First it was the pandemic, then rising trade barriers, and then the war in Ukraine. As the world dealt with one blow after another, food and energy prices escalated exponentially. Simultaneously, fiscal support to manage economic gaps continued to rise. Meanwhile, household income growth ceased to keep pace with soaring inflation and interest rates. In hindsight, this was the perfect making of a crisis.
Today, the cost-of-living crisis dominates the list of global risks that the world faces. According to the World Economic Forum’s (WEF) 2023 Global Risks Report, a rapidly changing economic landscape coinciding with long-term structural changes in geopolitical dynamics is pushing the global economy into an era of low growth, low investment and low cooperation which could result in a decline in human development.
This will not go away. It will be with us for the foreseeable future. It will not be a pressing crisis in the sense that the Lehman crisis was, but there will be a sustained pressure on working people.
Costas Lapavitsas, Professor and co-author of The Cost-of-Living Crisis (and how to get out of it), adds that this period of low investment, coupled with low productivity has led to a significant increase in income inequalities.
“The burden has fallen on working people again. At the moment, income inequality is unprecedented. It has led to a widening of the gap between developed and developing countries,” he says.
There are no easy solutions for the crisis, emphasises Lapavitsas. “This will not go away. It will be with us for the foreseeable future. It will not be a pressing crisis in the sense that the Lehman crisis was, but there will be a sustained pressure on working people.”
But not all countries are impacted equally by the cost-of-living crisis. For instance, Britain is additionally reeling under the impact of Brexit along with the other problems that the world is facing. Therefore, the impact of the crisis is more acute there than in America or parts of Western Europe. Several developing countries in Asia and Africa that are reeling under high debt servicing costs, capital outflows and reduced availability of credit from foreign lenders are in deeper trouble than others.
OECD’s economic outlook 2023 states that to attain strong and sustainable growth fiscal support needs to be scaled back and better targeted. Central banks too, need to maintain restrictive policies until inflationary pressures start abating. Additionally, the world economy needs ambitious structural policy reforms including reenergising labour and product markets, removing cross-border trade barriers, promoting competition and adapting competition policies to the digital era; and enhancing skill development.
Experts also suggest rethinking the role of large institutions like the International Monetary Fund (IMF) and the World Bank that were established under the Bretton Woods Agreement in the post-World War II era.
“If we were resetting the world framework, the truth is that we have to recognise the importance of newly developed and emerging industrialised economies. We need structures that would better reflect the countries that provide savings in the world, and how we can channel those to those parts of the world that need investment,” explains Jagjit Chadha, Director at UK’s National Institute of Economic and Social Research (NIESR).
“Working on the role of these institutions and their agency would also allow us to find better solutions to climate change because it could help us deal with countries that have polluted to get industrialised and those that are now polluting in order to get industrialised.”
We need to think very hard about how we encourage that with tax breaks, incentives, political stability as well as currency stability so that people are prepared to invest domestically in the economy.
No doubt, we need all hands-on deck to bring the world economy back on track. This is why the participation of the private sector is a top priority.
“Private investment as a proportion of GDP, has been very weak, as big businesses don’t invest proportionally the way they used to,” says Lapavitsas. “The roles of public and private interests need to be rethought so that a condition of public investment is created such that private investment can also increase.”
According to UNCTAD World Investment Report 2023, global foreign direct investment (FDI) fell 12% in 2022. This has widened the annual investment deficit gap in developing countries to USD 4 trillion per year compared to USD 2.5 trillion when they adopted the Sustainable Development Goals (SDGs).
“There's a lot of bias in investment patterns in the world, as people tend to invest in advanced economies, which are thought to be more stable with broader brush democracies, and abilities to repatriate funds when required,” says Chadha.
“So, we need to think very hard about how we encourage that with tax breaks, incentives, political stability as well as currency stability so that people are prepared to invest domestically in the economy.”
Fortunately, there are solutions in sight. A McKinsey report points out while many governments and companies are focused on finding solutions to immediate problems, they cannot solve the world’s problems or open an individual path to sustained growth.
The McKinsey report states that given the disrupted world, sustainable and inclusive growth can only come from international cooperation and engagement in economic development. In this context, the private and public sectors need each other more than ever before to define the long-term parameters of economic growth.
The report suggests that governments need to lead with a longer-term view on strategic and geopolitical alignment with clear parameter for global trade for companies and industries to act upon. This includes supporting sectors of national strategic importance and incentivising private sector investment in R&D, manufacturing, and distribution in order to shift industry dynamics and affect country-level competitiveness.
The good news is that several governments around the world are taking forward-thinking steps towards increasing private sector investments. For instance, many countries are already encouraging Public Private Partnerships (PPP) for clean energy investments and infrastructure development.
Several countries are also looking to expand PPPs to other sectors such as healthcare, skill development and agriculture. As money finds its way to the right causes, we could be on the road to recovery sooner than later.
