Slow growth and the cost of debt: the World Bank's Chief Economist on the global outlook

Indermit Gill, Chief Economist, World Bank: The global economy, it's a complicated picture, in the sense that it's doing better than we expected just six months ago but it's doing much worse than what it was doing six years ago.

Robin Pomeroy, host, Radio Davos: Welcome to Radio Davos, the podcast that looks at the biggest challenges and how we might solve them. This week it’s our regular check in on the state of the global economy as the World Economic Forum publishes its Chief Economists Outlook - we speak to the chief economist at the World Bank .

Indermit Gill: Inflation has come down. And so you'll see that advanced economies are starting to think about growth again rather than inflation. So that part is good.

Robin Pomeroy: And the bad part?

Indermit Gill: The problem is that the growth that the world economy is settling into is much lower than what we saw in the 2000s. It's even lower than what we saw in the 2010s, which was lower than the beginning of this millennium.

Robin Pomeroy: World Bank Chief Economist Indermit Gill explains the impact that debt levels have on the poorest - and also the richest countries. And the head of Economic Growth at the World Economic Forum talks of the risks to countries paying more than half their revenues to service their debt.

Aengus Collins, Head, Economic Growth, Revival and Transformation, World Economic Forum: There are 3.3 billion people who are living in countries that spend as much on debt servicing as on health or education. So it's really seeing quite direct impact on core areas of societal function.

Robin Pomeroy: Subscribe to Radio Davos wherever you get your podcasts, or visit wef.ch/podcasts where you will also find Meet the Leader and Agenda Dialogues.

I’m Robin Pomeroy at the World Economic Forum, and with this look at the Chief Economists Outlook …

Indermit Gill: You can convert that into progress.

Robin Pomeroy: This is Radio Davos

Welcome to Radio Davos. Later in the show, that interview with Indermit Gill, Chief Economist of the World Bank and Senior Vice President for Development Economics, with his assessment of the glass-half-full state of the global economy.

He spoke to Radio Davos to coincide with the publication of the World Economic Forum’s Chief Economists Outlook - that’s a survey of chief economists around the world on how they see the state of the economy that the Forum publishes every three or four months. If you want a snapshot of where things stand, where they are headed, and what are the big headwinds facing economies big and small, the Chief Economists Outlook is a great digest of where the world is at right now.

To get a flavour of what is in the latest edition, my colleague Anna Bruce-Lockhart spoke to Aengus Collins, Head of Economic Growth, Revival and Transformation at the Forum’s Centre for the New Economy and Society. Anna asked Aengus Collins to outline the headlines of the Chief Economists Outlook

Aengus Collins: In the latest edition of the Outlook. I think there are three main things that we focus on.

First is the overall outlook for the global economy. And there there's some cautious optimism, but I think also a sense of vulnerabilities, if any more shocks come along.

The second thing we look at is what's been going on debt levels and debt servicing costs in recent years. And we see some vulnerabilities there.

The third thing, and it's connected to the second, is the need for a new approach to growth. I think there are numerous global challenges that countries are having to lean into, climate change being obvious one. Resilience in the face of potential new pandemics would be another. And just finding both the political will and global collaboration to really make progress on those challenges.

Anna Bruce-Lockhart: One of the themes that pops up time and again in these Chief Economist Outlooks is the theme of cautious optimism. It seems to be a bit of a hedging term perhaps for predicting what's going to happen or how people feel about economic trends. It's popped up again in this Outlook. Could you took us through what it means this time around.

Aengus Collins: Sure. One of the things we point to there is the fact that interest rates have started to turn around. We're seeing interest rates starting to reduce, and that should ease up some of the pressure, allow more activity help labour markets, job creation and so on. So that's, I think, a positive for the world.

The cautious bit remains, though. It's still a very volatile situation. It's hard to overstate the amount of volatility, the amount of uncertainty, you know, the difficulty that everyone has been facing, particularly since Covid, but even going back years before that.

So it's difficult to say we're out of the woods. So we'll always have that element of caution, I think. But there are some encouraging signs.

Anna Bruce-Lockhart: And looks like obviously we've seen examples in Kenya, and of course, you have Sri Lanka defaulting on its debt, causing instability. As people come out of the pandemic, it seems to be a sort of growing theme. Would you just start with the finding of this rising global debt from the report and then talk about its implications?

Aengus Collins: So one of the findings in the latest edition is that the chief economists are concerned about current debt loads and debt servicing costs and see it as a potential source of instability.

I think one of the key things here is, in the wake of the pandemic, there was a lot of spending had to happen to cushion economies, to cushion societies from what was going on, and that pushed debt levels up. Simultaneously, interest rates were very high, of a lot of countries facing this horrible situation of high debt levels and interest payments on those debts that are quite difficult to manage.

That looks quite different in different countries. In more advanced economies, we're seeing a fiscal squeeze. I think most advanced economies are seeing that. You're seeing it in the politics as well. So it's a very difficult balancing act in terms of needing to be careful with what's happening to position the fiscal position, but also recognising that the need for public spending in these countries.

The situation could be much more serious for developing economies without fewer resources with which to cushion these impacts. And we have seen some countries where debt servicing costs have really skyrocketed, taking up more than half of revenue. So really serious situation.

Anna Bruce-Lockhart: And how does this then lead into social instability?

Aengus Collins: Well, I guess when you see in a country that is having to spend as much as half of overall revenues on debt, that's obviously squeezing spending out from other areas of society. And that could start to hit the basic functioning of those societies.

There are 3.3 billion people who are living in countries that spend as much on debt servicing as on health or education. So it's really seeing quite direct impacts on core areas of societal function.

Anna Bruce-Lockhart: And it's not just in developing countries, is it, because the US spends more on its debt than on its military. Is that correct?

Aengus Collins: That's true. Definitely advanced economies are also seeing this fiscal squeeze. I think the stakes are a bit lower. Almost by definition advanced economies, they are richer, they have more resources to to cushion the blow. But we're seeing it in the politics all around us. The demands for public spending, for investment in basic infrastructure. That's not just a developing economy thing, that's becoming increasingly pressing needs across all of the world.

Robin Pomeroy: Aengus Collins, Head of Economic Growth, Revival and Transformation at the World Economic Forum’s Centre for the New Economy and Society.

Our next guest knows a thing or two about the impact of debt serviving on developing economies. Indermit Gill is Chief Economist of the World Bank Group and its Senior Vice President for Development Economics.

He spoke to my colleague Linda Lacina, who started by asking Indermit Gill to explain what the World Bank actually is.

Indermit Gill: So at the World Bank, of course, we cover the entire world. We especially pay attention to the emerging markets and developing economies. But since the world is so integrated now, we have to worry about everything, including the advanced economies.

Linda Lacina: People are very interested in understanding how is the global economy doing? What is the top line? What is your assessment?

Indermit Gill: The global economy. It's a complicated picture, Linda, in the sense that it's doing better than we expected just six months ago but it's doing much worse than what it was doing six years ago.

So essentially, it's settling into a better equilibrium in a sense, than what we were seeing last year when inflation was high or even the year before last, when inflation was even higher. So inflation has come down. And so you'll see that advanced economies are starting to think about growth again rather than inflation. So that part is good.

The problem is that the growth that the world economy is settling into is much lower than what we saw in the 2000s. It's even lower than what we saw in the 2010s, which was lower than the beginning of this millennium.

So in a sense, what's happening is that we've seen a step down in terms of growth from the first decade of this millennium to the second to the third.

Linda Lacina: In the short term for the economic outlook, there's some stabilisation, but there's also some vulnerabilities. Can you kind of talk us through what some of these vulnerabilities are?

Indermit Gill: Well, the first vulnerability, of course, is we have a series of conflicts around the world. And what we are talking about, Ukraine, of course, and then the Middle East and then countries like Sudan. Now, each of these economies by themselves is not very big. So as long as this conflict is contained, one can imagine the world actually going back to a growth rate which was reasonable - again, not reasonable compared to a decade ago, but compared to a year or so ago. But if this conflict spreads, or if worries about this conflict spread, then all bets are off.

Linda Lacina: Do you see any opportunities that could enable higher growth?

Indermit Gill: Yes. Mainly in the emerging markets and developing economies. I can see, for example, India doing well and India is doing well, is growing at close to 7% now.

We can always sort of think about China actually doing better than it is right now. It's growing at around 4.5-5%, but it could grow even more. It's still in the process of recovering from Covid and things like that.

And then of course, the US economy, the US economy matters the most because it matters for world economic output, because it is about about a quarter of it. It's the most dynamic among the advanced economies. And of course, it matters a lot when it comes to the global flows of trade of goods, services and capital as well. So the health of the US economy matters a lot.

Linda Lacina: Looking at the medium and the long term, what are the big trends that sort of stick out for you?

Indermit Gill: In the advanced economies, the big concern, the big concern has to do with what we call secular stagnation, which means slowing productivity growth and adverse demographics. I mean, essentially the ageing of the population and declining labour force participation.

This is a concern that has come back again and again. So we were concerned about this actually just before Covid and so on and those concerns would come back. So that's for the advanced economies. It's called secular stagnation.

The second thing is, for the middle income countries, we worry about something that we call the middle income trap. And that basically means that these countries have actually done reasonably well in growing into what we call middle income levels, which are somewhere between $1,500 and $15,000. But then instead of growing through these middle income levels, they tend to stall in that.

So you have lots of cases of countries that actually get to middle income and then don't get past middle income. Exhibit A in this is Latin America and the Caribbean.

And then we also worry about a third group of countries. These are the low income countries. For them we worry about something that you could loosely call a lost decade, because if you look at their per capita incomes over the last decade or so, they have not grown at all. So, in fact, they might even have shrunk in some parts of the world.

So we are worried that that they are going into a period, because the world economy is not doing nearly as well as it should, because their partners, their trading partners, are not doing well, they might end up actually having very slow growth. And these are countries that actually have fairly high population growth rates.

So as a result of it, as the growth rates fall and the population growth rates remain high, the per capita income levels fall. So we are worried about them. These are between 25 and 75 countries, depending on which way you count them. And these countries, actually, their prospects are the ones that we have the most concern.

Linda Lacina: You've written a lot about the issues that could be coming for these lower and middle income countries. And in fact, our survey recently of chief economist there talking about these public debt levels as well, that you've also been very concerned about and the threat that that has for macroeconomic stability.

In 2022 alone, these countries paid a record of $443 billion to service those debts. Many countries, they pay more to service their debts and they are in health and education. But anyway. Well, tell us a little bit more. What can we understand about the threat that this debt service pays to macroeconomic stability for these countries?

Indermit Gill: So it's worth going back about 20 years to sort of see why these countries are in the troubles that they are in right now.

So about 20 years ago, what happened was that many of these countries received debt relief. There was something called the highly indebted poor country initiative, as well as a multilateral debt relief initiative. And as a result of it, a lot of their debt was wiped out.

So that was in the early 2000s. Since that time, what has happened is, there was a lot of money, there was quite a bit of money in advanced economies. There was also China that was really investing a lot in places like Africa and Asia.

So as a result, these countries started to get a lot of money, decided to borrow a lot of money. Interest rates were relatively low and they loaded up on debt. So what happened was once inflation fears kicked in, starting in the middle of 2022 or so, essentially what happened was that you got an increase in interest rate, real interest rates and so on, and suddenly these debt levels were very high. They were too high to sustain because most of the debt is contracted on floating exchange rates. I mean, both on floating exchange, but as well as the contract on variable interest rates. So as a result, their debt servicing burdens rose very, very rapidly.

Now that has two effects or three effects. The first effect, of course, is that you start to divert money. You actually continue to service your debt, but you divert money from other things. And the other things usually are education, health, investments in infrastructure and so on. And as a result of it, what happens is that the state of the people becomes poorer and the state of the economy gets worse.

And the idea is you hope that this is a temporary phase, that interest rates come down very, very quickly and that you can start to reallocate money again to do these things.

That has not happened. So many of these countries are actually they are groaning under the weight of this interest burden.

Now, some of them actually end up being hit by 2 or 3 shocks at the same time. The first one is because if they've contracted money in foreign currencies, to the extent that the currencies depreciate, they end up they end up with burdens that they cannot actually service anymore. And so they declare that debt default. When they declare debt default what happens is that you get you immediately get all private investment coming to a halt. Poverty levels skyrocket and these countries end up really getting or getting into a lot of trouble, including political instability.

So these countries then actually end up being the ones that you see the headlines about. But there's another group of countries. This is a group of countries that look seemingly fine because, mainly because they haven't borrowed abroad, they borrowed at home, they borrowed from life insurance companies, institutional investors and so on. And what happens with them is that they actually start they start to borrow more and more to service their debts and so on. And they starve their private sectors of finance. And so what happens in these countries is private investment falls in these countries too but is because the government is competing with them, not because there's an uncertainty about repayment and so on, but because the government is actually suctionning off all of the finance from the economy. And they tend to start slowing down, too. So there is that crisis as well.

Well, it's a three part crisis. Those that are in outright default, those that are servicing their debt but just barely, and those that look seemingly healthy but actually their growth rates are slowing down because private investment.

And you sort of see this problem across many countries, including some seemingly healthy ones.

Linda Lacina: If one country defaults, what is the impact maybe to other countries?

Indermit Gill: It depends on the country. It depends on the country. If it's a small country, it really doesn't do that much harm to others around it because it's not systemically important country.

Though the problem there is that it's very easy to forget about this country. And you would see quite a few countries like this, especially in the continent of sub-Saharan Africa.

Now, these countries, by the way, have very high population growth rates and they have so as a result, they have a lot of people who then are actually in really dire straits and they start to look for jobs elsewhere.

So I think the rest of the world only notices when you actually see a huge wave of migrants. But then you start to notice them, right?

So that's the thing. Now, then, on the other hand, you have very systemically important countries. These are the very big economies, whether it's China or the US or India and so on. Fortunately, those countries have not had trouble servicing their debts. So as a result, we are not worried about the sort of big systemic debt crisis. What we are worried about is a lot of countries getting into trouble and them not being big enough or rich enough for others to care. And those are the countries we care about a lot about at the World Bank.

Linda Lacina: You talked about a little bit that if the debt service goes up the people are not the countries are not maybe investing in education or health care. I think a lot of people aren't maybe aware of the connection between investing in education and the resilience and the strength of someone's maybe health care system. It can maybe give us a sense of like the knock on effects of pulling away from some of these investments over time in the quality of life that that leads to.

Indermit Gill: I think it's worthwhile actually knowing how much these countries invest even when they're not in trouble.

Some of the low income countries, they invest something like $54 per student per year in K-through-12 education. $54. Compare that with more than $10,000 for the typical high-income economy. Compare that with more than $15,000 for a country like the United States. So you're talking about a minuscule amount. That's how much they spend when they can spend money.

So when you're talking about them not being able to spend even that much, you're really talking about a lot of people not being able to go to school.

Similarly, they spend roughly about about $75 per patient per year. So if you can't spend that much, you now have a whole lot of other problems, health problems and so on. And it's not just the pandemic, it's just general health problems. And you start to see problems like starvation and stunting, early mortality, etc.

So you're talking about really, really bad circumstances. These are for the low income countries. For the lower middle income countries, too.

So if you add up the low income countries as well as the lower middle income countries, this adds up to roughly half the world's population, about 4.1 billion. Now, if you look at these countries, you'll find that this is a large share of humanity. It's half, right. And you start to sort of see problems. They cannot deal easily with slow or no growth for more than a decade or even for a few years. And what we are seeing.

So that's what worries us now, you know, about about the fact that these countries have not been able to finance even decent levels of education and health and so on.

And meanwhile, because the advanced economies weren't doing particularly well, the advanced economies also found it very difficult to actually continue to sort of continue to to provide aid levels that are commensurate to the needs here.

So one of the things that we do, Linda, is that we administer the International Development Association trust. And with that, what we do is that we get money from the donors and we leverage that. We use the World Bank's creditworthiness and we leverage it by borrowing in advanced economy markets and so on.

And that allows us to actually help these countries a lot, even countries that are currently in debt distress who are not getting money from anybody. I'm talking about private creditors, I'm talking about China and so on. We continue to bring money to them, new money to them so that they can continue to actually keep the health systems going, keep the social protection systems going and keep the education systems going to.

Linda Lacina: With the rising debt service costs, is there anything that governments can do, any steps they can do to boost growth?

Indermit Gill: So two things. So the first one is for the countries that are not in trouble, I think that they shouldn't be thinking that, okay, look, you know, we can continue to maintain these high debt to GDP ratios and debt levels that even these high debt levels will be sustainable because interest rates will come down. They might, but they will come down only slowly. And meanwhile, your debt to GDP ratio will keep going up and you'll become less and less attractive for any foreign investor or even domestic investors because they know that this country's now unstable.

So that's the first thing that they need to do, is that they need to recalibrate what they thought was sustainable levels of debt. These are not going to be the levels of debt that people thought was sustainable in 2015 or 2016. When you're talking about 2025-26, you should you should be thinking about much lower levels of debt.

So for a country that has a debt to GDP ratio of 80% of GDP and it's a low income or a low middle income country should be thinking about a much lower level of debt. So that's the first one.

The second one is ultimately you do care about economic growth because economic growth allows you, so the best way to think about debt is debt is a claim on future output. So if your future output is higher because you institute the conditions that make your private economy dynamic and that it yields higher and higher output, you will more likely than not you will get out of these debt troubles because you'll be able to finance the debt that you have. You'll be able to finance investments and so on.

So that's the second part. So you need to put in the conditions that are good for business. So one of the things that we do here at the World Bank is that we do an assessment of the quality of the environment for business. Which countries are business ready, which countries are not? So we are coming out with the report in a couple of weeks. It's called Business Readiness or B Ready. And that report that report will actually sort of say which are the countries that actually do well, which are the countries that don't do well, What do countries that are not doing well need to do better?

Then the third thing, there are some countries, even if they do all of these things, it takes a little bit of time for them to get out of this trouble. For many of these countries, the problem is not one of what we call liquidity, is not one that they are temporarily short of money and they just need time or they need emergency loans from the IMF or the World Bank. These countries require what we call debt relief or debt restructuring. So some of their debts need to be written off.

That mechanism is a terribly, terribly cumbersome mechanism. It takes too long. We don't expect it to take weeks, we don't expect it to take months, but it shouldn't take ten years because ten years is too long a period.

So that structure of what we call sovereign debt restructuring, that system is broken. It's for a time long ago, when these countries did not borrow from markets abroad, they borrowed from other governments. They borrowed from governments that actually knew about all of these things and said, these were essentially governments like the United States, like Europe and so on, that had been in these cycles year. So they knew how to deal with these problems.

Now you have new lenders like China, and they don't have experience with what to do when a country actually cannot repay its loans and so on.

The third thing is, in the past, even when they borrowed abroad from the private sector they borrowed from banks, they borrowed from Citibank, Bank of America, etc.. That's not the case anymore. Now they actually borrow in the markets. They float bonds. So which means that on the other side you have bondholders. So it's very difficult to coordinate all of these efforts to actually sort of say, okay, here's a country that actually really does require some debt relief quickly. That country could be Zambia, for example. It takes forever to negotiate that. Meanwhile, the only money that comes to Zambia are from organisations like the World Bank, so we can provide quite a bit, but not enough for all of their needs and so on, especially when their revenues have gone down because the growth rates have gone down.

That's the predicament of many countries today. About 40 of them.

Linda Lacina: You recently said in The New York Times that lenders who are maybe extending a little bit too much, they're often not sort of experiencing any kind of financial penalty there. And that's a bit of a weakness in the system. In your opinion, how can that kind of weakness get fixed?

Indermit Gill: The only way that weakness gets fixed is if these countries that had borrowed from them - and you have to remember that a poor country, when it borrows from an international lender, it pays what's called a risk premium, which means that it actually has to pay a high interest rate, because they are a risky bet.

Now, it shouldn't be that that these creditors are bailed out by the IMF, by the World Bank and others. It shouldn't. That shouldn't happen. Because if that happens, they've essentially won twice. The first one is that they ended up getting higher interest rates because because they were placing a riskier bet. And then when the bet turned against them, they got their money back anyway, you know?

So those are very bad incentives for private creditors. They're also very bad incentives for the borrowing countries, because what happens is that these creditors actually they end up doing fairly hard sells in terms of a country. I've heard, for example, of a country that has decided that it needs half $1 billion in international markets. When they go to the international markets and the international markets are flush with money, they're told, why do you only want half $1 billion? We can get to $2 billion. So they actually enticed almost to actually borrow much more than what they can sustain.

Now the only way for this problem to get fixed is both sides suffer.

Now, it turns out that the borrower suffers like crazy. I mean, if you go to these countries, you'll find things are terrible, things are politically unstable, poverty is rising, there's misery, there's no private investment, the public schools, etc.. You have lots of problems.

Meanwhile, you need to make sure that the other side, the other side of that equation, which was the lender, also gets, bears a part of the pain. Right now the weakness of the system is all of the pain is concentrated on the part of the borrower and very little bit of it is on the side of the lender. That's the problem.

Linda Lacina: A big topic of this September's economic Outlook is sort of that need to balance both growth, but with other sort of big policy goals like sustainability, equality, things like that. What sorts of things should leaders be prioritising to strike that balance?

Indermit Gill: So I think for countries that are already in debt distress, we have to come up with a way to do orderly defaults. You know, so they should not be disorderly. They should not be delayed. They should not take forever and so on, because those end up causing a lot of trouble and those end up actually sowing the seeds for future crises, too, because of the problem that we just talked about.

Then you've got a whole bunch of other countries that are actually not in outright default, but which are actually in what we would call debt distress, in the sense that they are paying the price not by actually defaulting but they're paying the price by servicing the debt and taking money from important investments and so on.

They are what we would call somewhere between a country that has borrowed too much and does require treatment in the sense that some of those debt need to be restructured, they need to get better terms for them and so on. And the other part, of course, is that they need to actually make sure that that they understand that the markets will only bear a certain level of debt to GDP ratio. They can only bear a certain level of debt to GDP ratio. So they need to scale their expectations for the future. So that's the second part.

Then there's a third group of people, a third group of countries, the seemingly healthy ones, which are actually paying a price in terms of lower and lower growth rates and lower and lower growth rates create all kinds of problems, including the fact that, you know, these are countries that actually cannot deal with things like climate change and so on, because richer countries tend to deal with climate change better. And these are countries that actually don't have more public resources, the public resources that they need for all the things that we mentioned, education, health, of course, investing in new technologies like artificial intelligence and so on, but also things like climate action.

So for all of those reasons, growth is very important for them and they need to make sure that they don't overborrow at home and they leave enough money at home for the private sector because it's always the private sector that actually ends up that getting these countries out of trouble. It's not public investment, even though public investment is important, private investment is the most important thing.

And then finally, the thing that actually affects all of these countries and the advanced economies and so on, Ultimately, these countries, the way that they attain efficiency at home, the way that they can get better deals for the products that they make, is by having an international trade, trade in goods and services, foreign direct investment and so on. So the international environment needs to be repaired.

Linda Lacina: We have exactly one minute left, sir, in your mind, it's a two parter, but very quick one. What keeps you up at night and what gives you hope?

Indermit Gill: I think it's the 75 poorest countries of the world. These are the countries that are eligible for the most concessional assistance from the World Bank. This is the year in which we actually go back and replenish that fund that I told you about, against which we borrow a lot in markets so that we can provide long term concessional assistance, emergency assistance for countries that are in trouble and so on.

So I guess it keeps us working when we are awake and it keeps us. It keeps us working when we are awake and it keeps us awake when we should be sleeping.

Linda Lacina: And what gives you hope?

Indermit Gill: What gives me hope are countries like the United States, which have a very vibrant private sector. And I feel that the private sector will bail out the US economy again and again. So I have a lot of confidence in it.

What gives me hope also are countries like India and Indonesia that these countries are actually doing very well. They could do even better, but they're doing rather well.

And then what gives me hope is that, you know, that even among the poor countries, the really poor countries, there's there are always good examples that actually show the others that you can take really adverse circumstances. I mean, things like civil conflict and really bad geography and so on. And you can convert that into progress for girls or boys and for women and for men, everybody. And I'm talking about countries like Rwanda.

Robin Pomeroy: Indermit Gill is Chief Economist of the World Bank.

You can find the Forum’s Chief Economists Outlook on our website - link in the show notes.

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This episode of Radio Davos was presented and produced by me Robin Pomeroy, with reporting by Anna Bruce-Lockart and Linda Lacina. Studio production was by Taz Kelleher.

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