INTERVIEW | DAVID MALPASS

World Bank chief: ‘This crisis must be seen as an economic depression; the question is how long it will last’

The head of the international organization is worried about the effects of the coronavirus pandemic on developing economies, which lack the recovery tools of developed countries

World Bank President David Malpass in late October in New Delhi, India.
World Bank President David Malpass in late October in New Delhi, India.getty

Before even hearing the first question, World Bank President David Malpass, 64, speaks out to emphasize the “very worrisome” data about the increase in extreme poverty. It is his main concern right now, and the numbers back it up: the coronavirus pandemic will leave up to 150 million more people below that threshold, breaking more than two decades of uninterrupted decline on a global scale.

“We are in the depths of the recession and this is very worrisome. The effects of poverty are long-term: it is urgent to reverse this trend, and that requires for economies to get back to some kind of growth,” says Malpass. Unlike the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, who has ruled out an economic depression derived from the coronavirus crisis, the American economist does believe that the world is immersed in one: the question is how long it will last. His hope is that it will be shorter than the Great Depression of the 1930s.

Question. According to the World Bank’s own records, the coronavirus crisis has caused the largest economic contraction in 90 years. Where are we at right now?

Answer. Some advanced economies are beginning to have an uplift. The forecasts reached their worst point in May and June, and since then, the new forecasts are beginning to go up for the advanced economies. The problem is that the average of the developing world, except for China, is still getting worse in terms of the forecast. And that includes both the poorest nations and middle-income countries, many of them in Latin America.

Q. The V-shaped recovery forecasts seem to have been left behind in many countries.

A. That’s right. For many developing countries, there’s not so much a V as an L: there was a sharp decline and now these economies are barely growing from that lower base. That is very troubling from the point of view of poverty expectations and for education. The challenge now is to restart growth earlier so the setbacks can turn into an uplift.

Q. Until we have a vaccine, the economy will be in trouble.

A. Vaccines are important and I am cautiously optimistic about the timeframe for that, but it’s still going to take a substantial amount of time. In the meantime, the most critical thing is the reopening steps. Europe has been moving forward; China has reopened many parts of its economy using social distancing, masks and careful interaction among people. Those big economies really need to reopen and begin to grow, and that will help the developing world begin its own recovery.

Unlike 2008, the developing world is being hit even harder and it’s not getting very much support from the stimulus efforts in the advanced economies

Q. Unlike the financial crises of 2008 and 2009, when the emerging countries resisted and even came out stronger, this time they are the weakest link. Do you have the feeling that they are not receiving attention from the advanced economies?

A. Efforts have been made to give a global response [to the crisis]. The United States is doing a huge amount of government spending and central bank asset purchases. It is a similar situation in Europe and Japan, which are hoping to relaunch their own economies and also bring some benefit to the developing world. But it’s true: unlike 2008, the developing world is being hit even harder and it’s not getting very much support from the stimulus efforts in the advanced economies.

Q. Where then does the answer lie?

A. What needs to happen is actual growth in the developed economies. Job creation is important, that creates the demand that can help the developing countries. There’s going to have to be a cycle of recovery for the world, and a chief part of it is the safe reopening of schools and businesses as people await a vaccine.

Q. When will the world economy return to pre-crisis levels?

A. I do not have a precise estimate, but, in the case of developing countries, it will take many years. The advanced economies have provided such a huge response that there might be a quicker recovery of GDP, but it will come with much higher government debt levels. A primary stimulus in the advanced economies now involves borrowing and spending, and that raises questions about the sustainability of that kind of recovery. Meanwhile, developing countries do not have the borrowing power of the advanced economies, and their central banks do not have the degree of confidence necessary to expand their balance sheets: if they do, the concern is that it will weaken their currencies and turn into an inflation cycles that would makes things worse, not better.

Q. Do you think that this pandemic can be inflationary?

A. In developing countries inflation is a phenomenon closely related to the exchange rate of their currencies. I am optimistic that so far, most developing countries are maintaining the stability of their currencies and therefore the inflation rate can remain relatively low compared to past crises, when there were devaluations that led to major inflation problems, but so far that has not been the primary problem this time: this time it is the contraction itself and the loss of jobs.

Q. The way out of the crisis in the advanced economies is being expansive. Austerity is not on the map, at the least for now. Have we learned the lesson of a decade ago?

A. The tools that advanced economies are using are much on a much larger scale than in the past. We see it in the 0% interest rates, in the asset-purchase programs by central banks. That did not happen in previous crises. And also by the magnitude of public-sector borrowing. The debt-to-GDP ratios have climbed much faster than on other occasions, with the possible exception of World War II. All this has managed to stabilize the situation and it allows the recovery to take hold.

The challenge is to make good use of the borrowing: it will take several years to see whether there is a good payoff from the borrowing that is occurring now

Q. How worried should advanced economies be about public-debt levels?

A. Advanced economies are borrowing with very long maturities and at very low interest rates. The challenge is to make good use of this borrowing: it will take several years to see whether there is a good payoff from the borrowing that is occurring now, it may be that the investments made in recovery, human capital and technology will have a payoff in the future.

Q. How do you rate the European Recovery Fund?

A. Again, it depends on how well those funds are used. And it will take several years until we can evaluate it.

Q. Six months after the first lockdowns Europe and the US, can we rule out an economic depression?

A. No. In fact, I’m afraid we have to see this as an economic depression. The question is how long it will last: the Great Depression of the 1930s lasted 10 years or more in some countries. I am hopeful that this downturn can be shortened, both by the government activities and by the power of the private sector. In this crisis there is much more information available to a much bigger group of people around the world: millions of people are interacting to understand the crisis and take steps to recover. And that can be a more powerful recovery engine that didn’t exist in the Great Depression.

Q. What can we expect in Latin America?

A. From the point of view of GDP, I am afraid that it will be one of the hardest-hit regions. On the positive side, Latin America has made substantial progress in previous years, in contrast with the poorest countries, many of which are in Africa. Latin America has fiscal, monetary and regulatory tools that can help with the recovery.

Q. Do you foresee a cascade of defaults in emerging countries?

A. We are worried that many developing countries entered this crisis with high levels of debt and the economic contraction makes the debt burden even heavier. Along with the IMF, we proposed a moratorium on debt payments in March, and the G20 and the Paris Club endorsed that and have taken initial steps toward the suspension of debt payments. Unfortunately the commercial creditors have not yet begun to participate in this moratorium, and some of the major official creditors have not been participating, such as China.

Q. Why is China recovering so fast? It is the great exception.

A. I don’t know the whole explanation, but my impression is that they were able to adjust to the risks of Covid-19 and to begin reopening their economy before the rest.

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