Geopolitical conflict is making the poor world’s economic problems worse, and harder to resolve
Save time by listening to our audio articles as you multitaskRising inflation and higher interest rates are painful everywhere, but the stakes are particularly high in poor and middle-income countries. Food prices, which are up by nearly 20% this year, make up a greater share of consumer spending. Inflation is more likely to spiral out of control.
As investors have priced in such tightening, the yields on ten-year Treasuries have risen by 1.2 percentage points in the past six months. That is roughly the same increase as during the “taper tantrum” of 2013, when emerging markets suffered capital flight because of a hawkish Fed.
Often higher rates in the rich world are associated with a stronger world economy, which boosts exports for emerging markets. This time, however, America is overheating, and may face a recession as it slams the monetary brakes. Europe is being squeezed by expensive energy. Though countries that pump oil or grow soyabeans will benefit from higher commodity prices, they must still fight inflation and cope with tighter financial conditions.
Several middle-income countries face idiosyncratic crises: China is locking down to battle a coronavirus outbreak, and Argentina continues to stagger under the weight of unsustainable debts. But the greatest vulnerability is found among the poorest economies, nearly 60% of which are in debt distress or at high risk of it, according to the World Bank.
It does not help that it is harder than ever to provide emergency support to struggling poor countries. In aggregate they owe more to China than to the “Paris Club” of rich governments who have typically co-operated to restructure debts. So far attempts to include China and other new lenders like Saudi Arabia and India in debt-restructuring efforts have flopped. Theonly lends to countries with sustainable debts, and the West does not want to see its aid being siphoned off by other creditors. .
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