Hapless New Year for Global South Jomo Kwame Sundaram

As dire economic predictions for 2023 did not materialise, pundits began 2024 far more optimistically. But policy ghosts from the last half-century will likely undermine such wishful thinking.

Optimistic forecasts

As New Year celebrations of different cultures decline with the coming of spring in the northern hemisphere, it is useful to review and reconsider various end-of-2023 and early-2024 economic prognoses against what happened in the previous year.

Macro-financial economist Nouriel Roubini agrees that worst-case scenarios – including a “severe recession, leading to a credit and debt crisis”, stagflation, and other financial crises – are unlikely for now.

But he acknowledges this can easily be “derailed by any number of factors, not least geopolitics”. Such developments – especially the US-China conflict – are likely to undermine growth.

Former Goldman Sachs Asset Management chair Lord Jim O’Neill warns against overconfidence in such forecasts. He warns of the many “known unknowns”, particularly geopolitical ones, besides “unknown unknowns lurking on the horizon”.

For former Wall Street pundit Mohamed El-Erian, “the chances of robust global growth in 2024 appear tenuous”. He dismisses “optimistic sentiment” based on “central banks aggressively cutting interest rates amid the softest of all soft landings for the US economy”.

After all, the European Central Bank has emphasised it will not follow the US Fed in ending interest rate hikes. Even the International Monetary Fund (IMF) has become an inflation hawk, accelerating world economic contraction.

El-Erian agrees central banks alone “may not be enough to generate the necessary growth momentum to withstand the headwinds facing the global economy”. Meanwhile, fiscal austerity policy pressures limit the means for counter-cyclical policies.

World Bank Chief Economist and Senior Vice-President Indermit Gill and Ayhan Kose agree on the risks of tepid world growth for developing economies. However, their main recommendation is to pursue the same policies that have led to the current predicament.

The duo urge developing countries to pursue policies “generating a broadly beneficial investment boom”, including contractionary fiscal austerity! Governments are told to “avoid the kinds of fiscal policies that often derail economic progress”, such as counter-cyclical efforts.

Western central banks resorted to unconventional monetary policies – mainly ‘quantitative easing’ (QE) – to keep their economies afloat after the 2008 global financial crisis. But QE enabled more financialisation and indebtedness rather than real investments or recovery.

Dismal recovery prospects

The World Bank’s 2024 Global Economic Prospects is pessimistic, fearing “the weakest global growth performance of any half-decade since the 1990s”. After all, growth has slowed in most of the world since the pandemic, falling from 6.2% in 2021 to 2.6% in 2023.

Growth in 2023 in most developed economies was below the 2010-19 average of the Great Recession after the 2008 global financial crisis (GFC). Consumer prices began to rise, driven by supply-side disruptions and increased demand, thanks to more government expenditure after the 2020 pandemic-induced recession.

Fuel and food price speculation followed the February 2022 Ukraine war outbreak, further raising prices. Soon, however, as C. P. Chandrasekhar and Jayati Ghosh have shown, speculation receded as adequate supplies became evident, bringing price levels down from their mid-2022 peaks.

But decelerating inflation was attributed to US Fed-led sustained interest rate hikes long after inflation had peaked, over a year before central bank rates peaked. Falling global growth has thus been misrepresented as the unfortunate but inevitable and necessary cost of taming inflation.
It is widely believed that growth can now be revived as interest rates come down. However, over a decade of low-interest rates from late 2008 to early 2022 did not end the slow growth after the GFC.

Most governments backtracked as soon as the ‘green shoots’ of recovery appeared in 2009. Similarly, budget deficits were quickly cut in 2021 and 2022, with the post-pandemic recovery rapidly losing momentum.

With the policy mantras of balanced budgets and fiscal austerity – dictated by financial interests – dominant in recent decades, more government spending to stimulate recovery and growth remains unlikely. Instead, all hopes are on interest rate cuts still eschewed by many central banks.

South under greatest threat

Harvard Professor Kenneth Rogoff expects 2024 to be a “rocky year for everyone”. He forecasts the likelihood of a US recession at “probably around 30%”, twice the “15% in normal years”, and notes China’s recovery efforts “face several daunting challenges”.

Almost alone among Western economic oracles, he recognises developing economies “are in the most danger”. Now much more vulnerable after decades of earlier Western-promoted globalisation, most struggle to avoid stagnation if growth fails to recover as expected.

After over a decade of tepid growth and deteriorating conditions in much of the Global South, especially the poorer nations, prospects will depend on policymakers thinking realistically and acting pragmatically to expedite sustained recovery rather than pursuing the failed prescriptions of recent decades.

(This article was originally published in Inter Press service (IPS) news on February 28, 2024)