Why 2020-2030 has the makings of a Lost Decade for the Global Economy

What’s in today’s article?

• Why in News?
• Key Highlights of the Report
• Reasons for the Slowdown
• Observations about India
• What can be done to boost potential Global Growth?

 

 Why in News?

• The World Bank, recently, published a report titled “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies”.
• The report offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 Pandemic and the Russian invasion of Ukraine.

 

Key Highlights of the Report

• The report “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” is published by the World Bank.
• The report uses a comprehensive database of multiple measures of potential growth.
• It examines trends in potential growth and its drivers, global and regional prospects for potential growth and investment over the 2020s, and a range of policy options to lift potential growth.
• It documents three major findings –
  • First, there has been a protracted, broad-based decline in potential growth and its underlying drivers.
  • Major adverse shocks also reduce potential growth by leaving a lasting impact on these drivers.
  • Second, the slowdown in potential growth is expected to persist for the rest of this decade.
  • Third, while they are significant challenges confronting emerging market and developing economies (EMDEs), they are not insurmountable.It is possible to reverse the slowdown in potential growth and chart a sustained, sustainable, and inclusive growth path by implementing ambitious, broad-based and forceful policies at the national and global levels.

 

Reasons for the Slowdown

• The biggest reason for the slowdown is that the EMDEs are in the midst of a prolonged period of weakness.
• The following table shows a broad-based decline over the past two decades whether a country belongs to EMDEs or the middle-income countries (MICs) or the low-income countries (LICs).

 

Image Caption: Decline in economic growth of countries

• The World Bank has looked at a whole set of fundamental drivers that determine economic growth and found that all of them have been losing power.
• These fundamental drivers include things like –
  • Capital accumulation (through investment growth),
  • Labour force growth, and
  • Growth of total factor productivity (which is the part of economic growth that results from more efficient use of inputs and which is often the result of technological changes) etc.
• Not surprisingly then, the potential growth rate is expected to decelerate further.

 

Observations about India

• Even though India has also lost its growth momentum over the past two decades, it is and will likely remain a global leader when it comes to growth rates.
• India falls under the South Asia Region (SAR), which is expected to be fastest growing among emerging market and developing economies for the remainder of this decade.
• To be sure, India accounts for three-fourths of the SAR output.
  • SAR includes countries like Afghanistan, Pakistan, Sri Lanka, Nepal and Bangladesh etc.
• Economic activity in the SAR rebounded strongly from the recession caused by the COVID-19 pandemic, expanding by 7.9 percent in 2021.
• Output in the region is on track to grow by about 6.0 percent a year between 2022 and 2030, faster than the 2010s annual average of 5.5 percent.

 

What can be done to boost potential Global Growth?

• The report highlights specific policy actions at the national level that can make an important difference in promoting long-term growth prospects.
  • Align monetary, fiscal, and financial frameworks –
    • Robust macroeconomic and financial policy frameworks can moderate the ups and downs of business cycles.
    • Policymakers should prioritize taming inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence.
  • Ramp up investments –
    • Transportation and energy, climate-smart agriculture and manufacturing, and land and water systems.
    • In the above mentioned areas, sound investments aligned with key climate goals could enhance potential growth by up to 0.3 percentage point per year.
  • Cut trade costs –
    • Trade costs—mostly associated with shipping, logistics, and regulations—effectively double the cost of internationally traded goods today.
    • Countries with the highest shipping and logistics costs could cut their trade costs in half by adopting the trade-facilitation and other practices of countries with the lowest shipping and logistics costs.
  • Capitalize on services –            
    • The services sector could become the new engine of economic growth.
    • Exports of digitally delivered professional services related to information and communications technology climbed to more than 50% of total services exports in 2021, up from 40%in 2019.
  • Increase labor force participation –
    • About half of the expected slowdown in potential GDP growth through 2030 will be attributable to changing demographics.
    • This change includes a shrinking working-age population and declining labor force participation as societies age.
    • Boosting overall labor force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage point a year by 2030.
• The report also underscores the need to strengthen global cooperation.
• International economic integration has helped to drive global prosperity for more than two decades since 1990, but it has faltered.
• Restoring it is essential to –
  • Catalyse trade,
  • Accelerate climate action, and
  • Mobilize the investments needed to achieve the Sustainable Development Goals.

 

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Q1) What is the meaning of Economic Stagnation?

Economic stagnation is a prolonged period of slow economic growth, usually accompanied by high unemployment.

 

Q2) When was World Bank established?

The IMF and the World Bank were created in July 1944 at an international conference in the United States (in Bretton Woods, New Hampshire) that established a framework for economic cooperation aimed at creating a more stable and prosperous global economy.

 

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Source: ExplainSpeaking | Why 2020-2030 has the makings of a lost decade for the global economy