Growth and Stability During Crises
Delivered in Niamey, hosted by the Abdou Moumouni University of Niamey
at the Gandhi Conference Center, March 30, 2023
Thank you very much, President Bazoum, to the University of Niamey, and to the Government and people of Niger for the warm welcome and for your hospitality. It¡¯s a great pleasure for me to be speaking with you today from Niger ahead of the World Bank Group-IMF Spring Meetings. Niger is in the heart of the Sahel and the place where many of the hardest development challenges overlap. Yet, history teaches us that the Sahelian trade routes were also the source of immense opportunities. The success of the Sahel is vital for the success of development.
My speech today is about both the central dilemmas of development policy in a time of crisis and the opportunities we must harness, especially for the region. Niger personifies this blend of challenge and opportunity. Amid regional tensions, one of the lowest electrification and highest birth rates in the world, harsh climate, and difficult economic circumstances, we are partnering with the government in their efforts to create opportunity ¨C including reforms that promote stability, human capital, and economic opportunities for the growing population. I am pleased to see Niger taking bold steps to help people improve their lives.
Your efforts to counter violent extremism by creating jobs, skills, and inclusion for youth in fragile and conflict prone areas should be an example for other countries. I commend your focus on maintaining security and peace in the region, building resilience to the devastating impacts and costs of climate change, investing in girls¡¯ education, and sustaining democratic achievements.
Over the last few years, the world has faced an unprecedented series of crises. Å·ÃÀÈÕb´óƬ Group has led through these crises with a clear focus on rapid and impactful support. In previous speeches, I have spoken about the World Bank Group¡¯s responses to the devastating reversals in development, including rising poverty rates, backsliding in access to electricity and clean water, and the severe setbacks in foundational learning skills due to school closures.
The COVID-19 pandemic cost millions of lives, caused massive job losses, and disrupted supply chains. It led to the loss of more than one full year of education for one billion children around the world, which underscores the urgency of a strong recovery in education. The pandemic also triggered extraordinary policy responses, with macroeconomic consequences still being felt. Inflation soared with governments providing massive fiscal and monetary support to counter the pandemic, especially in the advanced economies. The war in Ukraine triggered outright shortages of fuel, food, and fertilizer. Natural disasters struck hard too ¨C from earthquakes in T¨¹rkiye and Syria to floods across South Asia and catastrophic drought in East Africa.
Developing countries have suffered the most from this onslaught of crises. The pandemic increased the global extreme poverty rate from 8.4 to 9.3 percent, the first recorded increase since we started keeping count. The true death toll remains unknown in many parts of the world. Now, a growing number of developing countries are facing the prospect of major domestic crises, with economic growth slowing, poverty and hunger on the rise, public debts reaching unsustainable levels amid rising interest rates, ineffective mechanisms for resolving external debt distress, underinvestment, and growing populations.
A. Time to reassert core economic development principles
Confronted by these developments, we have the responsibility to forcefully reassert core economic principles for development in every country. I will highlight four:
- First, achieving macroeconomic stability is critical ¨C not least because fiscal recklessness compromises essential services and inflation penalizes the poor the most.
- Second, sound policies to promote private investment should always remain a top priority ¨C because without them there would be no economic growth.
- Third, free and fair international trade must be nurtured ¨C because it promotes efficiency and creates enormous opportunities for growth and convergence.
- Finally, the international community¡¯s mechanisms to finance the provision of global public goods must be strengthened ¨C because climate costs, conflict, and pandemics will set back human progress everywhere unless the effectiveness of global efforts improve.
I¡¯ll mention two other undertakings that are critical here in the Sahel. One is human capital, especially investing in the health of infants and the education of young people to create opportunities for a better future. The second is good governance, citizen participation, and accountability of public officials. I commend Niger for its first-ever peaceful transition of power two years ago. These hard-to-achieve societal attributes are necessary for peace, stability, economic growth, and prosperity. Over the past few decades, countries in Africa have made considerable progress in human development by bringing primary school enrollment rates close to 90% on average, with the continent recording some of the biggest increases in elementary school enrollment. Africa has also scored some of the fastest improvements in key health metrics, including life expectancy and under-five mortality rates. Less progress has been achieved on the governance front, with multiple coups in recent years across the continent, domestic conflicts, and rising violence.
The multiple crises we have faced in recent years call for an affirmation and adaptation of basic economic principles to a new, more challenging environment.
B. Promoting macroeconomic stability
Let¡¯s start with macroeconomic stability, including government spending and revenues, monetary policy, and currency stability. To respond to the pandemic, countries around the world ran large budget deficits and saw significant increases in public debt. In many developing countries, the stimulus response came on top of sharp increases in debt from projects financed by entities outside the traditional creditor countries. These contracts often lacked transparency. As a result, public debt has grown to unsustainable levels in much of the developing world, with precise amounts and terms often unknown due to non-disclosure clauses, collateralized debt and debt-like arrangements, and escrow accounts.
As we meet today, more than half of the world¡¯s poorest countries are in or at high risk of debt distress. Their difficulties are mounting as the world economy and asset prices adjust to more normal interest rates and bond yields. Inflation and higher interest rates in advanced economies lead to capital shortages for developing countries, causing currency depreciation and higher interest rates, thereby adding to the debt burden.
Thus, governments must plan for continued financial stress. This requires adopting a credible fiscal policy framework. On the spending side, policymakers must increase the efficiency of public spending, remove wasteful and regressive subsidies, and improve public procurement. On the revenue side, governments should be reducing tax exemptions and broadening the tax base, not repeatedly suffering the diminishing returns of tax and tariff rate increases. Enacting long-term fiscal discipline in government finances is vital to attract private sector capital.
Further, to stop the deepening inequality from devaluations, governments that issue their own currencies must prioritize creating the conditions for sound money. Monetary policy also has a role in supporting private investment, primarily by promoting low and stable inflation over the medium term. This should be anchored in a fiscal policy that does not depend on monetization of government deficits.
C. Invigorating private investment
I will now turn to policies that enable private investment. Developing countries have immense investment needs, given inadequate infrastructure, rapid urbanization, and escalating climate costs. Capital inflows from abroad will have a role to play in financing these needs. But in these uncertain times, with widespread pressures from debt distress, countries will not be assured of foreign finance.
The stability and efficiency of domestic financial markets should be at the forefront of policymakers¡¯ efforts to meet domestic investment needs. The COVID-19 pandemic showed that a key attribute of a successful response to crisis was a diversified investor base.
This puts a premium on an environment that allows domestic savings to flow to productive private sector firms instead of being channeled to public deficits. This requires a pool of savings and access to domestic financial markets through an enabling environment that includes: regulations that facilitate the entry and growth of private firms; competition in domestic product and financial markets, including a level playing field with state owned enterprises and the government; transparent access to international markets; effective mechanisms to allow firms to exit when they fail; and clear policies and practices against corruption.
These steps are hard but achievable and necessary for private sector development.
Last week, I announced the World Bank Group¡¯s new approach to strengthen our delivery of private capital facilitation that, if successful, aims to create an infrastructure asset class. These efforts are key to strengthening private sectors, attracting private capital to meet climate and development costs, and boosting resources for development.
D. Fostering robust international commerce
Another necessary condition for development is robust international trade. For decades, the rapid economic integration of economies and the increase in cross-border commerce delivered substantial gains to global growth. Businesses were able to tap larger markets, gain economies of scale, and, on net, generate jobs for millions.
However, global trade volumes had started to decline even before the COVID-19 pandemic and the Russian invasion of Ukraine. There had been ample concern about the deterioration of the global trade system, including the unequal application of WTO rules by some countries. Most recently, subsidies to farmers and punitive tariffs on imported food products make it difficult for farmers in developing countries ¨C who tend to be poor and are not subsidized ¨C to compete. The trade concerns worsened during the pandemic and the Russian invasion of Ukraine further added to protectionist policies, raised commodity and food prices, and encouraged stockpiling. These developments have fueled a drive toward self-sufficiency, triggering another wave of protectionism, subsidies, and local content requirements. Industrial policy is making a strong comeback, with government support extending from inputs such as aluminum, steel, and chemicals to final products such as electric vehicles. The clear effect throughout history is greater conflict and slower growth, with poorer nations suffering the most.
Not surprisingly, global trade is expected to shrink in 2023. If ongoing trends are maintained, they will severely undercut international commerce and the benefits that come from it. Slowing trade will create a headwind for the global economy and especially the poorest countries, which require access to global markets to achieve sustained economic growth and poverty reduction.
A renewed recognition of the essential value of international trade is needed. Its key principles are relatively straightforward. Trade that is based on comparative advantage and specialization is additive to innovation, efficiency, and growth. Government intervention should be targeted, time-bound, proportional, and non-discriminatory, and governments should recognize the growth benefits of harmonizing tariffs, customs procedures, and standards for safety and climate. Importantly, trade finance and access to sound money are essential to realizing the benefits of cross-border commerce.
Here in Africa, there is huge potential for regional trade to reduce food insecurity and fertilizer shortages. For example, the continent produces approximately 30 million metric tons of fertilizer each year, twice as much as it consumes. And yet, approximately 90 percent of fertilizer consumed in Sub-Saharan Africa is imported, mostly from outside the continent. This reflects a poorly functioning market system; inefficiencies in shipping and port costs, distribution chains, and information availability; and a range of regional trade frictions. Each factor needs a concerted effort by African nations to fix the system. Better trade infrastructure and facilitation measures, such as harmonized rules, have an important role.
E. Boosting global public goods
Finally, the international community¡¯s mechanisms to finance the provision of global public goods must be strengthened. Just as trade practice should account for the impact of one country¡¯s policies on another, many cross-border activities also have costs, with consequences that stretch far into the future. Climate costs are being incurred worldwide, without much regard to which countries are causing the damage. Fragility in one country or region can have massive costs in a neighbor or a distant country. And most recently, the pandemic showed the global costs of a pathogen, the unequal impact on the poor, and the importance of countries working together to share information and health practices.
The investment needs related to global public goods are vast. We estimate that developing countries will need $2.4 trillion per year for the next seven years to address the global challenges of climate mitigation and adaptation, conflict, and pandemics.
Let me mention each in turn. Climate change is causing widespread costs, with the most vulnerable people and systems bearing the brunt. Adaptation is a top priority for developing countries, including more resilient agricultural practices and migration to safer locations. Developing countries also need to find low-carbon growth paths to provide reliable and affordable electricity and build resilient cities. The benefits of these efforts can extend beyond emissions reductions ¨C for example, phasing out coal reduces local air pollution and makes for healthier communities.
The same is true with regard to security. The number of civil conflicts almost doubled over the last decade. Conflict is tragic for the affected populations, which tend to be much poorer than the global average, and has significant spillover effects to other countries. This is vividly experienced every day by the people in the Sahel Region.
We must also recognize the cost of pandemics and learn from the lessons of COVID-19. The pandemic fatally exposed the shortcomings of our global infrastructure for pandemic preparedness and response. Preventing pandemics requires investments in laboratory and diagnostics, surveillance, clinical care, infection control, infrastructure and supply chains, human resources, and management and systems linkages.
New concessional resources will be particularly important for global public goods - including to facilitate the energy transition, bolster security and prioritize health preparedness. Results-based mechanisms are an efficient way to provide concessionality in a non-fragmented manner.
F. The role of the World Bank Group
Against this background of overlapping crises, the World Bank Group doubled its financing for global public goods during my presidency, reaching over $100 billion in the three-year period of fiscal years 2020 to 2022, with over half of this amount in climate finance. We are continually exploring options to further increase our financial capacity. At the Spring Meetings, we¡¯re expecting to increase IBRD¡¯s financing capacity by up to $50 billion over the next ten years.
Å·ÃÀÈÕb´óƬ replenishments have doubled over the past decade to reach $93 billion in Å·ÃÀÈÕb´óƬ20, the most recent three-year replenishment and the most ambitious in Å·ÃÀÈÕb´óƬ¡¯s history. This was possible through financial innovations, including the issuance of well-received Å·ÃÀÈÕb´óƬ bonds. However, there are still 700 million people living on less than two dollars a day¡ªthey should be the world¡¯s highest priority.
During the last four years, we have shown that financing for development can be quickly ramped up. Development needs have increased dramatically and so should development finance, to help countries such as Niger implement good development policies that support their citizens, boost economic growth, alleviate poverty, maintain peace, and respond to complex global problems. With that, thank you.
Last Updated: Mar 30, 2023
