The World Cannot Afford to Ignore the Poorest Countries

Apr 20 , 2024
By M. Ayhan Kose , Indermit Gill

Despite possessing 20pc of the world's copper and gold reserves and crucial rare metals for clean energy transition, poor countries struggle to use these resources for sustained economic growth. The problem is compounded by inadequate infrastructures, such as limited access to electricity and basic sanitation, requiring investments surpassing 10pc of GDP in some countries. In this commentary provided by Project Syndicate (PS), Indermit Gill, chief economist and senior vice president for Development Economics at the World Bank, and M. Ayhan Kose, deputy chief economist and director of the Prospects Group at the World Bank, press on the need for robust government institutions and significant international support.

They are home to a quarter of humanity – 1.9 billion people. They possess prized natural resources, including one-fifth of the world's copper and gold reserves, as well as many of the rare metals essential for the transition to clean energy. Their working-age populations will expand for the next five decades amid demographic decline nearly everywhere else. Yet a historic reversal is underway among the world's 75 countries eligible for grants and low-interest loans from the World Bank's International Development Association (IDA).

For the first time this century, the income gap relative to the wealthiest economies is widening in roughly half of IDA countries. And while these countries are midway through what could be a lost decade, the rest of the world is largely averting its gaze. IDA countries have an extreme poverty rate eight times higher than the global average. They account for 70pc of all extreme poverty, and they are home to 90pc of people facing hunger or malnutrition. Many of their national governments, meanwhile, are paralysed, and half are either in debt distress or at high risk of it.

The flow of foreign capital has largely dried up for IDA countries. In 2022, for the first time in 16 years, private creditors took more in principal repayments than they put in via loan disbursements to IDA governments and government-guaranteed entities. Financing from foreign governments dwindled to an 11-year low. The remaining lifeline has been multilateral development banks, especially the World Bank, which provided more than half of the 26 billion dollars in loans that IDA governments received from multilateral creditors in 2022.

We are witnessing a dangerous retreat from the principles upon which much of the global economic architecture was built after World War II. Back then, the wealthiest economies wisely recognised their interest in improving the welfare of the weakest. The 17 donor countries that made their first financial contributions to the IDA in 1960 believed that accelerating "economic and social progress in the less-developed countries is desirable not only in the interests of those countries but also in the interests of the international community."

The global prosperity that followed validated this insight. Three of today's global economic powerhouses – China, India, and South Korea – are former IDA borrowers whose growth has transformed them into important IDA donors.

Of course, the path to prosperity is rarely linear. Progress often occurs in fits and starts, with some countries advancing and then regressing. But there is no doubt that the IDA's consistent support for the weakest economies has done immense good for the world. In all, 36 countries that once were IDA borrowers no longer depend on it, with a dozen "graduating" in the last two decades alone. Today's IDA countries account for a mere three percent of global GDP. Yet their economic potential is considerable, owing to the demographic dividend inherent in their population growth.

These countries will have deep reserves of young workers at least through 2070, long after working-age populations in other countries have dwindled.

IDA countries are endowed with a trove of mineral deposits crucial for the world's transition to clean energy – including silicon in Bhutan and manganese in Ghana. Most IDA countries are also well placed to take advantage of solar energy, with long-term daily generating potential among the highest in the world. However, IDA countries will enjoy neither durable growth nor stability unless they can readily make productive jobs available for young people entering the workforce, requiring substantial investment in health and education. Lasting benefits from their natural-resource wealth will remain out of reach without government institutions capable of nimbler economic management.

Ensuring IDA countries achieve their full potential will require a concerted effort involving vigorous domestic reforms and stronger financial and policy support from abroad. South Korea, India, and China have shown that economic magic - productivity surges, incomes rise, and poverty fall - occurs when countries undertake the ambitious reforms needed to accelerate investment. Investment needs in IDA countries are immense. In some, improving access to electricity and basic sanitation facilities will require infrastructure investments exceeding 10pc of GDP.

On average, each IDA country today has succeeded at least once over the past 50 years in achieving sustained investment acceleration. But, that is only slightly more than half the average of earlier groups of IDA countries. To raise their game, today's IDA countries will need to bolster fiscal and monetary frameworks, ramp up cross-border trade and financial flows, and improve the quality of institutions.

Global assistance will also be essential. IDA countries deserve financial support from abroad and fresh policy solutions to transition to clean energy. Already, climate change is making them pay a steep penalty for others' sins. They also need an improved global debt-restructuring system. The current framework consigns them to an indefinite purgatory. And they need global help to tackle food insecurity, especially now that faraway international conflicts and trade disruptions have added to the problem.

In the coming decades, the world will need to summon every available reserve of economic potential to achieve universal peace and prosperity. It cannot afford to turn its back on a quarter of its people.

PUBLISHED ON Apr 20,2024 [ VOL 25 , NO 1251]

By M. Ayhan Kose ( M. Ayhan Kose, deputy chief economist and director of the Prospects Group at the World Bank, press on the need for robust government institutions and significant international support.   ) , Indermit Gill ( Indermit Gill, chief economist and senior vice president for Development Economics at the World Bank, )

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