World Bank warns globe requires new economic models to solve current crises

World Bank president David Malpass  has warned that the world is facing a major challenge to navigate the risks which are driving a perfect financial storm.

Speaking at the Stanford Institute for Economic Policy Research (SIEPR) Malpass (pic) warned there were dark times ahead for the global economy and developed nations would not be immune to the impacts.

“Weathering this perfect storm and undoing the recent reversals in development require new macro- and micro-economic pathways in both advanced and developing countries,” he warned. “The urgency is clear in daily news reports of inflation, climate change, famine, civil protests, and violence.”

Malpass added a tough reality confronts the global economy, and especially the developing world.

“A series of harsh events and unprecedented macroeconomic policies are combining to throw development into crisis,” he warned. “This has consequences for all of us due to the interlinked nature of the global economy and civilizations around the world.”

“The developing world is facing an extremely challenging near-term outlook shaped by sharply higher food, fertilizer, and energy prices, rising interest rates and credit spreads, currency depreciation, and capital outflow,” Malpass continued. “Under current policies, global energy production may take years to diversify away from Russia, prolonging the stagflation risk discussed in the World Bank’s Global Economic Prospects report from June 2022.

“These shockwaves have hit development at a time when many developing countries are also struggling in other areas: governance and rule of law; debt sustainability; climate adaptation and mitigation; and limited fiscal budgets to counteract the severe reversals in development from the COVID-19 pandemic, including in health and education.

“The human consequence of these overlapping crises is catastrophic. The COVID-19 pandemic, which alone led to over six million deaths, geopolitical conflicts, and extreme weather events have hurt countries and people worldwide, with the poor bearing the brunt, especially women and girls.”

Climate change could not be ignored Malpass added

“The recent floods in Pakistan have left over 1,500 people dead. Droughts are taking a toll in the Horn of Africa and in South America, affecting food production and hydropower generation and throwing nine million more people into severe food insecurity across Ethiopia, Kenya, and Somalia alone.

“Developing countries are being hit by more frequent and more severe climate-related disasters. Man-made greenhouse gas emissions are causing climate change, which in turn is having tragic impacts on development in multiple ways. Both adaptation by countries and people harmed by climate change and mitigation of greenhouse gas emissions are urgently needed. This set of challenges receives the largest share of World Bank Group resources and focus.”

He continued: “The World Bank Group has not financed new coal projects since 2010 and has been working actively with developing countries and partners in the global community to reverse the trend toward increased use of high-carbon emission fuels. Yet due to Russia’s invasion of Ukraine, and limited and high-priced natural gas supplies, coal-fired power plants are seeing their closures postponed across the world, and coal mining has accelerated.”

Facing these overlapping crises, a pressing danger for the developing world is that the sharp slowdown in global growth deepens into a global recession, Malpass added.

“Many developing countries have not reached their pre-pandemic per capita income levels,” he warned. “The U.S. has experienced contractions in GDP in the first two quarters of 2022. The sharp decline in asset prices worldwide has consequences for weakened corporate and pension balance sheets and could dampen new investment. China’s economy has slowed sharply due to COVID-19-related lockdowns, pushing the World Bank’s 2022 forecast for China down to 2.8% from 5% in April.

“Europe is confronting the sudden spike in energy prices caused by Russia’s invasion of Ukraine and market rigidities. The weakness of the euro and high inflation increase the likelihood of a European recession and further constrain the eurozone’s longer-term growth outlook.”

Looking beyond this sharp cyclical downturn, developing countries face the risk that these trends in advanced economies, inflation, slow growth, lower productivity, the drain on global energy supplies, and higher interest rates, persist beyond 2023,” Malpass cautioned. “If current fiscal and monetary policies become the new ‘normal,’ it implies heavy absorption of global capital by advanced governments, prolonging the under-investment in developing countries and hampering future growth.”