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In Uncertain Economic Times, a Chance for Global Breakthroughs

Jim Yong Kim's picture
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A shop in Sri Lanka is lighted by solar panels. © Dominic Sansoni/World Bank


​The global economy is growing, but a bout of New Year anxiety has taken hold, posing challenges to our global mission: boosting the prosperity of the bottom 40%, ending extreme poverty by 2030, and avoiding a climate meltdown.

As world leaders in governments, industry, and fields ranging from entertainment to media gather in Davos this week, one of the main topics of discussion will be the divergent factors affecting the global economy. We now live in a world of plunging oil prices, volatile exchange rates, and weakness in many high-income countries that are still struggling to put the legacies of the global financial crisis behind them. On top of this, emerging economies as a whole are less dynamic than in the past.

Our just-released Global Economic Prospects report downgraded our growth estimates and showed the world’s economy is still growing, but a bit more slowly than we projected last June. Global growth registered a modest 2.6% in 2014 and is expected to grow by 3% in 2015. Developing countries are expected to grow by 4.8% this year and high-income economies will likely grow by 2.2%, buoyed by the United States.

This is far better than recession, but the engines of growth are still sputtering. Japan and the Euro area could slip into a prolonged period of stagnation or deflation and global trade could weaken from an already low level unless policymakers manage budgets well and plan carefully so they will be well prepared when future crises occur.

 Global Outlook. © World Bank


​Also, falling oil prices create uncertainties, winners and losers, and economic strain. Indeed, low oil prices present significant challenges for major oil-exporting countries, which will be hurt by weakening growth prospects.

In such an uncertain environment, how should leaders react?

In most high-income countries, the still-fragile economic recovery calls for continued accommodative monetary policy and a flexible approach to fiscal policy. In other words, a delicate balance is needed between supporting growth while also laying out plans for medium-term consolidation and structural reforms.

In developing countries, post-crisis growth has been stymied by persistent geopolitical tensions, bouts of broader commodity market volatility, and structural weaknesses. Structural weaknesses vary from place to place, but in many countries they relate to rigid labor regulations, poor-quality roads, ports, and information and communications technology systems needed for businesses to thrive, and reliable basic services as well as access to finance. All of these are essential for inclusive prosperity and well-being.

One bright spot for the world is low-income countries, which, as a group, recorded robust growth of about 6% last year. They were buoyed by rising public investment, strong capital inflows, good harvests, and improving security conditions in several conflict countries. A similar pace of growth is expected for this group in 2015, although soft oil prices will almost surely dampen the outlook in some exporting countries.

As many climate advocates and environmentalists are rightly pointing out, now is the time to push the world to a lower-carbon future, which means finding ways to lessen our reliance on oil and investing in renewable energy.

Oil-importing countries have a window of opportunity, given the low price of oil, to raise fuel taxes and eliminate poorly targeted fuel subsidies. The extra revenue could be used for social safety nets, jobs programs, badly needed infrastructure investments and other growth-enhancing investments.

Such investments in people also could substantially reduce poverty levels and boost shared prosperity of the most vulnerable. We estimate that sustained per capita growth rates on the order of 4% would allow the share of the global population living on less than $1.25 a day to fall toward 3% by 2030. This would mark the virtual end of extreme poverty, as volatilities such as conflict and weather-related disasters will always keep some numbers of people impoverished. But it’s hard to be optimistic today that we will reach and sustain such strong levels of growth for the next 15 years.

We can make gains now to reverse the dangerous levels of pollutants that cause climate change, and we can dramatically reduce the numbers of people living in poverty – even in these uncertain times. For the first time in human history, we have the opportunity to end extreme poverty in a generation. Also for the first time ever, world leaders are seriously focused on solutions equal to the challenge of containing climate change.

Davos has a history of breaking new ground by bringing together political foes, and by addressing difficult global issues with stunning clarity. For this year’s gathering, we must keep our focus on the truly daunting issues in our midst, and agree to build a world that boosts shared prosperity, ends extreme poverty, and fights climate change.

This post originally appeared on LinkedIn.

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