Launch of the Trade and Development Report 2022
03 October 2022
[as prepared for delivery]
Ladies and gentlemen of the media, thank you very much for your presence, for being here, for accompanying us.
Welcome to the launch of our Trade and Development Report 2022.
As I have said before, we are in a world of cascading and interconnected crisis (Climate change, covid 19 and the war in Ukraine). As the Secretary-General of the UN has said: “we are in a perfect storm”. It is a difficult moment, no doubt for all of us, but also for policymakers because choices matter.
Today we need to warn that we may be on the edge of a policy-induced global recession.
But the Trade and Development Report also outline actions that can be taken to avert that a global slowdown will be turned into a downturn.
Our projections show that global growth of 2.5 per cent in 2022 will slow farther to 2.2 per cent in 2023.
This will leave real GDP still below the pre-pandemic trend by the end of next year.
It will cause a cumulative shortfall of more than $17 trillion -- close to 20 per cent of the world’s income, and about the totality of China’s GDP in 2021. This is the extra income the world economy would have produced if it had continued on its pre-Covid growth trend.
The synchronized slowdown is hitting all regions but is ringing alarm bells for developing countries.
Our calculations show that average growth rate in developing countries will drop below 3 per cent, as it did actually in the lost decade of the 1980s. By comparison, average annual growth in developing countries was almost 6 per cent in the 1990s and in the 2000s.
This pace is clearly insufficient for sustainable development.
It will further squeeze public and private finances and damage employment prospects.
Middle-income countries in Latin America, as well as low-income countries in Africa, will register some of the sharpest slowdowns this year, compared with other regions.
East and South-East Asia are set to register growth rates significantly below those observed in the five years prior to the COVID-19 pandemic.
Across South and West Asia, global energy market volatility is leading to slower and divergent growth prospects.
In Latin America and the Caribbean, many economies are facing growing pressure on their external debt positions and the rising cost of living is a growing challenge to policymakers.
In Africa, an additional 58 million people will fall into extreme poverty in 2022, adding to the 55 million already pushed into extreme poverty by the COVID-19 pandemic.
So, let me go to the policy choices.
Monetary and fiscal policy, the policy move that we have seen in advanced economies, are affecting economic, social and climate goals. They are hitting the poorest the hardest.
They could inflict worse damage than the financial crisis in 2008. We do not believe; it is possible to bring down prices by relying only on higher interest rates without generating a recession.
The world is facing falling real wages: fiscal tightening, financial turbulence, and insufficient coordination. In this context, excessive monetary tightening could bring a period of stagnation and economic instability for many developing countries and not out for some developed ones.
Our analysis shows that this year’s interest rate hikes are set to cut an estimated $360 billion of future income for developing countries (excluding China).
Commonly cited studies indicate, and this is also a study that came from the Federal Reserve is that 1-point increase in the Fed policy rate reduces developing countries’ GDP by 0,8 per cent over a three-year period. With this year’s rate increases totaling 2.25 points, this cut developing countries GDP by 1.8 per cent or $360 billion I referred to.
So, developing countries are facing alarming levels of debt distress and under-investment.
Currently, 46 developing countries are severely exposed to multiple economic shocks and another 48 seriously exposed, like the global crisis response group have clearly said.
So, countries that were showing signs of debt distress before Covid are taking some of the biggest hits, with climate shocks further threatening economic stability. This is increasing the threat of a global debt crisis.
So, countries urgently need real debt relief.
The other worry is that net capital flows to developing countries have turned negative with the deterioration of financial conditions since the last quarter of 2021.
On net, developing countries are now financing developed countries.
Some 90 developing countries have seen their currencies weaken against the dollar this year, 90 developing countries, and over a third of them have seen that by more than a 10 per cent.
Foreign exchange reserves are falling, and bond spreads are widening, with a growing number posting yields 10 percentage points higher than US treasuries.
Developing countries have already lost an estimated of $379 billion of reserves in trying to defend their currencies this year and due to capital outflows.
How much is $379 million? Well, it is almost double the amount of Special Drawing Rights (SDRs) that these countries received with the new issuing of Special Drawing Rights that was decided by the International Monetary Fund. So, what we gave them Special Drawing Rights (SDRs), they have just lost almost double of it because of the capital flight in the devaluation of their currencies. So, what are we calling for?
we are calling for the increasing of Official Development Assistance (ODA).
We are also calling for a larger, more permanent, and fairer use of SDRs to urgently provide increased liquidity for developing countries.
A new issuing of the SDRs is also deeply needed.
The IMF has opened the “food stock window” for balance of payments support, this has to be deployed as soon as possible with the minimum conditionality. The same as the PRGT and the RST that have been put forward by the Board of the IMF. (Barbados is the first country to receive the support of the Resilient and Sustainable Trust). This is a welcome development, but we need much more.
Also critical are hedging mechanisms to deal with exchange-rate volatility and to leverage multilateral capital to support developing countries with comprehensive social programmes.
We need to prioritize progress on a multilateral legal framework for handling debt restructuring, including all official and private creditors.
And we also recommend a programme of reforms in developing economies to boost productive investment and constrain capital moving to exploit tax loopholes.
In addition, we call for new arrangements to support closer regional trade, investment, and financial ties. Regional integration is important today.
So, let me just share with you a few words with respect to inflation.
We really think that today’s inflation challenge is a distributional crisis.
Too many firms are paying too high dividends while too many people are struggling from paycheck to paycheck. Too many governments are surviving from bond payment to bond payment.
Inflation in developed countries has been mostly driven by commodity prices. But also, persistent bottlenecks in supply chains, with roots in the insufficient investment since the global financial crisis is an important cost, the effects still of Covid 19 cannot be underestimated.
In many developing countries, inflation has been largely driven by energy and food prices and exchange rate depreciation, which has made imports more expensive.
Even as international prices have gone down, domestic prices in developing countries have gone up because of the depreciation of the currencies. So, large corporations with considerable market power appear haven taken undue advantage of the current context and financial speculation has also played an important role.
As inflation is beginning to ease in advanced economies, we call for a correction in favour of policy measures targeting price spikes in energy, food, and other vital areas directly.
I am pleased to note that the Black Sea Grain Initiative led by the United Nations has had a significant impact in lowering food prices.
The FAO Food Price Index declined for a fifth consecutive month in August 2022, reaching the lowest level in seven months, due to a broad-based fall in food cost.
Cereal prices went down 1.4 per cent, led by a 5.1 per cent drop in international wheat prices.
This was linked to the resumption of exports from the Black Sea ports in Ukraine for the first time in over five months of interruption.
We now need to increase support for vulnerable groups, including lower-wage workers and households in financial distress. They need targeted social protection programmes.
We call then for a more pragmatic policy mix that deploys strategic price controls, windfall taxes, anti-trust measures and tighter regulations on commodity speculation. I repeat a more pragmatic policy mix that deploys strategic price controls, windfall taxes, anti-trust measures and tighter regulations on commodity speculation. For example, the European Union is pursuing a policy agenda along these lines – promoting demand reduction, taxing windfall profits, sheltering consumers from rising fuel prices.
We also need to make greater efforts to end commodity price speculation
Commodity prices climbed for much of the last two years.
Costlier food and energy posed significant challenges for households everywhere.
Added upward pressure on fertilizer prices means the damage could be lasting.
Insufficient attention has been paid to the role of speculation in this.
Our report outlines better regulation and calls as I said before for windfall taxes to be part of the policy mix governments deploy to curb price spikes.
It is time for a new policy agenda
One that delivers economic stability and boosts investment, public and private.
Warning signs are flashing across a range of economic and environmental indicators.
We must reclaim our future with innovative, ambitious policies, political will and private and public support.
Our report lays out a strategy of increased cooperation among developing countries.
With reforms to the multilateral architecture, we can shift the global economy in the right direction.
We still have time to step back from the edge of recession. Nothing is inevitable.
We have the tools to calm inflation and support vulnerable people across the world.
It is a matter of policy choices and political will.
The current course of action is hurting vulnerable people everywhere, especially in developing countries.
We must change course.
Thank you. Thank you very much.