Slipping back into deep abyss

Continuing from Tuesday Repayment of Debt. Also see How will this tiger ride end?
The overall poverty level in the world has seen material decline over past three decades as highly populated countries like China, India, and Bangladesh pulled millions of people out of abysmal poverty conditions; even though, this period has also seen sharp rise in economic inequalities also.
The pace of poverty reduction has reduced since global financial crisis, as the flow of development aid from developed economies to the poor countries saw a marked decline; commodities dominated economies suffered due to persistent deflationary pressures; EM currencies weakened; and abundantly available credit at near zero interest rates helped the large global corporations and investors to increase their wealth disproportionately.
The global economic shut down induced by the outbreak of deadly COVID-19 virus is threatening to reverse the process of poverty alleviation. Millions of people who had been barely out of poverty conditions are facing the prospects of slipping back into the deep abyss. The fiscally constraint governments, anemic economic activity and feeble businesses would find it tough to support these people.
The key question to examine therefore is, If the global growth continues to remain low, how the poor and developing economies will bridge the development gap with developed countries and come out of poverty? And if this gap widens, what would it mean for the world order?
As per the World Bank, “Poverty projections suggest that the social and economic impacts of the crisis are likely to be quite significant. Estimates based on growth projections from the June 2020 Global Economic Prospects report show that, when compared with pre-crisis forecasts, COVID-19 could push 71 million people into extreme poverty in 2020 under the baseline scenario and 100 million under the downside scenario. As a result, the global extreme poverty rate would increase from 8.23% in 2019 to 8.82% under the baseline scenario or 9.18% under the downside scenario, representing the first increase in global extreme poverty since 1998, effectively wiping out progress made since 2017.”
The report further emphasizes, “The number of people living under the international poverty lines for lower and upper middle-income countries – $3.20/day and $5.50/day in 2011 PPP, respectively – is also projected to increase significantly, signaling that social and economic impacts will be widely felt.” Besides, “A large share of the new extreme poor will be concentrated in countries that are already struggling with high poverty rates and numbers of poor. Almost half of the projected new poor will be in South Asia, and more than a third in Sub-Saharan Africa.”
As per another report of World Bank (Global Waves of Debt – Causes and Consequences), “…wave of debt began in 2010 and debt has reached $55 trillion in 2018, making it the largest, broadest and fastest growing of the four. While debt financing can help meet urgent development needs such as basic infrastructure, much of the current debt wave is taking riskier forms. Low-income countries are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China. Some of these lenders impose non-disclosure clauses and collateral requirements that obscure the scale and nature of debt loads. There are concerns that governments are not as effective as they need to be in investing the loans in physical and human capital. In fact, in many developing countries, public investment has been falling even as debt burdens rise.
The debt build-up also warrants close analysis because of slower growth during the current wave. In comparison with conditions prior to the 2007-2009 crisis, emerging and developing economies have been growing more slowly even though debt has been growing faster. Slower growth has meant weaker development outcomes and slower poverty reduction.”
“The latest debt surge in emerging and developing economies has been striking: in just eight years, total debt climbed to an all-time high of roughly 170 percent of GDP. That marks a 54-percentage point of GDP increase since 2010—the fastest gain since at least 1970. The bulk of this debt increase was incurred by China (equivalent to more than $20 trillion). The rest of the increase was broad based—involving government as well as private debt—and observable in virtually every region of the world.
The study shows that simultaneous buildups in public and private debt have historically been associated with financial crises that resulted in particularly xviii prolonged declines in per capita income and investment. Emerging and developing economies already are more vulnerable on a variety of fronts than they were ahead of the last crisis: 75 percent of them now have budget deficits, their foreign currencydenominated corporate debt is significantly higher, and their current account deficits are four times as large as they were in 2007. Under these circumstances, a sudden rise in risk premiums could precipitate a financial crisis, as has happened many times in the past.
Clearly, it’s time for course corrections.”
…to continue on Tuesday
Weekend readings

Author: Midas Finserve

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