Project Syndicate Restoring Trust in Global Leadership Dec 11, 2023 SRI MULYANI INDRAWATI

 Project Syndicate

Restoring Trust in Global Leadership

Dec 11, 2023

SRI MULYANI INDRAWATI

Even though the world economy remains beset by challenges, multilateral cooperation appears to be in decline. But by working together to de-escalate geopolitical tensions, prevent technological fragmentation, and mitigate the effects of climate change, the international community could lay the groundwork for a more hopeful future.

JAKARTA – Global leadership was woefully absent in the wake of the COVID-19 crisis, which left no country unscathed. In 2021, I noted that the shape and pace of the post-pandemic economic recovery largely depended on multilateral cooperation. That remains true today, as the global economy, which has yet to bounce back fully from the pandemic, faces a new source of risk: proliferating geopolitical conflicts. Over the last two years, the war in Ukraine, the Israel-Hamas war, and seven military coups in Sub-Saharan Africa have increased fragility and have displaced huge numbers of people.

And yet, despite conditions that require strengthening collective action, multilateral cooperation appears to be in decline. We are not on track to meet the Sustainable Development Goal of ending extreme poverty by 2030; an estimated 7% of the world’s population will still be living in penury, if current trends continue. Moreover, climate disasters are becoming more common – a dangerous and worsening trend. Discouragingly, there is a lack of global leadership in tackling these existential threats to humanity. It would do us well to acknowledge this reality and then decide how to change it.

Even amid overlapping crises, there is good news. The world economy has shown resilience in 2023, despite the slow and uneven recovery since the pandemic. The fight against stubbornly high global inflation seems to be working: inflation is projected to fall steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024. This can be attributed to interest-rate hikes and lower international commodity prices, although prolonged monetary tightening will slow global economic activity. Meanwhile, GDP growth in some emerging markets and developing economies, especially in East Asia and the Pacific, has surpassed pre-pandemic levels, with China, Vietnam, and Indonesia among the top performers. 

Moreover, at the International Monetary Fund and World Bank annual meetings in Marrakesh in October, finance ministers and central-bank governors agreed on eight global challenges to be tackled together and endorsed the World Bank’s new vision and mission to create a world free of poverty and to boost shared prosperity on a livable planet. This goal underpins the Bank’s new playbook for development, as well as its enhanced financing model, ensuring that our collective effort to combat global challenges is feasible and strategically sound.

GROWTH IN JEOPARDY

There are three main threats to global growth prospects over the medium term: escalating geopolitical tensions, which could lead to economic fragmentation; technological decoupling, which could prevent the diffusion of new digital technologies to boost productivity; and climate change, particularly its impact on agriculture. Unfortunately, many countries have limited policy space to support economic growth. Monetary policy has become largely restrictive to contain inflationary pressure, while fiscal policy is increasingly constrained, especially in low-income developing countries facing debt distress and the twin challenges of food and energy insecurity.

Geopolitical competition and conflict threaten to undo the gains of globalization. For the last 30 years, cross-border trade and investment have tripled the size of the global economy and lifted 1.3 billion people out of poverty. But today, new wars and simmering tensions could unravel supply chains, halt investment flows, give rise to multiple competing international standards for critical and emerging digital technologies, and lead to greater income and wealth inequalities.

To counter the threat from geopolitics, we must emphasize the importance of rules-based multilateral cooperation that values transparency, certainty, and shared prosperity. Concerted collective effort is required to resist fragmentation on all fronts. After all, a breakdown in integration could lead to a sustained increase in price volatility, impede the cross-border flow of commodities, and leave us with fewer tools to make global economic growth more inclusive.

Equally worrying is the recent trend toward technological decoupling, particularly between the United States and China regarding critical areas like artificial intelligence and semiconductors. This raises the specter of broader fragmentation, which could lead to losses in the order of 5% of GDP for many economies.

At the same time, the potential for technological change to contribute to development remains huge. Focusing on services and development in East Asia and the Pacific countries, a recent report by the World Bank found that services firms that use more digital technologies increase their productivity, although adopting them often requires substantial organizational change and complementary investments. Moreover, the diffusion of digital platforms, which offer customers new ways of connecting with suppliers, could drive explosive growth in online wholesale and retail, as it did in the Philippines.

The rapid development of digital technologies, if properly managed, could thus be a boon for sustained economic recovery. We can unite around a common strategy to increase their adoption and prevent fragmentation by ensuring that we account for complementary factors such as skill endowments, regulatory issues, and competition levels.

Finally, it has become clear that the impact of climate change on agriculture will worsen global inequalities. In the first half of 2022, we witnessed one of the largest shocks to global food markets in decades, partly owing to poor harvests resulting from extreme weather events. Around 80% of those most at risk of climate-related crop failures and hunger are in Sub-Saharan Africa, South Asia, and Southeast Asia, where farming families tend to be poor and vulnerable. A severe drought, whether caused by global warming or an El Niño weather pattern, could drive millions more into penury, even in relatively high-income countries such as the Philippines and Vietnam.

As global leaders, we can advocate policies to help make agriculture more climate-resilient (such as using water more efficiently), manage demand, encourage the switch to less thirsty crops, and improve soil health. At the same time, these efforts align with sustainability goals and could also cut greenhouse-gas emissions from the food system, which recent estimates show is responsible for about one-third of GHG emissions and is the largest human-related source of methane, as well as the primary driver of biodiversity loss.

COOPERATION OR BUST

Given the rifts and disparities that confront the international community today, strengthening multilateral cooperation is more important than ever. On a positive note, one lesson that global leaders have seemingly learned from the pandemic – an extraordinary and unprecedented event – is the importance of building more resilience.

Building on that lesson, we must sharpen our focus on four priorities. We must strengthen the spirit of solidarity, multilateralism, and collaboration to pave the way for peaceful conflict resolution and economic cooperation. We must provide well-targeted fiscal supports and more robust debt-management mechanisms, particularly for vulnerable countries. We must design policy responses to the current high-interest-rate environment that balance stability with growth. And we must ensure long-term growth sustainability through comprehensive structural reforms and investment in a green global economy.

Monitoring and mitigating potential systemic threats are crucial for economic stability. Now and in the coming years, the actions we take – both globally and locally – will determine whether we rise to pressing international challenges or fall victim to them. Multilateral cooperation is too important to let fall by the wayside.

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Sri Mulyani Indrawati

SRI MULYANI INDRAWATI

Writing for PS since 2011

14 Commentaries

Sri Mulyani Indrawati, Finance Minister of Indonesia, is Co-Chair of the Coalition of G20 Finance Ministers for Climate Action.