World Bank Warns Of A "Lost Decade" As Potential Growth Slows

The global economy’s potential growth until the end of the decade has fallen to the weakest in 30 years, the World Bank said, citing the effects of the coronavirus outbreak and the crisis in Ukraine.

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The global economy's "speed limit," or the highest long-term rate at which it can grow without generating inflation, is likely to decline to 2.2% per year between 2022 and 2030, according to research released Monday by the organization.

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Potential Growth Plunges

World Bank sees potential economic growth on an enduring slide

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"A lost decade for the global economy could be on the horizon," said Indermit Gill, the World Bank's chief economist and senior vice president for development economics, in a press release accompanying the report. “The continued fall in potential growth has major consequences for the world’s ability to manage the rising array of challenges peculiar to our times – intractable poverty, diverging incomes, and climate change.”

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The report's 550-page silver lining: Potential growth may reach 2.9%, indicating an increase if policymakers implement the correct policies to boost productivity and labor supply while also bolstering investment.

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The World Bank’s latest research is set against the backdrop of a fragile global economy that’s still reeling from Russia’s war in Ukraine and efforts to reopen after the darkest days of the Covid pandemic. Many economies, including China, are facing ongoing demographic crises that have meant a mad scramble for policies to promote more childbearing — or to push back the retirement age, as France has most recently demonstrated.

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The report’s analysts note that things could get worse, with steeper declines in potential growth if a global financial crisis or recession materializations to stem this decline in potential growth:

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Labor-Force Buffers

Almost half of the anticipated decrease in potential development through 2030 is attributed to changing demographics, namely a smaller pool of workers and reduced labor participation rates since many societies are skewing older.

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The authors specifically mention economies where female labor participation rates are below average, and they estimate that some in South Asia and the Middle East and North Africa regions could increase their potential growth by 1.2 percentage points a year in the period 2022–30 if they were to raise those rates to the average for emerging market and developing economies.

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Coordination of Finance and Money

In the wake of the epidemic, it has been a recurring refrain that governments and central banks must cooperate more closely in order to prevent their efforts from working against one another, particularly given the continued high inflation. To regain investor confidence, the World Bank study recommends concentrating on slowing price increases, securing financial sector stability, and reducing debt.

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Investment Stimulus

According to the research, governments need to invest more money in initiatives with a focus on reducing climate risk, particularly in the areas of transportation, energy, agriculture, and land and water systems. According to the authors, doing so might provide prospective development with a 0.3 percentage point annual buffer.

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Cutting Trade-Costs

While advocating for further trade liberalization and treaties, World Bank experts urged nations with the highest shipping and logistics costs to decrease them in half, particularly through improvements to customs and border procedures, which have operated as an effective extra tax. According to additional studies cited in the article, transit delays are highly costly, with each day of delayed transportation amounting to a 0.8% tariff.

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The authors point out that trade-cost savings can be obtained in a climate-friendly manner, for example, by eliminating any bias in favor of carbon-intensive items in national tariff schedules.

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Service Engines

According to the paper, the services industry may be "the new engine of economic development," citing a Covid-era increase in digital services exports connected to information and communications technology to more than half of all services exports in 2021 from 40% just two years earlier. The experts claim that's a boost to production and urge emerging countries to prioritize supporting related education and training.

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