The 1980s was widely considered to be a lost decade for many parts of the developing world, including Latin America and the Caribbean. Mounting debt levels, record-high interest rates, defaults on loans, high inflation, and a sharp rise in oil prices from the previous decade, all conspired to create massive economic and social problems for these countries back then.
For example, in Latin America and the Caribbean, the lost decade plunged more than 20 million people into extreme poverty, thereby erasing several decades of rising standards of living.
As has historically been the case for developing countries hit by crises of such magnitude, it took over a decade for many economies to recover.
Today, analysts are once again concerned that many developing countries are heading towards another lost decade. However, there is one major caveat – this time could be worse than the time before.
There are several factors which have conspired to create macroeconomic pressures onthe economies of many developing countries. These include the prolonged economic slowdown of China; food and fuel price shocks in the aftermath of Russia’s war on Ukraine; interest-rate hikes by the United States (US) Federal Reserve (Fed) and other leading central banks; climate change impacts, and the lingering effects of the COVID-19 pandemic.
Earlier this year, the US Fed raised interest rates at the fastest pace since the 1980s.
When the Fed convenes its final meeting of 2022 on December 13-14, analysts widely expect that its peak rates for 2023 may end up in the 4.5% to 5% range. The implication here is that countries with debt denominated in US dollars will find it much costlier to service that debt.
Meanwhile, some development partners are either cutting back or freezing their international development budget.
Not that long ago, the United Kingdom (UK) slashed its overseas aid budget by nearly a third. Even more recently, since becoming Prime Minister of the UK in October, Rishi Sunak, who also presided over reducing the aid budget while he was Chancellor, has contemplated freezing the aid budget for a further two years.
Other advanced economies have been reported to be engaging in a form of creative accounting with regard to their international aid commitments by simply diverting money from some development programmes to others. This is seemingly in lieu of providing new financing to help developing nations meet new challenges such as climate change adaptation.
According to Andrew Powell and Oscar Valencia, in an opinion piece for the Inter-American Development Bank (IDB), the next few years are going to be testing as countries seek to boost growth and maintain fiscal sustainability. They have to do this in a challenging international environment, including in circumstances where they cannot rely on traditional partners to help them fill some of their development gaps.
In many countries, young people are especially less patient to put up with economic dysfunction, compared to previous generations of youth. As such, while paying attention to economic problems, governments must also keep an eye on potentially course destabilizing social unrest.
Nearly six months ago in Panama, price increases incited some of the largest anti-government protests in over 30 years. There were similar mass protests in Quito, Ecuador and Buenos Aires, Argentina. In early October, an already destabilized Haiti experienced a wave of violent protests after its Prime Minister announced cuts in fuel subsidies.
The world is in a very weird space right now, for want of a better characterisation. Even in the best of times, life gives no certainties. In this strange moment, uncertainty has been further amplified.
Nonetheless, there are steps which can be taken to avoid another lost decade of development.
Fiscal discipline will be key, but this has to be balanced against the need to maintain critical social safety nets. The right conditions also need to be created and maintained for investments in infrastructure and the productive sectors, to create employment, generate exports and ease the burden on states to be all things to all their peoples.
Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.