are being shaped or forced to react by the interplay of several forces. Today we continue to face the strain of Covid and its variants, disrupted trade links, supply-side bottlenecks, soaring energy prices and labour-mismatches. This is the background to a fragile economic recovery which however will not automatically take us back to the pre-pandemic normal.
The developing world faces several key challenges; however, I believe that three stand out.
Rising macroeconomic risks
Macroeconomic risks abound. On national levels we are seeing a new era of inflation, driven primarily by supply-side bottlenecks and rising energy prices. The shipping bottlenecks have exposed one of the most serious threats to the global economy as it continues to slowly emerge from the pandemic: whether the worldwide shipping jam remains gridlocked or begins to flow again in 2022. If the bottlenecks persist, freight costs will remain high, space for cargo on ships will be limited and retailers and manufacturers will have to endure chronic delays. That could in turn fuel inflation, prompt supply chain upheavals and accelerate consolidation of shipping networks, fundamentally changing world trade.
On the energy front, the global economy was shaken by a major crisis in 2021. Prices for oil, gas and electricity surged as our economies reopened after the shutdowns imposed in response to the coronavirus (Covid-19) outbreak. Though last year’s events were extraordinary on many levels, spikes in energy prices are a common phenomenon. Since the 1970s, sharp movements in energy prices have been a recurring source of economic dislocations and volatility. And yet, the roots of today’s shock are likely to go deeper. While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even must keep rising if we are to meet the goals of the Paris climate agreement.
We are also seeing the emergence of risks related to public finances with deficits and det levels rising to levels last seen in the early 1990s. In some countries, it reached historic highs. A lack of fiscal and monetary space could lead to several countries defaulting. Although debt relief has started, more needs to be done. Yet, to return to sustainable growth and long-term fiscal sustainability, we will have to unleash the productive power of entrepreneurship and the private sector will have to play a crucial role.
Climate challenges
The pandemic has highlighted the vulnerability of life and the world we live in. it can be viewed as a stark reminder of the intensifying dangers of non-economic factors caused or exacerbated by climate change. It is expected that climate change will have a number of consequences, including more frequent and intense extreme weather as well as longer warm seasons. The transition to net-zero emissions is not merely an ideal goal: it is a necessity. The faster countries manage this transition, the more competitive they will remain, and the fewer social and economic disruptions they will experience. To this end, finance will play a key role.
In the fight against climate change, we must rely on proven market mechanisms, such as carbon pricing. Markets must be well regulated, but regulators must not stifle the private sector’s capacity for innovation or appetite for risk. Likewise, they must not impede the efficient use of resources. Whereas technological advances offer hope for real progress in the fight against climate change, strategies need to be inclusive to ensure that no one is left behind. The green transition can succeed only if it is a just transition. Provisions to support those whose livelihoods are hit hardest during the transition are essential as otherwise climate poverty will start creeping in adding to social risks. In the short term, direct financial support will be necessary whilst in the long run the provision of education and employment opportunities will be critical.
Digital disruption
The rapid digitalisation of the economy also demands this focus. Pandemic lockdowns have accelerated irreversible trends in the workplace and wider economy including payments, remote working, platform economy and gig work. And, the transformation of banking, retail, manufacturing, and many other sectors has only just begun.
Ensuring that promising technological innovations are developed and implemented requires a strong, competitive, and transparent regulatory framework. It also needs an enabling environment where educational institutions interact with the private sector to create the required skills and a responsive financial sector that can provide needed finance for investment to take place. The ecosystem approach has never been so important.
The challenges ahead of us are massive, but so are the opportunities if exploited. For this to materialise and for the opportunities to become key development thrusts, developing economies require the support of multilateral institutions to support, direct and oversee reforms, policies and visions that will enable the developing world to build back better. This needs to be done in concert with the private sector as ultimately it will be the market that will form the recovery and development needed to take place.
The writer is a co-founding partner of Seed, an international research driven advisory firm with offices in Europe and the Middle East
www.seedconsultancy.com |
jp@seedconsultancy.com