Globalization and the growth of market and financial linkages have made economic instability a common phenomenon, which should force policymakers in developing countries to remain alert and responsive to economic events and downturns in advanced economies.
Photo: Collected
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Photo: Collected
The new political and economic order that was established after the end of World War II was perhaps one of the best welfare-enhancing episodes in human history.
Not only have human societies collectively not experienced serious outbreaks of global conflict that led to the deaths of millions of people and the destruction of continents—an event that occurred twice within the first half of the 20th century—but the major political and economic actors in around the globe were also able to create an economic space that has lifted billions out of extreme poverty and caused global per capita income to more than triple between 1961 and 2019.
However, any serious reading of economic headlines from around the world no longer inspires any optimism. Record-high inflation across countries, serious doubts about the financial model of the post-2008 Western global financial crisis, and growing inequality within both advanced and developing countries beg the question: where is the global economy headed?
But to rigorously understand how the future might unfold, we need to look at shared history: How have different regions performed over the past five decades? Is the increase in economic instability a regional or shared phenomenon? Moreover, are the current economic concerns a short-term economic defect or are they driven by increasing structural defects in the global economic structure?
To shed some light on these pressing economic questions, it is appropriate to assess some of the stylized facts that emerge from a disaggregated assessment of the global economy over the past five decades.
More specifically, if we examine how growth has evolved and fluctuated over the past five to six decades across different regions, we encounter five stylized facts.
First, while global per capita income has more than tripled over the past five decades, this economic story masks marked regional differences in living standards around the world. For example, if we compare per capita income across regions, we can see that the average income in the EU or OECD is more than 20 times higher than an average in sub-Saharan Africa or South Asia; and about four times higher than a Latin American average.
In other words, regional differences in per capita income remain strong even though there was an expectation that economic liberalization and globalization after the 1990s would help economic convergence between countries.
Second, world economic growth has experienced a secular decline between 1960 and 2021 with some signs of increased volatility after 2000. This is most likely due to the global financial crisis in 2008 and the aftermath of Covid-19. Interestingly, average growth by decade fell for every major region between 2011-2021 – a unique phenomenon not seen between 1960 and 2000.
Infographic: TBS
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Infographic: TBS
Third, East Asia and the Pacific experienced improved economic performance until 2010, after which there has been a slowdown. However, it remains a region with the fastest economic growth over the past five decades.
Moreover, growth volatility in the region improved drastically after 1970 and has remained largely unchanged since then, with a worsening in the 1990s. However, East Asia’s growth volatility has remained one of the lowest in comparison with other major regions between 2001 and 2021.
Fourth, average economic growth in South Asia has largely improved over time. Volatility in economic growth was also low between 1980 and 2010, but has worsened significantly between 2011 and 2021, making it one of the most volatile regions in the last decade.
This trend is evident if we observe what happened recently in Pakistan and Sri Lanka, where serious macroeconomic instability has forced their governments to seek economic assistance from international lending agencies. Indian growth also suffered badly during the pandemic years.
Infographic: TBS
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Infographic: TBS
Fifth, economic growth within the EU and OECD experienced a secular decline between 1961 and 2021. In addition, it is essential to note that they experienced very low economic volatility between 1980 and 2000; however, volatility in economic growth has almost doubled in the past two decades.
Overall, the evolution of economic growth in all major regions over the past five to six decades indicates that macroeconomic volatility has been increasing over the past two decades, and there is no reason to believe that the future is less vulnerable. . to economic shocks.
This increase in global economic volatility is a serious phenomenon that deserves more rigorous scrutiny by experts and policy makers as it has coexisted with lower economic growth.
This also marks a departure from what was experienced between the 1960s and 2000s, when economic volatility experienced a steady decline. Certainly, while there is no clear consensus as to why regional economies are experiencing more volatility, there is reason to believe that economic instability originating in advanced economies—due to general deregulation of the financial sector, increased trade imbalance with the East, sharp rise in economic inequality and rising public sector debt – is now hurting the rest of the world due to increased economic and financial linkages over the last two decades.
In other words, globalization and increased market and financial linkages have made economic instability a common phenomenon, which should force policy makers in developing countries to remain alert and responsive to economic events and downturns in developing economies. advanced.
The ongoing macroeconomic situation in Bangladesh also shows the pitfalls of not reflecting global economic developments in our domestic economic policy-making. By keeping the exchange rate against the US dollar virtually fixed for nearly 10 years until 2023, despite relatively higher domestic inflation compared to trading partners and export competitors, the authorities had made imports cheaper and exports uncompetitive leading to large balance of payments deficits in 2022. external current account and overall balance.
Forcing the interest rate range to be confined within a range of 6-9% – when major central banks were raising policy rates led by the US Federal Reserve – prevented the Bangladesh Bank from supporting the Taka exchange rate and also to fight against rising inflation in the post-pandemic global economy.
The results were severe macroeconomic instability characterized by a sharp devaluation of the Taka, a loss of foreign reserves amounting to $24 billion, a downgrade of Bangladesh’s credit rating by major rating agencies, a large and growing deficit of financial account and a persistently high domestic inflation. .
These results could have been much better managed if the government had proactively and timely reflected global economic developments in our domestic policy formulation.
Furthermore, given that globalization and increased market and financial linkages have made economic instability a common phenomenon across regions, policy makers in developing countries like Bangladesh should no longer think that they can formulate monetary policy decisions. or isolated fiscal.
In other words, emerging and developing economies are no longer insulated from global economic volatility, and economic teams within central banks or finance ministries in developing countries must carefully follow and take into account the parameters of the global economy, in so that they can create their own macroeconomics. response to protect their respective domestic economy from any undesirable changes within the global economic space.
Moreover, if any political regime chooses to ignore this reality, then recent history makes it clear that the brutal invisible hand of the market will not allow such mistakes to go unpunished.
Dr Ahsan H Mansur is Executive Director at the Policy Research Institute (PRI). Dr Ashikur Rahman is the Chief Economist at PRI.
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