Branko Milanovic: Bright prospects for global recovery

By Branko Milanovic,

The Joint report of the International Monetary Fund and the Bank for the Reconstruction of the Formerly Belligerent Areas (FBA), entitled “Bright Prospects for Global Recovery” was released in Beijing today. Due to transportation difficulties and fear of contamination the Article IV consultations, on which the report is based, were conducted, separately, with the representative of the FBAs in Cape Town and Beijing. The report is written under the overall guidance of the key principles adopted by the IMF and the Bank for the Reconstruction of the Formerly Belligerent Areas, namely, the Three Ps (Peace, Progress and Prosperity) and the Two 2H (Happiness and Harmony). The report addresses three key areas: macroeconomic management, labor and social issues, and aid and international debt.

Macroeconomic management. Staff express support to the authorities of the FBA (separately) for their efforts to stabilize macroeconomic situation. The US Gross Domestic Product was estimated to have increased by 8.2% in the year ending in April 2020 which represents strong rebound from the previous year dominated by the issues of food security.

The food situation indeed remains precarious in all FBAs, and especially so in Russia and the Siberian Republic due to the need to import almost all food and to the severe transportation difficulties aggravated by the global cooling (nuclear winter). The Russian authorities were unable to provide an estimate of GDP, but it is believed that a modest recovery has begun.

In Staff’s opinion, the situation in Europe is somewhere in-between the United States and Russia and the Siberian Republic, with an anticipated growth of 4 to 5 percent. Last Summer’s adoption of Renminbi by Europe, and significant food aid from the countries of the African Union have stabilized, to a degree, the macroeconomic situation. It should be noted, however, that due to the severe difficulties of collection of information and inability of Staff to travel to the FBAs (separately), all National Account data have to be taken with a great dose of caution.

Macroeconomic challenges abound in all FBAs. They are due to the difficulties of tax collection, low and unrecorded incomes, and continued contamination and very high morbidity rates which necessitate large health expenditures. Estimated fiscal needs of the FBA are discussed in detail in the Annex to this Report.

Labor and social issues. Staff note that in the conversation with all FBAs (separately), it has been pointed out to the massive high-skill labor shortages. In the United States, the number of people with college degree has been reduced by an estimated two-thirds (in line with the overall casualty rate), but the outflow of high-skilled workers to other countries has additionally exacerbated the problem. It was thus estimated by the Bismarck authorities that the US has lost more than 80% of its college graduates. The US authorities mentioned the plan to build a wall which would stop further outflow of skilled labor but the costs of construction (especially given extremely high level of US foreign indebtedness; see below) are prohibitive. Staff also argued that such impediments to the free flow of labor are not in agreement with the spirit of the principles embodied in the 3Ps and 2Hs.

The skilled-labor shortage is even greater in Russia, Tatarstan and the Siberian republic. Such labor shortages, even when the financing from the Bank for the Reconstruction of the FBAs is forthcoming, impede the reconstruction effort. Attempts to attract labor from other parts of the world have proved fruitless. Staff have agreed with the representatives from Iraq and Somalia, who have experience with reconstruction under severe conditions, to provide technical assistance to FBAs (separately).

According to the estimates of the Bank for the Reconstruction of the FBAs, the total number of people living in FBAs at less than $4 per day is approximately the same as in Brazil. Since the estimated combined population of the FBAs is somewhat greater than Brazil’s, the poverty rate is a bit lower.

Inequality levels in the FBAs (separately) have also gone down driven by the “malign” forces of wars, contamination and epidemics. Still Staff note with satisfaction that the last fiscal year’s real growth of GDP has also contributed to the reduction of poverty and inequality substantially below their 2019 levels.

International aid and debt. At the recent meeting in Djakarta, following the principles of the 3Ps and 2Hs, the members of G7 (China, India, Indonesia, Brazil, Vietnam, Nigeria and South Africa) have agreed to provide substantial aid to the FBAs. While the first tranches of aid are of the humanitarian character, the next tranches will be on less concessionary terms until such time when the FBAs (separately) would be able to return to the financial markets.

The ability of FBAs to borrow and service their debt is hampered by their extremely high debt-to-GDP ratios which in the cases of the United States and Europe exceed 450 percent (due of course to the massive shrinkage of their GDPs). Multilateral debt-cancellation can be envisaged for some of the debt, but not all. Even the least indebted countries in Europe (like for example Greece with debt/GDP ratio of under 200 percent) find it difficult to service the debt. For France, Germany and the UK this is quasi impossible. The Report thus suggests to call as early as possible an international conference at which the problem of the FBA debt (separately) will be discussed in the spirit of the 3Ps and 2Hs.

The problem of debt is aggravated by the strong decrease of international trade and macroeconomic difficulties in China that has over a very short period of time lost its most important export markets. China’s attempts to readjust from export-led to domestic-driven growth, which date from before the WW3, have thus become even more difficult. This too, in view of the Staff, explains the 2.1 drop in China’s last year’s GDP.

G7 are committed, at least in the short-term, to keep on providing in-kind aid to the FBAs without compensation. The amounts of food aid from Africa to Europe have been particularly significant and have helped avoid starvation in Europe in 2019. It is expected that the need for food aid will diminish in the coming years as conditions in the FBAs (separately) normalize.

Conclusion. The Report notes brightening prospects for the global economy and is particularly encouraged by a more stable macro environment in the FBAs (separately). It is expected that the improvements will continue despite the challenges that remain ahead.

originally posted here