Fighting the recession to avoid fragmentation of the world

As international institutions predict an economic slowdown in 2023, Gayle Smith warns of the risks of a recession in developed and developing countries. Fragmentation of the world, increase of extreme poverty and famine, decrease of development aid… Gayle Smith advocates a modernization of development banks and a bold solution to the emerging countries’ debt problem. A paper written for the Rencontres Économiques de Washington.

If we fail to act to divert a global recession – or simply fail to help insulate the world’s low- and middle-income countries from the consequences of such a recession – we risk the creation of two separate economies serving different populations, rather than a single global economy for all of the world’s people.

Young people faced with yet another global recession – the third in less than twenty years – will not draw the same conclusions about the world that their counterparts did in the aftermath of the Second World War, which ushered in a new era of stability and global cooperation. Instead, today’s youth will continue to lose faith in an international system that they have reasonably concluded does not represent their values, interests or futures. That is precisely why discussions about the future of the global economy cannot be limited to the wellbeing of high-income states, but must also include low- and middle-income countries and the young people who now represent almost 25% of the world’s population.

A decline in poorer countries would threaten developed countries

And there’s another reason to think holistically, and tackle managing the global economy by looking beyond just its top G20 economies. It is neither modern nor wise to regard these countries as irrelevant to the global economy other than as perpetual recipients of assistance – and any stated belief in equity would suggest as much. What is being overlooked is that these countries are potential net contributors to the global economy – if the world has the wisdom to make the investments needed.

Unlike wealthier countries that have been able to turn to central banks, stimulus spending and supplemental budgets to dampen the effects of the global pandemic, previous recessions, and the fallout from the Russian invasion of Ukraine, poorer countries lack the access to the capital that can provide that kind of resilience. Even before the pandemic, finances in low-and middle-income nations were tight, and debt was high. And now, years later, skyrocketing food and energy prices – coupled with increased global interest rates – have stretched budgets even further. Sixty percent of low-income countries are now at risk of acute debt distress. Individually the collapse of these relatively small economies poses little risk to the global economy. But their collective decline would represent a major threat to global political stability and to the broader global economy which cannot be ignored.

More than 600 million people living with food insecurity

This is to say nothing of the human suffering that is already increasing in the face of widespread economic decline. Already today, there are more than 600 million people living with food insecurity, and since Russia’s invasion of Ukraine, 72 million more people have joined their ranks. We’re witnessing the first increase in extreme poverty in 25 years, and net losses in recent past gains in health and education.

To make matters worse, a global economic downturn will lead many of the world’s major donors to slash foreign aid budgets in order to avoid cuts to more domestically focused, politically sensitive programs. These cuts will have a cascading effect on low-and middle-income countries, worsening already tenuous economic and humanitarian situations around the world.

The social and developmental consequences of a global recession are clear and alarming. Fortunately, the courses of action most likely to avert these consequences are equally apparent.

Reinventing multilateral institutions

The most impactful move world leaders could make would be to reimagine and modernize the world’s multilateral development banks by enacting the five recommendations of the Capital Adequacy Framework report, which could yield the capital needed to build the resilience that poorer countries need to reduce their increasing vulnerability to exogenous shocks, including a global recession. These changes could unlock between $400 billion and one trillion dollars in urgently needed capital.

At the same time, world leaders can tackle a looming debt crisis and avoid another, long-term economic catastrophe. Revitalizing the Common Framework and the Debt Service Suspension Initiative are important steps, but a bigger and bolder solution – along the lines of HIPC – will likely also be needed. This time around it will be harder – the debt composition and the politics are more complex, and the underlying causes of recurrent debt crises have not, as yet, been addressed. But managing a global economy buffeted by crisis and inaction will ultimately prove more difficult and more expensive.



Gayle Smith, CEO of ONE