The world has become a more unequal place over the last few decades. Long gone are the days when countries like the US had a strong middle class and the world was hopeful that multilateral lending agencies could help developing countries achieve levels of prosperity comparable to those in the developed world.
For sure, trade has helped lift millions of people out of abject poverty the world over, mainly in China and, a few decades earlier, in the so-called dragon states of East Asia. Still, when we look at what has happened since the 1980s, the rich have become richer and the poor have become poorer, both domestically and among nations.
The global financial crisis of a decade or so ago widened that divide even further. Austerity measures in many countries curbed spending on schools and health sectors, leaving the poor to forego school meals for their children and basic health care.
Income and wealth inequality have been growing across the board. Even in “nice” countries with a solid middle class in central and northern Europe, this trend seems unstoppable.
Among the family of nations, we can observe the same. Poor countries have racked up debt at a disproportionate pace. According to the World Bank, the world’s 73 poorest countries accounted for 45 percent of global debt in 2013. By the end of last year, that figure had reached 63 percent — and it is steadily growing.
Then came the coronavirus disease (COVID-19) pandemic, which will ensure these inequalities are only going to grow. Nothing highlights this more than the World Bank and International Monetary Fund (IMF) annual meetings, which are taking place this week.
According to the IMF, growth prospects are unequal: The world economy as a whole will contract by 4.4 percent this year, while China is set to grow by 1.9 percent. The US economy will shrink by 4.3 percent, the eurozone’s by 8.3 percent, and some developing economies may contract by up to 10.3 percent. These forecasts were drawn up before we saw the number of COVID-19 infections spiraling out of control once again in the Northern Hemisphere, forcing an increasing number of regional lockdowns.
The IMF advises countries to spend in order to bolster education and health care. These are wise words and borrowing is possibly affordable at current interest rate levels. However, in OECD countries, these spending sprees tend to be followed by austerity measures. We have seen what austerity does to the public sector and how it afflicts the poor after a financial crisis.
Internationally, the IMF has provided liquidity throughout the pandemic. However, according to Oxfam, 76 of the IMF’s 91 loans since March have led to austerity measures of some sort in the recipient countries.
The real issue is the deferral and forgiveness of debt payments. In April, the G20 finance ministers endorsed the Debt Service Suspension Initiative (DSSI). So far, 44 of the 79 eligible countries have availed of the initiative. The G20 finance ministers agreed to extend the DSSI through June 2021, but that is not long enough by far.
The issue is private sector creditors. The World Bank, IMF and G20 finance ministers have time and again pleaded with private sector lenders to offer debt deferral. Some, particularly nongovernmental organizations, have asked for debt forgiveness, but to no avail. Chinese banks, which are the biggest creditors in many countries, have been particularly reticent. Beijing also classifies its large policy banks as private sector institutions, complicating the matter even further.
To make matters worse, addressing the issue of inequality among nations is also left to the rich. The least-developed countries do not sit at the table when G20 ministers or members of the Paris Club (a gathering of creditor nations) ponder debt rescheduling, when what may in fact be needed is the forgiveness of some debt.
These concerns of inequality really matter to stability both within countries and among nations. Inequality breads conflict — at times violent conflict. Abject poverty and the inability to escape it is, for instance, a driving force behind streams of migrants moving from south to north, whether from Africa to Europe or from Latin America to North America. This should be sufficient for policymakers in the more affluent nations to contemplate how to help their poorer neighbors.
The same policymakers should also worry about inequalities growing domestically. The queues at food banks in the US and in parts of Europe should be a disquieting warning of what is to come if the least affluent are not provided for. Hunger and deprivation do not make for stable societies — a strong middle class does.
All of the above means that the wealthier, be they nations or a domestic class of people, need to give a little. Compassion and generosity are what is needed in the face of the COVID-19 pandemic and what looks set to be the biggest global recession since the Great Depression. Tightfistedness and mean-spiritedness will simply not do — and, worse, they are dangerous in the long run.
- Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources
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