Secondig shocks to the global economy, such as the Russian invasion Ukraine, understandably grabs the most attention. But a new global pattern of “little fires everywhere” could be just as important for long-term economic well-being. Over time, these small fires may coalesce into one that is just as threatening as the larger fires that acted as catalysts in the first place.
In addition to causing widespread death and destruction and displacing millions, the war in Ukraine continues to intensify Strong stagflation wind throughout the global economy. The resulting damage—whether from higher food and energy prices or new supply chain disruptions—cannot be easily or quickly offset by domestic policy adjustments.
For most countries, the immediate economic consequences of the war included higher inflation (reducing purchasing power), slower growth, rising inequality, and financial instability. At the same time, the multilateral system now faces greater obstacles to the cross-border policy coordination needed to address pressing global issues such as climate change, pandemics and life-threatening migration.
The challenges are particularly acute for the developing world’s vulnerable commodity importers, especially when compared to the problems faced by advanced economies. For example, there is a difference between legitimate fears of a cost of living crisis in the UK and fears of famine in some African countries. The problems of higher U.S. trade and budget deficits appear to be much smaller than potential defaults by heavily indebted low-income countries.and although The recent depreciation of the yen In Japan it may be striking, but a disorderly collapse of exchange rates in poorer countries could trigger widespread financial instability.
as Michael SpencerThe Nobel laureate in economics and an expert on growth and development dynamics recently pointed out to me that, for too many developing countries, the likelihood of simultaneous growth, energy, food and debt crises is alarmingly high. If such a nightmarish scenario materializes, the implications will extend far beyond individual developing countries—and far beyond economics and finance.
Therefore, it is in the interest of advanced economies to help poorer countries reduce the risk of small-scale economic fires everywhere. Fortunately, there is a rich history of this, especially from the 1970s and 1980s. Effective action today will require policymakers to refine proven solutions and support their continued implementation with strong leadership, coordination and perseverance.
First, a pre-emptive multilateral debt restructuring and relief initiative is needed to provide overly indebted countries and creditors the necessary space to achieve orderly outcomes on a case-by-case basis. A multilaterally coordinated approach is also crucial in order to reduce the damaging (and sometimes paralyzing) risks of free-riding and to ensure a fair burden-sharing between official creditors as well as private lenders.
Reinvigorating emergency commodity buffers and financing facilities is critical to reducing the risk of food riots and famine. Such measures could also play a useful role in countering the understandable but short-sighted tendency of some countries to ban agricultural exports and/or inefficient self-insurance through excessive stockpiling.
Finally, rich-country governments will need to provide more official development assistance to support reform efforts in individual countries. Such assistance should be provided through long-term, low-interest loans or direct grants on highly favorable terms.
Without more rapid progress in these areas, the phenomenon of “little fires everywhere” will further weaken growth, increase the risk of recession and fuel financial instability, undermining global economic well-being. This will add to current migration challenges, hinder efforts to tackle the climate crisis and delay the global vaccination campaign, which is key to living safer through Covid-19. Moreover, all of these issues contribute to geopolitical instability at a time when the global system is already under increasing divisive pressure.
The rich world has shown impressive solidarity in helping Ukraine fight Russian aggression. In the face of mounting economic and financial challenges, it now needs to show the same determination to protect the well-being of its citizens and the world. Policymakers must work to ensure that the many economic fires sparked by the conflict in Ukraine elsewhere do not end up sparking a second devastating fire that destroys the lives or livelihoods of many of the world’s most vulnerable people.
Mohamed El-Erian is Allianz’s Chief Economic Advisor. He served as chairman of Barack Obama’s Global Development Council and is a former deputy director of the International Monetary Fund.
