Tracking three divergences in 2022

Posted January 24, 2022

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Differences between developed and developing countries on vaccine availability and fiscal and monetary firepower unsettled economic growth, jobs, and well-being around the world in 2021. The challenge for 2022 is, unfortunately, a storm of interlocking divergences that involve policy responses to inflation, a snowballing debt crisis, high energy prices disincentivizing investment, and the continued damaging effects of vaccine inequity.

While developed economies are likely to bounce back quickly from COVID-19’s Omicron variant and its policy effects, most developing countries will be stuck in first gear, with dozens facing a ‘reversal of fortunes’ for the first time in two decades. Per capita income is now growing slower than in developed economies, and is not expected to return to pre-COVID-19 levels until 2023 or 2024.

A look at this fork in the road suggests that 2022 will test national and multilateral policymakers’ resilience. Is the world entering a new period of ‘global divergence’?

First divergence: The race to get the world vaccinated against COVID-19 will continue in 2022

As we enter 2022, half of the world population is fully vaccinated, but only 9.6 percent of people in low-income countries have received at least one dose. Globally, 3.97 billion people are fully vaccinated against COVID-19, whereas an additional 760 million (9.7 percent) have received one dose of the available vaccines. The number of people who have received at least one dose, per hundred, in lower-middle-income countries is 52, whereas this figure is much higher at 77 and 79 in high-income and upper-middle-income countries, respectively.

Vaccination rates by income group

Our World in Data. Data accessed January 19, 2022. LIC: Low-income. LMIC: Lower-middle-income. UMIC: Upper-middle-income. HIC: High-income.

We need to get the world vaccinated for a swift economic recovery. In 2021, countries with higher vaccination rates saw better macroeconomic outcomes compared to those with lower rates. Economic forecasts have recovered since the beginning of the pandemic with the commencement of vaccine roll-out, but more than half of the countries are still lagging, expecting 2021 GDP growth rates even lower than what was forecast in the first months of the pandemic.

How to achieve this: First, reallocate surplus vaccine stock towards developing countries—the situation is urgent for those with less than 10 percent coverage. Second, suspend licensing and allow regional hubs to fill the gap, as prescribed by future health preparedness plans. Third, prioritize health, education, and informal workers in vaccination plans. Fourth, emphasize preparedness of social protection systems as required for the transition between pandemic and endemic status.

Second divergence: Interest rate hikes will shape fiscal space and financial flows

Not all economies are equally able to fund their development needs. Fiscal space and financial flow will continue as key determinants of a diverging global economic recovery. With inflationary pressure, interest rate hikes and renewed worries about capital flight from developing economies, fragile recoveries are further threatened.  

In 2020, global debt reached a record of 256 percent of global gross domestic product, with public debt accounting for 99 percentage points. Countries with access to low-cost borrowing on financial markets and strong central banks account for most of the pandemic-related increase in debt. But even before the pandemic, many developing economies were struggling with deteriorating debt dynamics and limited fiscal space, which is now severely worsened.

Based on sovereign credit ratings - useful indicators of the severity of debt distress - of 105 emerging and developing economies, it is worth noting that only 24 (23 percent) have an investment-grade rating, including no countries from the low-income group and only three of 37 countries from the lower-middle income group.

Credit-ratings and gross government debt in EMs and LIDCs Gross public debt %/Ratings Scale

Ratings are long-term foreign currency ratings from S&P, Moody’s and FITCH ratings agencies assessed on January 6, 2022. Debt data is for 2021 (except for ARG and LBN which is 2020) from the IMF WEO October 2021. Ratings are translated to a numeric scale. For a country where more than one rating agency provides a rating the datapoint is the simple average.

The UNDP estimates that 82 developing (low- and middle-income) countries (60 percent) can be classified as ‘highly debt vulnerable’, and the vulnerabilities are far from limited to shorter-term liquidity concerns. More than half the countries have now breached the ratio of gross public debt-to-GDP (a key indicator of solvency) deemed sustainable according to their debt sustainability assessments.

What lies ahead? Low- and middle-income countries’ service on external debt will amount to US$3.18 trillion between 2022 and 2025, including $1.44 trillion in public debt. With rising interest rates and the expiration of the Debt Service Suspension Initiative, default risk will rise and problems of debt overhang will intensify. To avoid further setbacks, orderly and pre-emptive debt-restructurings should be prioritized, and additional liquidity support measures should be made available to vulnerable economies by the international community. 

A third divergence: Decarbonization pathways will set the template for the future

In the short run, high energy prices have captured policymakers’ attention, threatening longer-term responses to the climate crisis. Limiting warming to 1.5 degrees Celsius requires, at the very least, a complete decarbonization of the global energy system through bold and immediate measures. This involves a credible global collective effort and using all available policy tools. But, as some effects of decarbonization may disproportionately affect less advantaged groups, this process also involves fairness considerations on two fronts: (1) complete regulation to prevent CO2 leakage to both poorer countries and vulnerable groups within a country; and (2) country-specific allowances for common-but-differentiated responsibilities (and for what we term ‘space to develop’).

Is decarbonization likely to occur under these considerations—or even likely to be achieved at all? Let’s be honest on the latter: The outlook is grim. Fossil CO2 emissions last year returned to their pre-pandemic levels while major economies have continued to inject billions of dollars to support fossil fuel-intensive sectors. That decarbonization would be fair and driven by a collective effort is no less grim. Some countries would face hard distributive and political challenges, some would embark on a low-hanging fruit agenda, and some would exert policy retaliation in the presence of CO2 leakage.

How to converge on decarbonization: The question of CO2 leakage needs to be addressed head-on. Decarbonization will not be achieved solely through carbon pricing (although that will also be needed). For developing and emerging economies to move forward on energy transitions, they need financial and technological transfers that are not currently on the multilateral agenda. Energy transitions will create jobs, foster innovations, and create the conditions for a global pathway that secures the Paris Agreement targets.

An uncertain period

In recent years, we had stopped thinking about ‘global divergence’ and focused instead on specific sectoral, geographic or population ‘gaps’ within a converging global pathway. We are now entering an uncertain period. The unequal and unsustainable churning of the global economy is threatening to divide the world into pathways that will not meet.

Over the following months, granular data will allow us to track trends across diverse development contexts and describe emerging trends. Many will build upon past trends with a twist: new balances of power, new pockets of productivity, new digital technologies, rising social norms and expectations, more extreme weather patterns, new financial flows, greater gender equality, and an aging demographic profile, among other shifts.

The current turmoil presents us with a unique opportunity to learn about the interlocking divergences, identify signals and microtrends in the making and adjust our policy response. 

We hope to write more about how these new challenges and threats evolve soon.