The past twelve months have been turbulent for the global economy. Conflict, inflation, food supply crises and the long tail of the Covid-19 pandemic have caused shockwaves across the world. In this episode of The Development Podcast we speak to World Bank Group chief economist Indermit Gill, and take stock of the last twelve months, while looking ahead to 2023. Indermit explains why forecasts at the start of the year were wrong, and why he remains optimistic for the coming year. We also reflect on one of the biggest stories of 2022, food prices. We get an update from Egyptian baker and restaurant owner Dareen Akkad. Listen now!
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[00:00] Welcome and introduction of the topic
[01:23] Putting 2022 in context
[02:31] What were we expecting 2022 to look like in January?
[03:47] The economic impact of Russia's invasion of Ukraine
[05:02] Are we looking at a recession next year that's getting worse?
[06:47] Policy steps being taken
[09:28] Monetary tightening, raising interest rates, subsidies, inflation
[16:07] Stories of people's lives
[17:30] Inflation and food security: Visions from a pizza baker in Cairo
[19:42] Closing and thanks for tuning in!
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The World Bank Group is one of the world’s largest sources of funding and knowledge for low-income countries. Its five institutions share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development.
Hello. And welcome to The Development Podcast coming to you from our headquarters in Washington, DC and beyond. I'm Paul Blake alongside Raka Banerjee.
Raka Banerjee: Today, a reflection on the extraordinary year that was 2-0-2-2, the post pandemic recovery, the wartime economy and more with World Bank Chief Economist Indermit Gill.
Indermit Gill: I think that the last two years will become a case study of how the world forgot Economics 101, and I think it was because of fear, it was because of the disease, it was because of the war, but it was also because of impatience, and I'm hoping that 2-0-2-3 will not be part of this case study.
Paul Blake: Plus an update from Cairo, how global events have driven a tremendous food price shock.
Dareen Akkad: The businesses that survive are those that are able to change and adapt. We've already made plans to create food that is completely locally sourced.
Raka Banerjee: All that and more, here on The Development Podcast from the World Bank Group.Raka Banerjee:
Well, it was just one year ago that we were all asking how the newly emerged Omicron variant might prolong the COVID-19 Pandemic.
Assorted speakers (Footage audio): This variant is a cause for concern, not a cause for panic. We don't yet know whether Omicron is associated with more transmission, more severe diseases, more risk of re infections.
Paul Blake: The fast moving variant threatened to drag out one of the biggest global economic disruptions since World War II. It was the biggest story in January.
Raka Banerjee: And then February came.
Assorted speakers (Footage audio): Today, what was unthinkable for many, particularly in Ukraine itself, has happened. An invasion by Russian forces.
Assorted speakers (Footage audio): One more Russian missile strike. It brings terror to the streets of Kyiv.
Paul Blake: Russia's invasion of Ukraine shocked the world and sent reverberations through every level of the global economy.
Raka Banerjee: These two stories, I think, framed the uncertainty around 2-0-2-2.
Paul Blake: Indeed, the long tail of the pandemic and the fresh shock of a major ground war in Europe fundamentally changed the global economic narrative.Raka Banerjee:
To understand just how COVID and conflict changed economic history in 2-0-2-2, let's bring in World Bank Chief Economist in Indermit Gill. Indermit, thinking back to January 22, it was a completely different world. What were we expecting 2-0-2-2 to look like in January?
Indermit Gill: Well, back in January, we actually put out our Global Economic Prospects report. And I was looking at that, and we were expecting the world economy to grow at around 4%, and we expected the US and the EU to grow by about that much too. And we thought China would grow at 5%, Indonesia by a bit more, and India would grow at nearly 9%. So if you look at things today, we expect the global economy to grow by less than 3%, so we've sliced off about a quarter of the expected growth, and next year will be even worse. We've actually sliced off nearly a third of the growth for 2-0-2-3. So the world faces record debt levels, it faces declining investment rates, high inflation, widespread hunger, poverty reduction has come to a grinding halt. And as a result of all of these things, there is actually growing political instability. Things have become a lot worse in these 11 months.Paul Blake:
Russia's invasion of Ukraine, obviously a incredible human tragedy. Tens of thousands of lives needlessly lost. We can all comprehend the human tragedy I think, but help us understand what has the economic impact of that conflict been?
Indermit Gill: So the best way to think about this, Paul, is to think about what share of the world economy are the US, the European Union and China, and things that happen in these three parts of the world will affect the world economy. If you add up the share of global economic output, it adds up to more than 60%. So then if you look to see what exactly happened in these places, so the first one, as you mentioned, you had the invasion of Ukraine, and that plunged Europe into an energy crisis. Second one is China decided to kill COVID-19, which is a mutating virus, which is a very difficult thing to do. And then the third one was that the US decided to kill inflation. This was after feeding it for years through easy money and big government spending, so as a result of it, suddenly you had these three big shocks basically, all of them essentially happening in 2-0-2-2. So it's not just the crisis in Ukraine, though, that's a big part of it, but you also had these other two things happening at the same time.Raka Banerjee:
We'd had a podcast earlier this year about stagflation. There's obviously fears of a global recession. Are we looking at a recession next year that's getting worse? I mean, how can this be turned around?
Indermit Gill: So I thought that you would say, "Well, if you were so wrong 11 months ago, then why are you forecasting?"
Paul Blake: We wouldn't phrase it that way.
Indermit Gill: But I think that the answer is related to that. We were wrong about things because we didn't anticipate a few of these really bad things that happened. And by the same token, I think if we end up getting an end to some of these things, I think that already we are getting some good news out of China in the sense that they've stopped this trying to kill COVID off down to zero. And then if you look at the United States, again, we are starting to get good news here. So the best way to think about this is that the world has never gone into a recession, or at least in living memory, unless the US also goes into a recession, and I don't think the US is going to go into recession. You've got about, I would say about 45% of the world's economy in some kind of trouble or the other.
And the big problem that we faced over the last six months or so was inflation. High inflation usually means that you have too much money chasing, too few goods and services, so too much demand and too little supply. But I think ideally what we really want to do is we want a balance up policies that try to moderate demand because we overstimulated it in the past two years. But then by the same token, because we dampen supply so much, we want to do things that actually increase supply as well-
Paul Blake: So you meet in the middle.
Indermit Gill: ... so you meet in the middle.
Raka Banerjee: And do you feel like that's happening right now? Are these policy steps being taken? Do you think that's likely?
Indermit Gill: So honestly, I would say that we are doing too much of cutting demand and not enough of stimulating supply. Raising interest rates, cutting government spending, increasing tax rates, these are all supply killers. And then if you look at demand side things, I mean, what you really want to do demand, you want freer trade, so you don't want to impose trade restrictions because they tend to cut supply, that's one thing. The other thing is that if you cramp down on people's economic freedoms or what they can do with their time and their money, and their investments and so on, you're going to get less supply. The other thing is that many of the countries, because they had these mandated lockdowns, what they also did was they actually paid people to stay at home. And I think the tail end of that hasn't yet disappeared in the sense that you really want to not pay people to stay at home. You want people to go out and work. I guess, if you're asking me to give grades on the demand side, I would say it's like an A-, but on the supply side, I think that I would give the world a C right now. So I think that we made policy mistakes. I think-
Paul Blake: The world leaders, [inaudible]
Indermit Gill: ... well, world leaders generally speak. And I mean, essentially I don't think it's a private sector that's making the mistakes.
Raka Banerjee: And you highlighted the invasion of Ukraine, policies contributing to high inflation in the US, and China's decisions around COVID, three big ones that are made by governments.
Indermit Gill: Right. These are the three big ones. But by the way, I could add to that list. I could go down the list of the other countries, not the big three, but the other countries, they've done things like actually try to put trade restrictions on the exports of food grains and things like that. I mean, those are things that lead to all kinds of problems, especially for poor people in poor countries because they raise the price of food grains, and they actually cut the supply of food grains. In a general sense, I would actually say that I think that the last two years will become a case study of how the world forgot Economics 101. And I think it was because of fear. It was because of the disease. It was because of the war, but it was also because of impatience, and I'm hoping that 2-0-2-3 will not be part of this case study. So it would just be 2-0-2-0, 2-0-2-1, and maybe 2-0-2-2. If you keep interest rates low, if you tell people to stay home, and if you pump in trillions of dollars and euros and yuan in stimulus spending, you will engineer a situation in which demand will outstrip supply, so you'll get inflation.Paul Blake:
... I visited Colombia and Poland over the past year, and one of the things that was very striking to me was how average people who were talking about Central Bank interest rates. And my understanding is that countries like Poland, Colombia are having to dramatically react to the Fed. Can you explain what exactly the Fed's aggressive monetary tightening, raising interest rates means for middle income countries, even high income countries that have to compete?
Indermit Gill: So the first thing, Paul, you cannot blame the Fed for doing what is its job. Its job is that when you have too high inflation rates or too persistent inflation rates and so on, that's what they will do.
Paul Blake: They will push the lever up on rates.
Indermit Gill: They push the lever up on rates, and that's their job and so on. And I think it was expected by most countries that this would happen sooner or later. The issue then is, exactly what does this do to two people in the developing world? What does it do to countries? What does it do to the government, and what does it do to the people? So for the governments, there's a very straightforward effect of this.
The straightforward effect of this is that, they end up having to pay more for their debts. So most countries have to roll over their debts each year, every month, and so on, and then as these interest rates rise, they tend to make rolling over those debts more expensive. So what happens is that public investment and private investment both fall at the same time. And so as a result of it, these countries end up having a slower growth rate because everything is driven by investment mostly. For countries that actually borrowed for the right reason, I think for them, this is not as serious a problem, but for countries that borrowed in order to finance consumption, this is a problem.
Paul Blake: So unnecessary subsidies.
Indermit Gill: Yeah. Because public investment, because when you invest in things that lead to an increase in the productive capacity of the economy, it increases the capacity of the economy to pay back. I think times like this remind you of some basic principles. I think one of the basic principles is that governments should not borrow to consume things. They should be borrowing to make well considered investments in roads, in education, in health and things like that. The second thing, I think governments have to realize that... I think that what has happened across the world, this is not, I wouldn't blame the US or anybody else in particular, but across the world, governments took a lot of their freedoms from people because of good reasons and bad. But as a result of it, there has been a pullback of economic freedom that usually means that people aren't necessarily doing the things that are good for them. So then you say, "Okay, have governments been a really good protector of the private interest or the public interest?" And I would say, no, not during the last three years.
Paul Blake: Build on this a little bit, if you don't mind.
Indermit Gill: I mean, for example, closing a restaurant or having blanket lockdowns or not allowing people to travel for business because they have not been vaccinated, etcetera. Now, I'm not saying that they haven't been driven by good reason, but the net effect of it is that they're fairly blanket restrictions, so what you're doing is that you are actually, in a sense... Another way to put it is we thought that during the last 30 years, before 2-0-2-0, these were the best years for economic development across the world. The most progress in recorded history.
Paul Blake: The best time to be born, alive, a human being in human history, I think so.
Indermit Gill: Absolutely. I mean, we took it for granted that things were going to be like that. If you look at that, you say, what was it that actually led to that? The first one was a realization that the commanding heights of the economy should be given to the private sector. It should not be the government that should control the commanding heights. And if you look at the last few years, there's been a reversion of that. You've seen the government actually taking over a lot of things, that's one. The second thing was free trade. You found that poorer countries, actually, as soon as they started to free up their private sector and so on, you immediately got a private sector response. The problem is that countries become suppliers much more quickly than they become big demanders. So as a result, you needed to be able to supply these things to people who had the purchasing power, for that you needed trade because these people were somewhere else. The third thing, which was a very important thing, is that we had accepted that look, macro stability, low inflation rates, not very big fiscal deficits and so on. These are good things for everybody [inaudible].
Paul Blake: I mean, in mid 2-0-1-0s, there was talk about inflation being too low [inaudible].
Indermit Gill: That was in advanced economies, Paul. In the developing countries, inflation was still 4, 5%, but they were moderate levels. Last year there were more countries that had doubled digit inflation than single digit inflation.
Paul Blake: Wow.
Indermit Gill: So as a result of it, now you create a very uncertain atmosphere for private investors because they have to figure out whether or not it makes sense to do all this stuff. You make it really bad for poor people because the richer people tend to find good hedges against inflation, so in a sense, I think what we are trying to do is go back to that macro stability. I have a feeling that the world will get back to that fairly quickly. The second thing is, go back to actually greater economic freedom to people. That should be the natural, I mean, trust the people. I think that'll happen too over time. I think the third part, to actually have an environment, a worldwide economy in which free trade is a rule rather than the exception. That is the thing that should worry us all because right now, because of the politics of things and so on, there's a worry that the world would split into camps. If we don't end up having all three of these conditions and not just two, it's going to be bad for the poorest country, especially the countries that we care the most about right now. I think these are countries in Sub-Saharan Africa.
Raka Banerjee: Do you think that, I guess, there's going to be a return to the lessons of Economics 101.
I'm going to do my best. I'm going to scream this from rooftops.
Raka Banerjee: Indermit, thank you so much for taking the time to speak with us today. This was just an awesome conversation. We really appreciate your time and your perspectives.
Indermit Gill: It was a pleasure. Thank you all so much for this time.
Paul Blake: Indermit Gill is the World Bank's Chief Economist. He joined us in our studio here in Washington.Paul Blake:
Well, behind all the big trends in economics are the stories of people's lives.
Raka Banerjee: Over the past year, we've talked to several people from around the world to get their insights into some of these big complex topics.
Paul Blake: For instance, prominent Mexican economist, Enrique Cárdenas told us in July how the so-called lost decade of the 1-9-8-0s compares to today.
Enrique Cárdenas: In terms of recession, just people had lower incomes. They were not very happy. You went into the underground in the subway in Mexico City, you would see pale faces and not very happy faces.
Raka Banerjee: From rural India, we heard from Reema Nanavaty about how renewable energy has the power to transform lives for the better, but that any transition away from traditional energy sources would need to be just.
Reema Nanavaty: What alternatives could be there for the workers who are working currently, maybe in the coal mines? What are the alternatives which are also designed and worked out while the country is transitioning?
Raka Banerjee: And in our November edition, we shared the story of Sonia Cifuentes, who spoke of the difficulty of feeding her family in the post pandemic economy.
Sonia Cifuentes: Well, I never imagined we were going to be left without a job. During the pandemic, I was in need of food and I had to ask my mother to help feed my children because I had no money to buy food.Raka Banerjee:
Indeed, that was one of the most significant and maybe scariest trends of 2-0-2-2, the shock in agricultural prices.
Paul Blake: And specifically what that shock meant for food security.
Raka Banerjee: In June, our colleague Sarah Treanor, caught up with Dareen Akkad, a pizza baker in Cairo, Egypt.
Paul Blake: Well, Sarah joins us now. Sarah, remind us what Dareen had to say back then.
Sarah Jane Treanor: Hi, both. Yes. So Dareen gave us a peek into her kitchen where she's a passionate bread maker, and where she decided to turn her passion into a business. She told me how she's really struggling to source ingredients, that prices keep going up. She doesn't know where she's going to get some of her staple ingredients like flour from, and she was worried at the time that she was going to have to pass on price increases to her customers who were also struggling with increases in food prices across the board.
Dareen Akkad: This is something that's been a daily topic of conversation for the last five years. I think the daily conversation is how much worse, when is the price hike going to stop?
Sarah Jane Treanor: Well, since June, wheat prices have continued to be volatile. I wanted to check in with Dareen and see how things are going for her in her restaurant, and whether she's still finding it a challenge to source the product she needs.
Dareen Akkad: We've had to take some measures to make sure we stay alive. We don't know, we can't even reprice our menu enough times. My biggest issue has been having to change the brand of flour that we use every couple of weeks, maybe. But at the same time, since we've last spoken, I remember last time we spoke about trying to produce more of our ingredients in Egypt. We've had a great development. We've had an Italian producer set up shop here to make mozzarella. The businesses that survive are those that are able to change and adapt. We've already made plans to create food that is completely locally sourced.
Raka Banerjee: Dareen Akkad, owner of What The Crust Restaurant in Cairo, Egypt, speaking to Sarah Treanor, as we wrap up our 2-0-2-2 special.Paul Blake:
That's it for The Development Podcast in 2-0-2-2. We hope you've enjoyed joining us for this episode and throughout the past year.
Raka Banerjee: As always, you can email us. We'd love to hear from you at email@example.com.
Paul Blake: Until 2-0-2-3, goodbye.
Raka Banerjee: Goodbye.
Sarah Jane Treanor: See you next year. Goodbye.