Publications /
Opinion

Back
The global economy faces a lost decade
Authors
April 4, 2023

In 2010, when I was one of the vice presidents at the World Bank, colleagues I and published a very upbeat book  about the possibility of emerging and developing economies replacing advanced countries as engines of global economic growth. While the latter would be grappling with the aftermath of the global financial crisis, the former, already growing at a faster pace in the previous decade and accounting for more than half of the annual increases in global GDP, had largely shown an appetite for carrying out structural reforms needed to converge with the richest.

In the years that followed, I was forced to temper that optimism. The exuberant Chinese growth had been fundamental for the dynamism of other non-developed countries, and the  Chinese route had become one of lower speed. Additionally, the economic rise of many of the big emerging markets had given rise to a certain arrogance and complacency about continuing to reform – this applies well to Brazil, Russia, South Africa,  Turkey, and many others.

The low growth of the richer economies ended up dragging down the performance of the others. The slowdown was widespread: in 80% of advanced economies and 75% of emerging and developing economies, average annual growth was lower in 2011-21 than in 2000-10 (Figure 1)

 

PCNS

Source: Kose and Ohnsorge (2023)

 

Last week the World Bank released a study - Falling Long-Term Growth Prospects - projecting a reduction in the speed limit at which the global economy can grow over the remainder of this decade. The economic factors that have propelled prosperity over the past three decades are reportedly losing their grip.

Between  2022 and 2030, the report projects a decrease to 2.2% per year in average potential global GDP growth - that is, without triggering inflation - which corresponds to about a rate a third lower than that prevailing. in the first decade of this century. The fall on the side of developing economies, including China, would be equally sharp: from 6% per year between 2000 and 2010 to 4% per year for the remainder of this decade (Figure 2).

PCNS

Source: Kose and Ohnsorge (2023)

 

It is not just a question of the consequences of the series of shocks to the global economy over the last three years, such as the pandemic, the invasion of Ukraine, the greater frequency and intensity of adverse weather phenomena, and the acceleration of inflation. The sharp rise in inflation over the past two years has led to the tightest global monetary policy tightening in four decades.

Fiscal policy also became less supportive following the significant deterioration in public budget balances during the 2020 global recession, when debt levels reached historic highs. Amidst these multiple adverse shocks, in the last three years, the global economy has experienced the biggest growth slowdown following a global recession. The picture could worsen  if the ongoing monetary tightening unfolds into financial crises, which tend to be digested with lower subsequent economic growth.

However, all the fundamental factors of GDP growth have already been slowing down in the last decade. China has been moving towards a slower pace of economic expansion. But fundamentally, improvements in human capital, labor force growth, investment (including because of political uncertainty) and total factor productivity (including through the reallocation of production factors across sectors) have slowed their pace, as shown by the World Bank report. These growth engines are expected to continue losing steam for the remainder of the decade.

The aging and slow growth of the global workforce are highlighted as downward factors, explaining half of the expected slowdown in potential GDP growth through 2030 (Figure 2). Lower levels of participation in the labor force, as societies age, will have fiscal consequences via social security, in addition, of course, to lower average productivity per inhabitant.

Furthermore, international trade growth is much weaker now than in the early 2000s. The prospect of “deglobalization”, even if partial and relative, tends to bring higher costs than  the gains realized in globalization.

What should countries do in the face of this prospect of a “lost decade”? Above all, adhere to macroeconomic and financial policies that mitigate the ups and downs of economic cycles: controlling inflation, guaranteeing the stability of the financial sector, reducing very high debt levels, and restoring fiscal prudence. Such policies can help countries attract investment by bolstering investor confidence in national institutions and domestic policymaking.

This must be done consistently with increased investment in areas such as transport and energy, climate-smart agriculture, and manufacturing, as well as land and water systems. The report estimates that sound investments aligned with key climate targets can increase potential growth by up to 0.3 percentage points per year and strengthen the future resilience to natural disasters.

Reducing still high and unnecessary trade costs remains an important item on the agenda. Countries with the highest transport and logistics costs could cut their trading costs in half by adopting trade facilitation and other practices from countries where such costs are low. Trade costs, moreover, can be lowered in a climate-friendly way by removing the biases that exist in favor of carbon-intensive goods in tariff walls of many countries and by removing restrictions on access to green goods and services.

Exploring the service sector as a new engine of economic growth also applies. To give you an idea, according to the report, digitally delivered professional services exports have risen to over 50% of total service exports in 2021, up from 40% in 2019. Better service delivery is also a source of substantial productivity gains.

Finally, there is what can be done to raise labor force participation rates. The report highlights how, in some regions, such as South Asia, he Middle East, and North Africa, an increase in female workforce participation rates for the average of all emerging markets and developing economies could accelerate their potential GDP growth of up to 1.2 percentage points per year between 2022 and 2030. The case of Morocco has been recently approached here.

One last call is the hardest to obtain: restoring the international economic integration that has been instrumental in leveraging global prosperity for over two decades since the 1990s!

RELATED CONTENT

  • Authors
    Elhoussaine Wahyana
    January 12, 2024
    The debate on global value chains (GVCs) has emphasized countries’ contributions to value-added creation. From an intercountry perspective, a new body of research is addingto this debate by studying how subnational regions contribute to the indicators in specific countries. Proper assessment of economic contributions is essential for designing incentive policies. This paper analyzes the role played by the main trading partners of Moroccan regions in local value chains. We use input- ...
  • Authors
    November 21, 2023
    Multiple shocks faced by the global economy over the past three years have apparently shaken the conventional wisdom on gains from economic integration, and have sparked widespread calls for protectionist and nationalist policies. Is there already evidence of some ‘deglobalization’, or do the factors that underlie globalization remain strong enough despite the shocks? So far, there are no signs of an overall reversal in the long-term trend of greater global trade integration. Howev ...
  • Authors
    Sous la direction de
    Omar Awadallah
    Muhammad Ba
    Farah Bashir
    Said El Hachimi
    Mostafa El Sayed Abo El Soud
    Saloi El Yamani
    Pierre Jacquemot
    Divine Ngenyeh Kangami
    Hafsa Maalim
    Samuel Muriithi
    Solomon Muqayi
    Brian Kelly Nyaga
    September 21, 2023
    Disponible bientôt en vente sur Livremoi   Cette édition du Rapport économique de l’Afrique est construite autour d’une thématique d’une grande actualité : les conséquences des incertitudes et des risques aussi bien sanitaires que climatiques et sécuritaires sur les économies du continent. L’exercice est d’autant plus légitime que la recomposition de l’ordre mondial questionne la place du continent à l’échelle planétaire, sur les plans économique, social et environnemental. L’éco ...
  • June 26, 2023
    The COVID-19 pandemic and the war in Ukraine have reignited the debate on efficiency versus resilience in international trade and global value chains (GVCs). This policy brief[a] (i) explains the contrasting perspectives of the private sector (primarily seeking efficiency) and the public sector (aiming for resilience); (ii) demonstrates that GVCs are still flourishing, despite some mounting signals of a geo-fragmentation leading to greater reallocation of the GVCs; and (iii) provide ...
  • June 20, 2023
    This policy brief was originally published on T20 India website   A decade of poor growth, increased poverty, and political instability followed the serious debt difficulties that emerged worldwide in the 1980s. There are concerns that the looming debt crisis could create similar challenges and result in even more severe consequences. However, the current economic climate differs in many ways from that of the 1980s, when international banks and Paris Club creditors held most of th ...
  • Authors
    April 4, 2023
    In 2010, when I was one of the vice presidents at the World Bank, colleagues I and published a very upbeat book  about the possibility of emerging and developing economies replacing advanced countries as engines of global economic growth. While the latter would be grappling with the aftermath of the global financial crisis, the former, already growing at a faster pace in the previous decade and accounting for more than half of the annual increases in global GDP, had largely shown an ...
  • February 27, 2023
    In this interview recorded during the Atlantic Dialogues, Mr. Helmut Sorge, Columnist at the PCNS interviews Mr. Masood Ahmed, President of the Center for Global Development about his insights on Globalization between yesterday and tomorrow. In fact, although the process of linking coun...
  • Authors
    Sous la direction de Larabi Jaïdi
    Muhammad Ba
    Marouane Ikira
    Pierre Jacquemot
    Brian Kelly Nyaga
    Leo Kemboi
    Moubarack Lo
    Mouhamadou Ly
    Solomon Muqay
    Dennis Njau
    Meriem Oudmane
    Kwame Owino
    Faith Pittet
    Amaye Sy
    September 29, 2022
    La succession des chocs pandémique, climatique et géopolitique a éprouvé les économies africaines. Les liens commerciaux et financiers avec le monde ne sont plus seulement considérés comme des moteurs de performance, mais aussi comme des sources potentielles de vulnérabilité. La défiance à l’égard de la mondialisation s’est accrue. Parce qu’elle est venue souligner la dépendance du continent, le dérèglement de ses rapports à la nature et sa vulnérabilité face aux tensions géopolitiq ...
  • May 20, 2022
    Traders have worried that the war involving Russia and Ukraine could stoke inflation, further disrupt supply chains and derail the global economic recovery. Scarcity of food has led to ri ...