The Banking Executive Magazine - August 2021

Emerging Economies Even within EMDEs (emerging mar- kets and developing economies), the poor appear to be suffering much more than the rich, and in some economies the superrich are actually better off than they were before the pandemic. The World Bank esti- mates that COVID-19 will cause the number of people living in poverty to increase by 143-163 million in 2021, with more than half of the newly poor in South Asia, mainly in India. The problem with India is not its eco- nomic fundamentals, which are strong, but the fact that poor man- agement of the economy and the pandemic means, as the June GEP puts it, that “confidence remains de- pressed and balance sheets dam- aged”. The World Bank’s second warning concerns inflation. The long chapter in the latest GEP entitled “Emerging Inflation Pressures: Cause for Alarm?” lays it all out. Anyone read- ing that section will realize that the question mark is there only to soften the jolt. An exclamation point would have been more appropriate. Economists know how little they know about inflation. We compen- sate by being overcautious and advo- cating harsh preventive policy measures at the first sign of rising prices. And the current situation is worrying. Inflation usually declines during recessions. But, of the five global recessions of the last half-cen- tury, the drop in inflation during this pandemic-induced downturn has been the most muted. Furthermore, inflation has risen faster since May this year than at the end of previous recessions. The US Federal Reserve’s line is that the recent increase in inflation is a one-time adjustment caused by large fiscal infusions. That sounds comfort- ing but, in truth, no one knows for sure. If inflation in advanced economies persists, central banks may be compelled to tighten mone- tary policy. That could lead to higher capital inflows for advanced economies and the depreciation of EMDE currencies. These are big risks, with potentially devastating ef- fects on the world’s poor. Source: WUAB Research Depart- ment – Project Syndicate – World Bank the BANKING EXECUTIVE 30 ISSUE 152 AUGUST 2021