Before even hearing the first question, World Bank President David Malpass (Petoskey, Michigan, 64 years old) steps forward to emphasize the “very disturbing” data about the rise in extreme poverty. It’s your big concern right now, and the numbers back it up: The pandemic will leave up to 150 million more people below that threshold, breaking more than two decades of uninterrupted decline on a global scale.
“We are in the depths of the recession and this is very worrying. The dynamics of poverty are long-term: it is urgent to reverse this trend, and for that it is necessary for economies to return to growth ”, he says. In contrast to the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, who has ruled out an economic depression derived from the coronavirus crisis, the American economist does believe that we are immersed in one of them. The question is how long it will last. His hope: keep it short, unlike in the thirties of the last century.
Question. The coronavirus, according to its own World Bank records, has caused the largest economic contraction in 90 years. At what point are we?
Answer. Advanced economies are starting to pick up momentum. The worst forecasts were those of May and June and, since then, the forecasts have rebounded. The problem is that the average of the developing world, except China, has continued to deteriorate. And that includes both the poorest and middle-income countries, many of them in Latin America.
P. The V recovery forecasts seem to have lagged behind in many countries.
R. It is true. At least in developing countries, where more than a V we are seeing an L: there was a sharp decline and now these economies are barely growing. That is very problematic from the point of view of poverty. The main challenge now is to restore growth as soon as possible to reverse these setbacks.
P. Until we have a vaccine, the economy will be in trouble.
R. Vaccines are important and I am cautiously optimistic about the timing for them to be mass produced. But it’s still going to take a substantial time. Until then, and for now, the most critical thing is to be able to take steps in the reopening [de la economía]. Europe has progressed, China has reopened very important parts of its economy with social distancing, masks and caution in the interaction between people … And that is allowing it to grow again.
P. Unlike the financial crisis of 2008 and 2009, when emerging markets resisted and even came out stronger, this time they are the weakest link. Do you have the feeling that you are not receiving attention from the rich countries?
R. Efforts have been made to provide a global response [a la crisis]. The United States has greatly increased public spending and is counting on stimulus from its central bank, which is carrying out major asset purchases. Europe and Japan too, hoping to relaunch their own economies and thus benefit the developing world as well. But it’s true: unlike in 2008, the developing bloc is being hit even harder [que los países ricos] and it’s not getting much support from advanced economies.
P. Where then can your salvation be?
R. In which growth returns soon [global], and that employment and demand grow again. For this recovery cycle to occur around the world, the safe reopening of schools and businesses while awaiting the vaccine is very important.
P. When will the world economy return to the pre-crisis level?
R. I do not have a precise estimate, but, especially in the case of emerging countries, it will take many years. These are countries that do not have the borrowing capacity of advanced economies, and their central banks do not have the degree of confidence necessary to expand their balance sheets: if they do so, the concern is that their currencies will devalue and enter a cycle of inflation That would make things even worse. Advanced economies, on the other hand, given the stimulus response they have given, will rebound faster. Although also with much more public debt: this raises doubts about the sustainability of the recovery.
P. Do you think this pandemic could be inflationary?
R. In developing countries it is a phenomenon closely linked to the exchange rate of their currencies. And I am optimistic: most are maintaining the stability of their currencies and that means that inflation is being relatively low compared to previous crises, when there were large devaluations that led to inflationary escalations. So far this is not the case: the big problem this time is the economic contraction itself and the loss of jobs, not inflation.
P. The way out of the crisis in the rich bloc is being expansive. Austerity is not on the map, at least not yet. Have we learned the lesson of a decade ago?
R. The tools advanced economies are using are much larger in scale than in the past. We see it in the zero interest rates, in the asset purchase programs of the central banks… These are elements that did not occur in previous crises. And also, of course, in the extent to which the public sector has come onto the market: debt-to-GDP ratios have risen much faster than on other occasions, except in World War II. All this has managed to stabilize the situation and allows the recovery to be on track.
P. To what extent should this sudden increase in public debt worry us?
R. Rich countries are borrowing with very long maturities and at very low interest rates. The challenge is to make good use of this new debt: it will take many years to see the result, what fruits the investments made now will bear in the future.
P. How do you rate the European recovery fund?
R. Again, it depends on how well those funds are used. And it will take several years until we can evaluate it.
P. Six months after the start of the confinements in Europe and the US, can a depression be ruled out?
R. No. In fact, I’m afraid we have to see this as an economic depression. The question is how long it will last: the 1930s lasted for 10 years or more in some countries, and my hope is that this time it will be shorter, both due to the action of governments and the private sector. There is much more information available to a much larger group of people around the world: millions of them are interacting to try to understand the crisis and take the necessary steps for recovery. And that’s a powerful tool that didn’t exist in the Great Depression.
P. What can we expect in Latin America?
R. From a GDP point of view, I fear that it is and will be one of the worst hit regions. The good news is that it had made substantial progress in previous years, in contrast to the poorest countries, many of them in Africa. And you have fiscal and monetary tools that can help you recover.
P. Do you foresee a cascade of defaults in the emerging block?
R. We are concerned that many developing countries entered this crisis with high levels of indebtedness and the economic contraction is making the debt burden even higher. That’s why we proposed a moratorium in March, which the G20 and the Paris Club endorsed. Steps have been taken in this direction, but unfortunately private creditors have not yet begun to participate in this moratorium and some creditor countries, such as China, have not.
P. Why is China getting out of the crisis so quickly? It is the great exception.
R. I do not know the whole explanation, but my impression is that they were able to adjust to the risks of covid-19 and began to reopen their economy before the rest.