Earlier this week, the International Monetary Fund (IMF) revised its global economic outlook for 2022. According to the IMF, global growth is expected to moderate from 5.9 in 2021 to 4.4 percent in 2022, representing a half of a percentage point lower for 2022 than was projected by the Fund last October. The IMF noted that its forecast largely reflects markdowns in the United States (US) and China, the world’s two largest economies.
The IMF blamed the downgrade on rising cost pressures (inflation) and the rapid spread of Omicron. While the outlook for the US and China appears to be worse than for everyone else, the Fund noted that few countries would be spared a slowdown.
In addition to the more modest IMF forecast for global economic growth in 2022, global stock markets have also been jittery for the past few days, mainly because the brewing Russia-Ukraine conflict has been rattling investors. The Economic Times also went as far as to predict that a big global stock market crash is on the horizon, perhaps within the next year.
If we were hoping for a diet of better news in 2022, early indications are not very promising. However, the old adage, often credited to former British Prime Minister, Winston Churchill that we should “never let a good crisis go to waste” still rings true.
The multiple crises facing the world also present opportunities for transformation, especially for small economies, many of which have had one crisis too many in the past five years alone. Underdevelopment is not an inevitability for small economies and there are many which have managed to attain high levels of income and human development. However, one always gets the sense that most small economies are one crisis removed from the undoing of their hard earned social and economic gains.
Whether they are small economies in the Caribbean, the Pacific or Africa, there are certain realities which make their development prospects highly uncertain and which tend to be heightened in the face of global crises. Small economies are typically more open to both international trade and foreign direct investment, have narrow export structures and few export markets. Government expenditure also tends to play an outsized role in the economy, sometimes because the state ends up having to provide services which the private sector might be reluctant to provide due to limited returns on investment. Meanwhile, smaller landmass also suggests that the impact of natural disasters is more severe. These factors contribute to persistent volatility and this volatility gets worse when global crises occur.
Now, the question of transformation takes centre stage. How can transformation occur in the face of persistent volatility? Is transformation possible in a crisis environment which further amplifies existing volatility? The answer is yes, but with the caveat that it is not an easy feat.
Transformation would require some difficult decisions, one of which would involve a commitment to save more. About four years ago, the World Bank published a report which showed that Caribbean countries for example, have low savings. The World Bank publication noted that compared to the rest of Latin America, Caribbean economies have had lower average savings rates over the past forty years. Of course, hardly any other region of the world is as disaster prone as the Caribbean, and this certainly affects the ability of governments to save.
National savings are important because they contribute to increased productivity and stronger economic growth over the long term. They also increase a country’s capacity to produce goods and services in the future and, consequently, help to increase the standard of living for future generations. Savings also help to buffer against external shocks and provide governments with other options to borrowing.
How can national savings increase? Economic diversification, export growth and tax reform can go a long way in this regard.
Incentivising the private sector to play a bigger role in the economy can also help, as this would free the state of the burden of having to be involved in areas of the economy perhaps best suited to private sector involvement. These will be elaborated on in next week’s article.
Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.
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