This article first appeared in Forum, The Edge Malaysia Weekly on June 3, 2024 - June 9, 2024

The World Bank expects the international economic slowdown to be at its worst in over four decades in 2024. This is mainly due to powerful Western nations’ contractionary macroeconomic and geopolitical policies.

According to the Bank’s last Global Economic Prospects report, world economic growth will be weakest by the end of 2024. Only the US economy’s strength will statistically prevent a world recession.

World economic growth is expected to slow to 2.4% in 2024. But even the US-controlled World Bank acknowledges that growing geopolitical tensions are the main threat.

Medium-term prospects for most developing economies have worsened due to slower growth in most major economies. This has been exacerbated by tighter monetary policy and credit, sluggish trade and investment growth.

Owing to tighter monetary policies that are supposed to rein in inflation, 2024 will be the third year of economic slowdown. Central banks are fixated on bringing inflation below their 2% target by tightening credit.

Worldwide growth is expected to slow from 2.6% in 2023 to 2.4% in 2024 — well below the 2010s mean. Developing economies will only grow by 3.9% in 2024, more than a percentage point below the previous decade’s average.

World Bank chief economist Indermit Gill’s fear is that “near-term growth will remain weak, leaving many developing countries — especially the poorest — stuck in a trap: with paralysing levels of debt and tenuous access to food for nearly one out of every three people”.

The Bank has forecast that developed economies will slow as most developing economies outside Asia recover. It also acknowledges precarious prospects for vulnerable developing economies due to much higher debt financing costs.

At the end of 2023, the Bank expected things to worsen due to the Gaza invasion, related commodity market pressures, financial stress, more indebtedness, higher borrowing costs, persistent inflation, China’s weak recovery, trade disruptions and climate disasters.

The US’ unwillingness to broker a ceasefire in Ukraine or to stop the Gaza massacre or South China Sea militarisation has worsened geopolitical risks and recovery prospects while diverting more resources for war.

Financial stress and higher interest rates have exacerbated inflation and stagnation. Meanwhile, the new Cold War has slowed growth in China and much of Asia by worsening “trade fragmentation” and global heating.

The Bank urges multilateral cooperation to provide debt relief, especially for the poorest countries; address global heating; enable the energy transition; revive trade integration; address climate change; and reduce food insecurity.

The world economy has lost US$3.3 trillion since 2020. Yet, instead of strengthening developing countries’ recoveries, the Bank still urges fiscal austerity and financialisation.

A quarter of developing countries and two-fifths of low-income countries (LICs) will be worse off in 2024 than in 2019, before the pandemic. With limited fiscal space, developing nations with poor credit ratings are especially condemned.

With rich economies expected to slow from 1.5% last year to 1.2% in 2024, demand for primary commodities will further dampen. Despite other dismal projections, the Bank wishfully forecasts that LICs will grow by 5.5% in 2024.

But instead of prioritising economic recovery, finance ministers and central bank governors agreed to continue policies worsening the situation by suppressing demand and ignoring “supply-side disruptions” responsible for inflation.

For decades, the Washington-based Bretton Woods Institutions urged developing economies to be much more open and market-oriented. Unsurprisingly, the Global South now faces problems due to earlier procyclical policies.

The report advises commodity exporters — two-thirds of developing nations — on how to cope with price fluctuations. Breaking with past advice, the Bank now calls for a more counter-cyclical fiscal policy framework.

Fiscal policies in recent decades have often been procyclical, overheating economies and deepening slumps. The Bank found that fiscal policy in commodity-exporting nations was 30% more procyclical and 40% more volatile than in other developing economies.

It argues that commodity exporters’ fiscal policies have worsened price vicissitudes. It estimates that when commodity price increases enhance growth, government spending increases can boost growth by an additional fifth.

Greater fiscal policy pro-cyclicality and volatility amplify business cycles, hurting economic growth in commodity-exporting developing economies.

The Bank argues that this should be addressed with “a fiscal framework that helps discipline government spending, by adopting flexible exchange-rate regimes and by avoiding restrictions on the movement of international capital”.

The report claims that such policy measures will help commodity-exporting developing economies boost per capita growth by about 0.2% annually.

Misrepresenting statistical correlations, the Bank urges easing restrictions on international financial flows, claiming this will “help reduce both fiscal procyclicality and fiscal volatility”.

Ignoring developing countries’ experiences, it urges the adoption of developed-economy “exchange rate regimes, [lack of] restrictions on cross-border financial flows, and … fiscal rules” as part of a “strong commitment to fiscal discipline”.

The report ignores overwhelming evidence of fiscal austerity and capital account openness exacerbating procyclicality and volatility.

Clearly, Bank advice has not changed much since the 1980s, when such policy recommendations worsened Latin America’s and Africa’s lost decades.

Jomo Kwame Sundaram is currently senior adviser at Khazanah Research Institute. A former economics professor, he was United Nations assistant secretary-general for economic development. He is a recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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