Global Economic Crises: Implications and Proposed Policies
The global economy was recently subjected to several shocks that weakened its performance beyond expectations. After the Corona pandemic, the Russian-Ukrainian war increased pressure on it as a result of rising energy prices, interruptions in supply chains and high inflation, which affected many conditions in the world, and caused crises regarding the availability of basic goods .
This paper aims to analyze the current global economic crises and determine their repercussions on the overall performance, and to identify the measures taken by governments to confront the crises, and the proposed ways that can be taken to reduce their repercussions.
The research paper reached the most important repercussions of the current crises for the global economy as follows:
1- Global growth recorded a decline from 4.4% in 2022 to 3.8% in 2023.
2- High inflation is expected to persist for longer than expected, with continued disruptions in supply chains as well as high energy prices in 2022.
3- Supply chain disruptions, volatility in energy prices, and concentrations of wage pressures in certain places all mean high uncertainty about inflation and policy trajectories.
4- A deterioration in the direction of profits by multinational companies in the list of the top 100 companies affiliated to UNCTAD, which is considered a magnet for foreign direct investment trends in the world.
5- Market indicators point to inflationary pressures directed at local currency bonds, and in the face of mounting price pressures, many central banks in emerging markets continued to raise key interest rates.
6- A noticeable rise in real emerging market interest rates, affected by the repercussions of returning to normal monetary policy in advanced economies.
First: the impact on the development of the overall performance of the global economy
1. Impact on gross domestic product
According to the International Monetary Fund, global growth recorded a decline from 4.4% in 2022, to 3.8% in 2023. A contraction in GDP occurred starting in 2020 using the weights of the exchange rate in the market, which is the deepest global recession in decades.
The global economy has lost more than $2 trillion, especially since the coronavirus has led to an economic recession that has put pressure on public health funding, weakening the world’s ability to prevent or contain a virus outbreak afterwards. The response to this emergency has also created new risks – such as the massive increase in levels of public and private debt in the global economy.
2. Impact on commodity prices
Inflation is expected to remain high for longer than expected, with interruptions in supply chains as well as high energy prices continuing in 2022. Assuming that inflation expectations remain at a good level of stability around the target pillar, its rate is expected to gradually decrease as the imbalances between supply and demand recede in 2022 and the monetary policy response in major economies, where it is expected to remain high in the near term, averaging 3.9% in advanced economies and 5.9% in emerging market and developing economies in 2022, before declining in 2023 .
Figure No. (1) Inflation rate during the period (January 2021 – January 2022)
3- Impact on foreign direct investmentThe United Nations Conference on Trade and Development (UNCTAD) expected a global decline in the flow of foreign direct investment by 30-40% during the period (2020-2021). And the most profitable sectors have become: pharmacy and sterilizers, electronic commerce, remote work, logistic services, communication applications and distance education. The sectors that lost the most were: aviation, travel and tourism, hotel and hospitality, conferences, exhibitions and festivals, trade and services, oil and commodity exchanges.
Figure No. (2):foreign direct investment flows worldwide
During the period (2015-2022) one trillion dollars
Figure (2) shows foreign direct investment flows worldwide during the period (2015-2022), as it achieved $2 trillion in 2015 and continued to decline since then until it reached $1.5 trillion in 2019. As a result of the repercussions of Corona, it decreased in 2020 to approach trillion dollars, then it rose to 1.2 trillion dollars in 2022.
There is a rapid deterioration in profit guidance by multinational companies in the list of the top 100 companies affiliated to UNCTAD which is a magnet for foreign direct investment trends, as there are 61% of the multinational companies in the list of the top 100 companies affiliated to UNCTAD.
Figure No. (3) Financial situation indicators in the different regions during the period (2016-2022)
Source: International Monetary Fund: Update on the Global Economic Outlook, (Washington: International Monetary Fund, January 2022)
According to Figure (3), central banks in advanced economies took steps towards returning to normal monetary policy, while policy makers in many emerging markets continued to tighten monetary policy.
Figure No. (4) Flows of equity funds for emerging markets during the period (January 2021-January 2022)
Source: International Monetary Fund: Update on the Global Economic Outlook, (Washington: International Monetary Fund, January 2022)
Market indicators in this figure point to inflationary pressures directed at bonds in the local currency, except in China, albeit with great disparity between regions. In the face of mounting price pressures, many emerging market central banks continued to raise policy rates, exceeding pre-crisis levels in several countries.
Second: Policies taken by governments to confront the crises of the global economy
The set of policies chosen to address the effects of the crisis in the short term varies greatly from country to country, depending on the availability of resources and the specific nature of the risks that countries face. In addition to direct income support programmes, governments and central banks have made unprecedented use of policies aimed at temporary debt relief, including moratoriums on debt payments for the household and corporate sectors.
Figure No. (5) Interest rate fluctuations during the period (January 2020 – January 2022)
Source: International Monetary Fund: Update on the Global Economic Outlook, (Washington: International Monetary Fund, January 2022)
According to Figure No. (5), long-term global interest rates have increased dramatically since the beginning of 2022 until they reached record high levels for the pandemic era, reflecting in part the prevailing perception that the Federal Reserve will accelerate the restoration of normal monetary conditions, and then put an end to the witnessed decline in December due to concerns about the Omicron effect.
A number of governments have taken substantial targeted fiscal, monetary and financial market actions to support affected households and businesses.
Among the important measures taken by the central banks of a number of countries is the provision of monetary stimulus facilities and the availability of liquidity in order to reduce systemic pressure. Supervisors are encouraging banks to renegotiate loans to households and firms currently in distress while maintaining a transparent assessment of credit risk.
The International Monetary Fund provided a number of assistance to countries in facing the effects of the crisis, and supported the efforts made at the level of national policies to limit economic damage, through the Fund’s facilities directed at lending.
Third: policies to reduce the repercussions of global economic crises
Close multilateral cooperation is a necessary requirement for overcoming the effects of crises in the global economy, including assistance to countries that lack financial resources.
A number of proposals can be presented in order to manage the crisis and mitigate its impact, provide incentives and accelerate recovery, as follows:
1- At the level of public policies
Governments should take macro policy responses, through the following:
A- That central banks improve the provision of liquidity, and mitigate the major financial pressures that weaken economies, to improve access to finance for small and medium enterprises, and encourage lending and investment.
b- Improving social protection systems, by expanding coverage of cash transfer programs, food aid, unemployment benefits and other programs.
C – Extending the repayment deadlines for individual loans and mortgages, stopping the payment of government fees temporarily, and exempting the needy from taxes.
d- Providing credit support and interest-free loans to small and medium-sized companies and the self-employed.
2- At sectoral level
A- Ensuring the continuation and increase of agricultural production to meet potential food shortages, by improving the ability to obtain credit, enhancing production inputs, increasing the areas of public leased land, and removing barriers to trade.
b- Supporting small-scale food producers, and providing them with in-kind assets and production inputs such as seeds, organic fertilizers, and irrigation systems.
c) Reducing telecommunication tariffs and fees for households and individuals; improving broadband internet speed; Remote work, distance learning, and social communication.
D – Calling on multinational companies not to change basic income levels, in order to prevent further weaknesses in the balance of payments and financial accounts.
3- At regional level
A regional response should be implemented that supports national efforts and leads to the mobilization of resources and expertise. The responses implemented by regional development and financial institutions, as well as intergovernmental organizations and United Nations agencies, should embody the principle of leaving no one behind, by making every effort to reach the most marginalized groups. via the following:
a- Governments are invited to establish a regional fund for social solidarity in order to support countries at risk, including least developed countries.
Allocating this fund to serve the poor and vulnerable groups, ensuring expedited response, and providing relief in times of food shortages or health emergencies.
b- Regional development financial institutions, as well as multilateral financial institutions, shall consider setting up mechanisms to postpone and reduce debt repayment, with the aim of enhancing the fiscal space available to middle- and low-income countries worldwide.
c-Regional funds direct investments towards the health sector and small and medium enterprises, and can support soft loans to governments, to finance additional expenditures in the health sector in each country.
d- Specialized regional funds provide urgent financial support within the framework of aid-for-trade initiatives, by designing and financing appropriate programs to support exporters and importers.
Finally, the provision of large-scale global stimulus and liquidity facilities aimed at reducing stresses in the financial system can raise confidence and prevent a deeper downturn in demand, by limiting the expansion of the shock in the financial system, and strengthening the prospects for eventual economic recovery.
