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Dear Readers,
From the perspective of the global economy, the year 2023 started off on a mildly optimistic note. As top policymakers and CEOs met in Davos, there was a sense that the global economy might be able to dodge the chances of a recession in 2023. The IMF’s World Economic Outlook in January provided a salutary stamp to that notion. However, the recent collapses in the banking sector had yet again ratcheted up the apprehensions of a recession.
In this context, a new research publication by the World Bank, titled “Falling Long-Term Growth Prospects”, argues that the current decade (2020-2030) “could be a lost decade in the making—not just for some countries or regions as has occurred in the past—but for the whole world.”
Simply put, the World Bank has found that the overlapping crises of the past few years — Covid-19 pandemic, Russia’s invasion of Ukraine and the resultant spike in inflation as well as monetary tightening — have ended a span of nearly three decades of sustained economic growth.
“Starting in 1990, productivity surged, incomes rose, and inflation fell. Within a generation, about one out of four developing economies leaped to high-income status. Today nearly all the economic forces that drove economic progress are in retreat,” writes David Malpass, President, The World Bank Group.
He further warns that without a big and broad policy push to rejuvenate it, the global average potential GDP growth rate—the theoretical growth rate an economy can sustain over the medium term based on investment and productivity rates without risking excess inflation—is expected to fall to a three-decade low of 2.2% a year between now and 2030, down from 2.6% in 2011-21 and 3.5% during the first decade of this century.
The important thing to understand here is that while the report talks about global growth slowdown, the main hurt will be felt by emerging economies such as India. “A persistent and broad-based decline in long-term growth prospects imperils the ability of emerging market and developing economies (EMDEs) to combat poverty, tackle climate change, and meet other key development objectives,” states the World Bank.
The World Bank report recounts a 2015 research request by Kaushik Basu, the World Bank Group’s Chief Economist at the time, to assess the long-term growth prospects of emerging market and developing economies (EMDEs).
While the World Bank came up with a preliminary study (titled “Slowdown in Emerging Markets: Rough Patch or Prolonged Weakness?”), the latest publication provides “a definitive answer” to the question. And the answer is: These economies are in the midst of a prolonged period of weakness.
Look at the data for actual GDP growth and per capita GDP growth in the two tables (A.1 and A.3) below. It shows a broad-based decline over the past two decades whether a country belongs to EMDEs or the middle-income countries (MICs) or the low-income countries (LICs).
The World Bank has looked at a whole set of fundamental drivers that determine economic growth and found that all of them have been losing power. The six charts below capture the weakness.
These fundamental drivers include things like capital accumulation (through investment growth), labour force growth, and the growth of total factor productivity (which is the part of economic growth that results from more efficient use of inputs and which is often the result of technological changes) etc.
Not surprisingly then, the potential growth rate is expected to decelerate further (see Table A.3).
What about India?
Even though India has also lost its growth momentum over the past two decades, it is and will likely remain a global leader when it comes to growth rates. India falls under the South Asia Region (SAR), which is expected to be fastest growing among emerging market and developing economies (EMDEs) for the remainder of this decade. To be sure, India accounts for three-fourths of the SAR output. SAR includes countries like Afghanistan, Pakistan, Sri Lanka, Nepal and Bangladesh etc.
“Economic activity in the South Asia region (SAR) rebounded strongly from the recession caused by the COVID-19 pandemic, expanding by 7.9 percent in 2021 after a drop of 4.5 percent in 2020. Output in the region is on track to grow by about 6.0 percent a year between 2022 and 2030, faster than the 2010s annual average of 5.5 percent and only moderately slower than growth in the 2000s,” states World Bank.
According to the World Bank, if all countries make a strong push, potential global GDP growth can be boosted by 0.7 percentage point—to an annual average rate of 2.9%; this would be faster than the preceding decade (when the global economy grew by 2.6%) but still slower than the first decade of 2000s (when the growth clocked 3.5% per annum).
There are six priority interventions suggested by the report: incentivise investments into the economy, boost labour force participation rates (especially for women), cut trade costs, capitalise on service exports, improve global cooperation, ensure that fiscal policies and monetary policies don’t run against each other (for instance, government expenditures raising deficits at a time when central banks are trying to contain inflation).
Until next week,
Udit
Seven Covid cases in Chandigarh, testing starts in all emergency wards
Udit MisraUdit Misra is Deputy Associate Editor. Follow him on Twitter @ieuditmi… read more
