About a decade ago the words “Global South” evoked images of countries with low growth, financial instability, and weak governance. Having learned from crises, these countries have now emerged as a bridge to the future for the global economy. The latest World Bank/IMF forecasts indicate that growth will hold steady at around 3 per cent and most indicators point to central banks exiting from tight monetary policy and achieving a soft landing. The latest forecast for global growth five years from now, at 3 per cent, is the lowest in decades.
What is striking about these forecasts is that for the next two to three decades, nearly three-fourths of the global growth will come from middle- and low-income countries, with Asia leading the way. Without deep financial markets, the availability of sustainable financing will be a binding constraint for growth in the Global South — and by extension for global growth because the Global South attracts capital at prohibitive rates and at short tenure. It is in the interest of the Global North to support the growth potential of the Global South. But the present international financial architecture is ill-suited for this purpose. That must change.
Decades of supportive geopolitics, demographics, globalisation and technological advances resulted in a period of high growth. But this has changed in the last few years for three reasons. One, as globalisation deepened, safety nets in individual countries did not keep pace with the accompanying displacement of livelihoods denting social cohesion and support for the multilateral system. Two, the tailwinds to global growth — expanding markets, trade, supply chains, financial globalisation — were disrupted by the pandemic. Three, the war in Ukraine, worsening geopolitics, and the rise of strategic competition risks entrenched policy-driven fragmentation.
Headwinds to growth emanating from several sources — climate change, cost of living crisis, out-of-reach SDG goals, declining productivity, absence of liquidity financing, and a broken debt architecture – impact the Global South the most. While there are several areas to tackle, including the role of multilateral institutions and redressing their governance framework, addressing three specific areas — climate financing, liquidity provisions for the Global South, and global architecture for the development of digital public architecture (DPI) — can produce lasting wins.
With the surge in technological innovations including Artificial Intelligence (AI), the digital transformation of daily lives is now in focus. The pandemic demonstrated the power of DPIs. Countries with effective DPIs could provide emergency fiscal transfers to hundreds of millions; their health systems could support vaccine deployment across large populations; their education systems could offer platforms for learning; and their digital commerce platforms, augmented by digital payment systems, could blunt the worst ravages of the lockdowns. Those that did not have this infrastructure, unfortunately, struggled.
Advances in AI give it great potential to boost global growth and inclusion. The DPI architecture requires a centre and a firmer common structure to realise gains and ensure data and cyber security across multiple usages. An international effort to bring together a coalition of the willing to create a repository of best practices and provide a forum for sharing technical advances would avert system-wide incompatibilities.
As regards climate financing, several proposals envisage leveraging public and multilateral resources. A recent Bretton Woods Committee Report proposes a complementary approach to focus more forcefully on capital markets. Research shows that 1 per cent of publicly listed companies are responsible for 40 per cent of greenhouse gas emissions. Thus, could a focus on market based solutions provide significantly more financing (and impact) than the focus on public resources?
Such a solution would entail three elements: One, mandatory disclosure requirements applied globally for publicly listed companies and large state-owned enterprises. Two, a digital public infrastructure that translates data disclosed by companies into machine-readable data. And, three new rating agencies that will rate corporates on the sustainability front. With reliable and consistent data, shareholders and civil society groups will be in a better position to channel their activism more efficiently. It will provide the means for corporate boards to develop effective long-term plans for their organisations and large money managers will have the data to act on their sustainability-related goals.
Several international panels, including the G20 Eminent Persons Group on Global Financial Architecture and the recent UN Secretary General’s High-Level Advisory Panel have noted that the global financial system is not providing financing at scale and in time to emerging markets. For example, countries like India and Indonesia have no access to US dollar swap lines. In its absence, countries self-insure by amassing large reserves which could have been used for other purposes. A strengthened and reformed IMF must lie at the centre of this effort to provide liquidity significantly beyond what it offers now.
Have systemic central bank swap lines undermined the role of the IMF? Should the IMF intermediate systemic central bank swap lines? How can the IMF temporarily expand its balance sheet to meet large liquidity needs of its members? Should it borrow from the market that its legal framework allows it to do but it never has? None of these answers are easy or simple, but each is part of a transformational outcome and now is the time to take action.
Kant is India’s G20 Sherpa and Tiwari is the former Executive Secretary of the G20 Eminent Persons Group on Global Financial Architecture
