Take the US out of the advanced economies and their aggregate expected growth rate roughly halves, from about 1.5% to something nearer 0.8%. Take India and China out of the emerging and developing world and growth of 5.2% over 2010-19 becomes 3.2%.
These three countries account for most of the global economy’s resilience in recent years, argued Indermit Gill, chief economist of the World Bank Group, in conversation with OMFIF chairman David Marsh and vice chair Udaibir Das. Gill steps down in August, having steered the world’s largest development bank through a particularly tough time – pandemic fallout, inflation, rate tightening, conflict, energy shock and a sharp reordering of trade policy.
Gill, who coined the middle-income trap, arrived at the Bank to three sets of shareholders. The richest and poorest countries were happy with the Bank’s work, following a focus on climate change and a replenishment of the International Development Association fund. But emerging markets were dissatisfied, having experienced potential growth near 6% in the 2000s, then 5% in the 2010s and a projected growth of roughly 4% for the 2020s on the assumption that things went well. They didn’t.
The Bank’s response was a return to its core mandate: job creation, poverty reduction and economic growth. As Gill put it, ‘bad times are good for economists’ – people listen when things go wrong.
The gloom is overdone
Headline negativity about trade fragmentation, Gill argued, is more overdone than the data warrant. World trade as a share of global GDP rose from around 20% in the 1970s to about 60%, where it has since stabilised. Drawing on work by Richard Baldwin, Gill noted that the sharp fall in direct US-China trade has been offset by a commensurate increase in trade between these countries and third parties. The real issue, however, is trade policy uncertainty, which needs to be addressed urgently.
Trade remains a crucial platform for small economies, allowing them to improve efficiency and access technologies abroad. They are also better represented than they were: emerging markets have become markedly better at presenting a single coordinated view.
Europe, on the other hand, has the opposite problem, discussing economic questions as though they represent one large economy, when in fact they represent 27 mostly small ones. This coordination is a problem for a region with modest growth of 0.8%-0.9% – a rate that should ideally be double.
In choosing its allies, he said, Europe should adopt the mindset of a small economy first, and the matter of allies resolves itself from there. ‘When times are good, Europe is a lot like the US… but during bad times the EU is more like the United Nations than the United States.’
The architecture hasn’t kept up
Least encouraging is global debt burdens, which have grown far faster than the mechanisms to manage them. Gill blames borrowers, creditors and the system itself. While the quality of monetary policy in emerging markets has converged on advanced-economy standards, fiscal policy has not. On the creditor side, opacity persists and new official lenders (including, but not limited to China) resist disclosure where public debt should be public. This allows for surprises in the size of a country’s obligations, revealed only once that country is in difficulty.
Institutional failure underpins these dynamics and the fault, Gill said, lies as much with the World Bank and the IMF as with anybody else. Debt sustainability measurement frameworks have not modernised, and they no longer fit borrowers that have shifted from bank loans to bondholders, borrowing at home as well as abroad, from both Paris Club and non-Paris Club creditors. Lenders and multilaterals should instead be treating low-income countries as market-access countries.
And as for restructuring, the absence of private creditor participation was the key flaw of the 2020 Debt Service Suspension Initiative, which the G20 Common Framework has since reproduced. The whole architecture needs to be rethought – and will prove inadequate if global economies face a spike in inflation and an increase in policy rates, yielding simultaneous liquidity and insolvency problems.
Mitigation is not for everyone
Asked whether multilateral development banks are still solving yesterday’s climate problems, Gill said climate resilience – rather than mitigation – ought to be the priority for most developing economies. There are some developing economies where mitigation is the right priority, he said, but they can be counted on 10 fingers.
And there are ways to improve how the conversation should go. Borrowing from Michael Greenstone of the University of Chicago, Gill suggested starting not with global climate change but with air pollution – a tangible problem in almost every developing economy. Then one can turn to reliable and affordable energy; and only then with the global picture.
Artificial intelligence, and advice
Bank estimates find that electricity increased productivity growth or GDP growth by about one percentage point, and information and communications technology around half of that. The potential of artificial intelligence falls somewhere between those two – in a scenario of moderate adoption, it can bring growth back to the 2010 levels and, in the high adoption scenario, back to global growth rates seen in the 2000s. But these gains will come on a longer time horizon, realised only in the 2030s.
The current investment boom, Gill explained, will probably produce tears in the stock market, but tears of joy in the real economy as capital and talent are freed up. Outside of countries where big investments are made by hyperscalers, Gill expects AI to complement human capital rather than displace it across 90% of the economy. He is particularly positive about India, which he sees applying the middle stage of his own invest-infuse-innovate sequence to AI, absorbing technologies as in the case of India’s digital ID and India Stack.
His advice to the next generation of development economists was do not assume that international debates conducted in advanced economies – development, climate change, AI – translate perfectly to developing-country contexts. And never forget the fundamentals: get fiscal and monetary policy right first; the rest is what you do afterwards, not instead.
Jessica Prestorius is Programmes Coordinator at OMFIF.
Watch the conversation with Indermit Gill on demand.
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