For nearly 30 years, increased trade, investment and innovation fueled an era of unprecedented prosperity and brought the world closer to ending extreme poverty.It allowed the incomes of the poorest nations to reduce the gap with the richest and reduced the frequency and severity of national economic crises.
Then, in quick succession, two jolts halted progress. For developing economies,the war in Ukraineit erupted before they had a chance to climb out of the Covid-19 recession, and it is already clear that the economic damage will be severe and long-lasting.
The war has causedgreater impact on the price of raw materialsthat we have experienced since the 1970s. It is likely to reducea full percentage pointof global growth in 2022.
The war has also changed global patterns of trade, production and consumption of commodities in ways that prices could remain high for years.Many countries are moving away from Russia as a supplier of coal and oil and have been finding alternatives in more distant places.
Other major coal importers could undermine this by cutting out current suppliers and turning to Russia. The result can be longer haul distances that make diversion costly, because coal is bulky and expensive to haul. Similar deviations have begun to occur with oil and gas.
Those events will be especially hard on the world’s poorest people. Higher food and energy prices consume more of the income ofpoor householdsthan wealthier households.
Most poor countries are oil importers, so higher energy prices will put pressure on government budgets already strained by the Covid-19 crisis. At the same time, rising fertilizer prices, some of which are at levels not seen since 2008, could lead to reduced use. The result: lower agricultural yields and further reductions in food availability.
Commodity price shocks have the potential to change production and consumption patterns in beneficial ways. After the 1973 crash, for example, fuel efficiency requirements for American cars increased significantly: from 13 miles per gallon to 20 miles per gallon in 1990.
US lawmakers have also established regulations prohibiting the use of crude oil in electricity generation. . In both cases, the effect was to reduce the demand for high-priced energy while contributing to a cleaner environment. In general, theMost countries responded to the oil shocks of the 1970s by finding ways to reduce oil demand, boost production, or switch to alternative energy products.
However, implementing such options today will be more difficult. First, governments now have less room than in the 1970s to switch to cheaper energy alternatives: prices have risen across the board, affecting all fuel types. Second, oil consumption as a percentage of world GDP and total consumer spending is lower than it was in the 1970s, especially in advanced economies. As a result, higher prices are less likely to constrain energy demand. Third, governments have so far reacted by reducing fuel taxes or introducing fuel subsidies. Regardless of their temporary benefits, such policies are likely to prolong the crisis by increasing energy demand.
Persistently high energy prices are also likely to undermine another crucial global development goal: the clean energy transition needed to address climate change.Some countries intend to boost the production of renewable energy and low-carbon fossil fuels such as gas, but these projects will take time to materialize. Meanwhile, several countries have chosen to increase the production and use of cheaper fossil fuels. China, for example, plans to increase coal production by 300 million tons, which is equivalent to 8 percent of current levels.
Overcoming a global crisis requires global cooperation, the kind that has prevailed for the last three decades and from which the smaller and poorer countries benefit most. The war may have upset many traditional incentives for such cooperation, butgovernments everywhere can still minimize the damage to their most vulnerable citizens and to the global economy. Five actions would help a lot:
First, foster a robust supply response for grains, cooking oils, and fertilizers through policy reforms that increase productivity, rationalization of agricultural subsidies, and trade facilitation.The markets response to higher prices is more supply; in many cases this takes months, not years.
Second, strengthen specific social safety net programs such as cash transfers, school feeding programs, and public works programs.These can go a long way in shielding poor households from the effects of higher prices, and are a better use of resources than subsidies. If subsidies must be used, specify that they will be limited in size and temporary.
Third, resist the temptation to impose import and export restrictions on the movement of food.We know well from past food crises that they only make the problem worse.
Finally, increase investment in energy efficiency and renewable energies—in particular, the insulation and air conditioning of buildings that protect both from cold and heat. Such policies can help achieve climate goals and reduce costs for households. In the long run, they will also improve energy security.
Over the past two years, a succession of overlapping crises has left governments around the world with little room for maneuver and no room for error. The choices politicians make over the next year may well determine the course of the next decade. They must spare no effort to increase economic growth in the country and resist all actions that could harm the global economy.
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Vice President, Equitable Growth, Finance and Institutions (EFI), World Bank Group
Chief Economist and Director of the Outlook Group, Equitable Growth, Finance and Institutions (EFI)