a perfect storm

Image: Clara Figueiredo, untitled, essay. Digitized analog photography, São Paulo, 2019.
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By NGAIRE WOODS*

Covid-19, war in Ukraine, famine, political upheavals and debt crises affect developing countries

Without any accountability, developing countries face a perfect storm of famine, political upheavals and debt crises. The Russian invasion of Ukraine and the Western-led sanctions it unleashed are partly to blame, as are the lockdowns of Covid-19 in advanced economies, which have deprived poor countries of crucial tourism activity and export earnings.

Millions of lives are now at risk, but mitigation is possible. It was supposed to start at this month's spring meetings of the International Monetary Fund and the World Bank.

Policymakers have a lot to deal with – starting with escalating food prices. The Russia-Ukraine conflict, involving countries that supply 29% of the world's wheat, contributed to a 67% increase in wheat prices since the beginning of this year. To the export bans imposed by other wheat producers are also driving higher prices, as well as fertilizer shortages due to reduced supplies from Belarus and Russia.

Unsurprisingly, hunger is spreading out. The first countries to be hit are those that were in desperate straits before the Russian invasion, including Afghanistan, DR Congo, Ethiopia, Nigeria, Pakistan, Sudan, South Sudan, Syria, Venezuela and Yemen. They were quickly joined by countries that depend on imported grains and were already facing severe food insecurity, such as Djibouti, Lesotho, Mozambique, Burundi, Madagascar, El Salvador, Lebanon, Honduras, Swaziland, Guatemala and Namibia.

The Executive Director of the United Nations World Food Program, David Beasley, recently issued a stern warning: “If you think we now have hell on Earth, get ready. If we neglect North Africa, North Africa will come to Europe. If we neglect the Middle East, [the] Middle East will come to Europe.”

Rising food prices and famine will make riots and political upheavals more likely. Even before the outbreak of war in Ukraine, people had been plunged into crises in Afghanistan, Ethiopia, Somalia, Yemen, Myanmar, Syrian refugee camps, and elsewhere. In March, large scale protests erupted in countries such as Cameroon, India, Pakistan, Sri Lanka and Spain.

Governments that can take preventive measures are already doing so. O Egypt, for example, which imports around 80% of its wheat from Russia and Ukraine, recently introduced a price cap to contain the rise in the price of unsubsidised bread (the government has already subsidize bread for the majority of the population). The government also announced an economic aid package totaling 130 million Egyptian pounds (7 million dollars). These measures were made possible thanks to the  assistance the IMF and Saudi Arabia. But many countries have yet to receive such help.

The lack of cooperation is causing famine and conflict. Surprisingly, global stocks of rice, wheat and maize, the world's top three staples, are apparently at  all-time highs. Even wheat stocks, the commodity most war-affected Ukraine are “well above levels during the 2007-08 food price crisis”, while estimates suggest that around three-quarters of Russian and Ukrainian wheat exports had already been delivered before the invasion.

A severe debt crisis is also developing as many low-income countries, pushed to their limits by Covid-19, are hit by higher food and fuel prices, lower tourism receipts, reduced access to international capital markets. , disruptions to trade and supply chains, pent-up shipments and an historic increase in refugee flows. Debt of developing countries rose to a 50 year peak, at about 250% of government revenue. About 60% of the countries that were eligible for the G20 Debt Service Suspension Initiative (DSSI), related to the pandemic, are experiencing or at high risk of over-indebtedness.

Besides, slower global growth and rising inflation, accompanied by tighter financial conditions in richer countries, are spurring capital outflows from developing economies, forcing them to devalue their currencies and raise interest rates. As observed recently the President of the World Bank, David malpass, “never have so many countries experienced a simultaneous recession”. Malpass added that advanced economies' stimulus policies have helped to make the situation worse, driving price increases and increasing inequality across the world.

Finding a genuinely global solution to these problems is now vital. In past debt crises, rich countries have used the IMF and World Bank to force adjustment burdens onto developing economies, arguing that they must undertake reforms before receiving assistance. But the most powerful forces hitting debt-ridden low-income economies today are global and beyond their control – and IMF and World Bank member countries must pool resources and cooperate to confront them.

The good news is that the powerful shareholders in these institutions have proven capable of collective action. Last August, for example, they agreed on a new allocation of US$650 billion in special drawing rights (SDR, the IMF's reserve asset).

But since SDRs are distributed according to quotas of the countries in the IMF, most of the allocation went to the larger economies. Worse still, the major shareholders of the IMF and World Bank have failed to channel resources where they are most needed. Instead, to limit their possible exposure to any losses, they keep insisting on terms that prevent rapid deployment. This approach also threatens to undermine the new Resilience and Sustainability Fund from the IMF and emergency financing from the World Bank Group.

A much bolder collective approach is now needed. The United States, China, Japan, the European Union and the United Kingdom depend on global security and prosperity. They must work together to avoid famine, conflict and a developing country debt crisis that will push the world into recession. They can avert famine by acting together to calm global markets for wheat and other grains and to take steps to keep exports flowing. They can reduce the risk of conflict by not hampering IMF and World Bank emergency assistance with conditionalities. And they can build on the DSSI by creating a debt restructuring mechanism in which they all participate.

Two core elements are crucial to managing the current crisis in developing countries. Powerful countries should refrain from impoverishing trade, fiscal and monetary policies that wreak havoc on developing economies. And they must use their combined resources at the IMF and World Bank to act quickly and unconditionally to avert disaster.

The challenges faced by the poorest countries are unprecedented. And that means the cooperative response of the richest economies must be too.

*Ngaire Woods is Dean of the Blavatnik School of Government at the University of Oxford.

Translation: Fernando Lima das Neves.

Originally published on the website of Project-Syndicate.

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