Behind the bleak growth scenario

Hindustan Times

a day ago

Downward revision to global Gross Domestic Product (GDP) growth, thanks to the trade policy uncertainty unleashed by US President Donald Trump, has become the norm for multilateral institutions this year. The World Bank's Global Economic Prospects (GEP) report, released on Tuesday, has kept with the trend bringing down its global GDP growth forecast for 2025 by almost half a percentage point to 2.3%.
Where GEP paints a grim picture, however, is in drawing attention to the fact that things weren't exactly great even before Trump 2.0 shocked the world. Statistics speak for themselves. Global growth has been falling for a long time. This trend is in keeping with a slowdown in global trade, foreign direct investment (FDI) to emerging market and developing economies (EMDEs), and their income convergence with advanced economies. The EMDE story becomes bleaker once China and India are taken out of the picture.
When read with the fact that most things turned south after the global financial crisis of 2008, there are two key takeaways to be drawn. The first is growth and development — the latter in the sense of egalitarian economic progress in the world — are critically linked and development cannot be achieved without growth.
The second is that the world has been struggling to find a stable growth anchor in the aftermath of the 2008 crisis. The 2008 crisis itself was the result of a Ponzi scheme in the garb of financial innovation to boost growth. It is also important to underline that the political factors that have triggered the trade wars of today have their roots in the asymmetric incidence of the gains and losses of the nature of growth in the advanced economies. Unless this political sentiment is catered to sincerely, there is little hope of things returning to normal.
On this front, GEP's three-fold prognosis on how to make things better — it suggests trade liberalisation, fiscal balance, and employment generation — is underwhelming. The core of the economic problem facing the world at the moment is whether or not the advanced countries have the political appetite to absorb large exports from EMDEs. Solving this problem requires a rebalancing of not just the international division of labour and income but also the balance within advanced economies. Not engaging with this problem will not make it go away.
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