Trade and Development Board, 73rd Executive Session - Item 2: Interdependence and development strategies in a globalized world
13 February 2023
Presentation of the Trade and Development Report 2022
Excellencies,
Ladies and gentlemen, Dear friends,
It is my distinct honour and pleasure to be here with you again today.
We have prepared a very thorough session to present our latest Trade and Development Report 2022 to you. Richard Kozul-Wright, our divisional director, and Anastasia Nevatoslava, our director of the macro branch, will each elaborate on some of the key points of our TDR.
My remarks will therefore be brief, and focused.
Last year’s TDR could be summarized in three key points:
First, the world was at the brink of a policy-induced recession, that is why we called for a more balanced approach and a policy mix to fight inflation.
Second, much of the Global South was in an extremely fragile situation, especially in relation to debt and liquidity constraints
Third, the opportunity for global action was still open.
Let me go into each of these three points and reflect on what has happened since October.
On the first point, we still expect global GDP growth this year to be around 2.2 per cent (down from 2.5 per cent last year), with many tail-risks to the downside (and maybe you have more updated numbers). Financial markets remain very jittery, sovereign debt defaults are increasing in number, and we cannot rule further external shocks to the global economy, in what is fast becoming a very geopolitically uncertain environment.
Since the reopening of the Chinese economy, there has been a general sense, as I have said in the morning, a general sense of calm in some policymaking circles. We believe it is still too soon to claim that we have achieved a so-called soft landing. The impact of interest rates on the job market, the housing market, and more generally – debt— comes with a lag. So, in a way, we are still flying – we have not landed yet.
On this note, the debate is still open. We still believe that the inflation we see today is coming from two sides. There is a demand side coming mostly from some developed countries which combined Quantitative Easing (QE) with massive fiscal policy during COVID. And there is the supply side, especially due to dynamics in shipping, food and energy markets – as well as structural faults that this crisis has revealed, in terms of speculation, price markups, and market concentration in global supply chains. In other words, we do not think that inflation today is only demand-driven.
So, we have stressed the risks of continuing interest hikes, especially for developing economies, who according to the Federal Reserve’s own models, lose about 0.8 per cent of GDP growth for every 100 basis points of interest rate hikes. This is not our model, it is the model of the Federal Reserve.
That said, just last week, Canada was the first advanced economy to break the trend and pause further interest rate hikes. We welcome this decision and hope that it can be replicated.
This takes me to my second point, which is the current state of the developing world.
Here the probability of a soft landing in many developing countries is lower than the probability of a soft landing in the advanced economies.
It is true that most big developing economies are expected to grow relatively faster this year than the advanced economies. Between two thirds and three quarters of global GDP growth this year will come from the developing world, with China alone accounting for half of that.
But as I always say, when there is inequality, averages hide more than they reveal. In this picture of growth, there are many countries who are in extremely distressing situations, both low-income and middle-income countries, especially in Africa, Central Asia, and Latin America.
Hunger levels, for example, are still at record heights. Acute food security has tripled in three years, from 135 million in 2019, to 350 million today. There are six countries in a state of famine. And despite recent price falls, food prices are still very high in domestic currencies. And the situation on the ground is only getting worse due to lack of affordable fertilizers.
Furthermore, the debt landscape is particularly troubling.
The pandemic raised government debt in over 100 developing countries (excluding China) by $2 trillion, bringing public developing country debt to a grand total of $11 trillion. So, 100 developing countries raised their debt during the pandemic to $2 trillion.
As a result, Fitch Ratings estimates governments will pay an additional $ 1.1 trillion on the global debt stock in 2023, $ 1.1 trillion more. To place this figure in context, it represents almost 4 times the annual estimated investment needed for climate adaptation and mitigation in developing countries. We were just discussing about LDCs and what they need for adaptation and mitigation for a green structural transformation. So, the additional that has been paid in debt today is four times the amount estimated investment needed for climate adaptation and mitigation in developing countries.
Making matters worse, much of this debt is in foreign currency. The rate in foreign currency in Middle Income Countries is about 70 per cent of the debt, and in Low- Income Countries is 85 per cent of the debt. So here we have a double burden, due to rising interest rates and foreign exchange depreciation. Even if debt levels decline in dollar terms, countries with depreciating currencies are paying more of their own fiscal space to service them. The currency exchange fund (TCX) estimates that in most countries in Africa depreciation is increasing debt servicing requirements by an amount equivalent to the whole public health budget or the whole education budget.
This situation is also deteriorating rapidly, due to a lack of multilateral solutions to the debt issue, and interest rates’ incessant rise. Between October and today, another country defaulted on its sovereign debt – Ghana. As a reminder, Ghana is a middle- income country, and has therefore no access to the recent G20 debt initiatives. It cannot to go to the debt framework and it cannot go to any suspension of debt service because it is a middle-income country and Middle-Income Countries are not included in the initiatives of the G20.
So, this brings me to my third and closing point: Reform. The TDR is a diagnostic, but above all it is a call to action.
In the TDR we develop many important proposals for multilateral reform, in the area of debt, in the area of investment, in the area of liquidity, and in the area of regulation to tackle speculation and market capture.
UNCTAD is working very hard to advocate these policies at the global level, and to have a constructive dialogue with the International Institutions with the MDBs, with the G20. We are also taking an active part on the UN System-wide efforts in a very constructive and open way.
This year we are redoubling our efforts because in this world of cascading crises in which we live, we should work hard to find common ground for reform and action. And for that, the world must remain in crisis-mode because we have not turned the corner. So, we must not lower our guard.
I thank you and I leave you with my colleagues to follow-up.
Thank you.
