Half a century ago a surprise attack on Israel by neighbouring countries marked the start of the Yom Kippur war – an event that signalled the end of the long postwar boom and ushered in a period marked by higher inflation and rising unemployment.
So it was with a degree of trepidation that finance ministers, development ministers and central bank governors from around the world gathered in Marrakech last week for the annual meetings of the International Monetary Fund (IMF) and the World Bank. Nobody needed reminding of what happened half a century ago.
Publicly, the line from the gathering in the Moroccan city was that it was too early to say how big a risk the war between Israel and Hamas poses to an already fragile global economy but the warning signs are clearly there.
The IMF is clinging to the hope of a soft landing in which activity slows but doesn’t collapse under the weight of the sharpest rise in interest rates in decades. Nor does it think there is much chance of asset prices taking a tumble if interest rates stay higher for longer, which is what the IMF is recommending.
That seems far too sanguine an assessment, but is indicative of the complacency that permeated last week’s events. To be fair, there were some modest achievements. There was an acceptance that the IMF needs additional financial firepower. There was progress on a debt relief deal for Zambia. The new World Bank president Ajay Banga outlined his vision for a “bigger, bolder, better” bank.
But there was no real sense of urgency. “The bar for the meetings was set low,” said Michael Jacobs, a fellow at ODI, the global affairs thinktank. “And they only just cleared it.”
Nor was there much evidence that participants were heeding the warning from Jamie Dimon, the boss of the US investment bank JP Morgan, that “this may be the most dangerous time the world has seen in decades”.
The war in the Middle East has the potential to reverse the recent fall in inflation, prompting higher interest rates from central banks and a sell-off in the financial markets.
Last month’s trade and development report from UNCTAD (the UN conference on trade and development) said that even before the war in the Middle East, high interest rates were leading to rising inequality and lower investment.
The world has just experienced its hottest September on record, the war in Ukraine shows no sign of ending, the pandemic and its aftermath have led to the first increase in the number of people living in poverty in decades, and the willingness of countries to cooperate to solve problems is at a low ebb.
One small step forward would be for the World Bank to agree to a proposal backed by the Nobel prize-winning economist Joseph Stiglitz for a new indicator that would measure countries suffering from high inequality and seek to reduce the number over time.
As it is, poor countries – particularly in Africa – are becoming ever more frustrated by the failure of the Common Framework – the G20 scheme established in 2020 to deliver debt relief but which has failed to live up to its billing.
Banga and Kristalina Georgieva, the managing director of the IMF, both know the Common Framework is flawed but insist there is no alternative to it.
Yet, as Achim Steiner, administrator of the UN Development Programme noted, 52 countries are already in distress or at the risk of distress. Nine of the 52 – including Argentina, Sri Lanka, Zambia and Lebanon – have already defaulted. It will not be long before the IMF’s fresh firepower will need to be deployed.
Another source of tension was the pushback by developing countries against having net zero policies foisted upon them by the west.
Here, the message from the rich north has been simple but wildly optimistic: developing countries should skip the fossil fuel phase and move straight to clean energy.
But it is magical thinking to assume that this is going to happen anytime soon, not least because there is little evidence that the better-off countries, the multilateral institutions and the private sector will provide the vast sums required.
Increasingly, developing countries see this for what it is: a mixture of hypocrisy and fantasy. They look at Germany, which reopened coal plants after Russia’s invasion of Ukraine, and wonder why there is one rule for the rich and one for the poor.
They argue that they are being asked to do what rich countries are doing – achieving net zero – only more rapidly and with woefully inadequate resources. They don’t buy the idea that a dollar spent on clean energy is the same as a dollar spent on development. They say it is all very well talking about setting net zero targets for 2050 but they have people going hungry now.
The harsh truth is that poor countries are not getting debt relief, have seen aid flows cut, and see no sign of the long-promised wave of investment in clean energy. Little wonder there are rumblings against what is seen as a form of green colonialism.
Stiglitz is calling for a massive increase in support for poor countries before it is too late, and he is right. This tension needs to be defused – and fast.
That seems unlikely. The similarities between 1973 and 2023 are not exact, yet the idea that the world could again be on the brink of something nasty is inescapable.
It would be wrong to say that the IMF, the World Bank and the rich countries that dominate them are not worried. They are. The problem is they are not nearly worried enough.
