Opinion – Martin Wolf: War in Ukraine is causing multilateral economic shock

Wars are also major economic shocks. The Vietnam War destabilized US public finances. The Korean War of 1950-1953 and the Yom Kippur War of 1973 caused huge increases in the prices of vital commodities. This time, too, a war that directly involves a major energy exporter, Russia, and, in the case of Ukraine, a major exporter of many other commodities, notably cereals, is causing inflation to rise and real incomes to fall sharply. consumers. The most important thing is that the war aggravated the strains already present in economies, international relations and world governance. The abandonment of last week’s G20 meeting by Western ministers and central bankers when the Russian delegation spoke was a sobering reminder of our divided world.

Even before Russia’s invasion of Ukraine, the world had not yet recovered from the economic cost of Covid, let alone its broader social and political effects. Supply disruptions were widespread and inflation had soared to unexpectedly high levels. Monetary policy was going to undergo a strong tightening. The risk of recession, compounded by defaults and financial turmoil, was high. To this must be added the rising tensions between China and the West, and the divergent policies between the two sides on Covid.

This war follows a plague and brings with it the threat of waves of famine. Together these form three of God’s four “disastrous” judgments, according to the prophet Ezekiel. Sadly, the fourth, death, follows from the other three.

War, in short, is a multiplier of disorder, in an already disordered world. Economically, it works through five main channels: higher prices for commodities; trade disorder; financial instability; humanitarian impact and, above all, millions of refugees; and the political response, especially sanctions. All these things also arouse uncertainty.

In its most recent assessment of the world economy, the IMF (International Monetary Fund) lowered, as expected, its economic growth forecasts, and raised its inflation expectations, for the second consecutive time. After the excitement generated by the unexpectedly rapid recovery from the Covid-induced recessions in 2020, disappointment hit hard. Forecasts for global economic growth this year have been reduced by 1.3 percentage points from October 2021 onwards. For high-income countries, the projection dropped by 1.2 percentage points, and for developing countries by 1.3 percentage points. Estimates of production potential also point to below expectations that existed before the pandemic.

Inflation forecasts also rose sharply. It is now expected to reach 5.7% in high-income countries and 8.7% in developing and emerging market countries. Nor is it just a result of higher commodity prices or other forms of supply shortages. As Jason Furman of Harvard University’s Kennedy School of Public Management insists, the inflation we have “is demand-driven, and persistent.” As in the 1970s, strong demand can sustain a price and wage spiral as workers seek to maintain their real income. The IMF argues against this that oil is now much less important than it used to be, labor markets have changed, and central banks are independent. All this is true. But the interplay between policy errors and supply shocks can still create stagflationary chaos.

It is not difficult to imagine results much worse than those that the IMF points to in its basic forecast, because this assumes that the war remains confined to Ukraine, sanctions against Russia do not escalate further, a more lethal form of Covid does not emerge, monetary policy tightening is modest and there are no major financial crises. Any (and indeed many) of these hopes may not be realized.

A big issue for human well-being, if not the world economy, is the likelihood of financial problems in developing and emerging market countries, especially those that will also be hurt by rising commodity prices. As the “World Financial Stability Report” points out, a quarter of countries that issue debt securities in hard currency already have liabilities being traded at speculative prices. The West now needs to help developing and emerging market countries affected by the crisis much better than it did in the fight against Covid.

The only good thing about the recent disasters is that absolute dictatorship is being discredited. The concentration of power in the hands of a fallible human being is a great risk at best and a catastrophe at worst. The Putin regime is a sickening reminder of what can happen in this situation. But Xi Jinping’s attempt to eliminate a highly infectious and not especially dangerous pathogen in his country is yet another sign of what unfettered power can bring. Democracy has not performed gloriously, but at least its leaders can be removed.

However, we unfortunately share the planet with these regimes, especially China’s. Unlike Russia, China is a superpower, not a declining power equipped with endless resentment and thousands of nuclear warheads. At the very least, the West will have to cooperate with China in managing the debts of developing countries.

More fundamentally, we need peace, prosperity and protection for the planet. And that cannot be achieved without some cooperation. The Bretton Woods institutions serve as a monument to the effort to that end. Twenty-five years ago, many people expected us to be on our way to what humanity needs. Now, unfortunately, we are back on a downward trajectory, towards a divided, disordered and dangerous world.

If no new shocks arise, it should be possible to overcome the current disorder. But we’ve already had reminders that big shocks are possible, and almost always negative. Russia must be resisted. But if we fail to maintain minimum levels of cooperation, the world we end up sharing is unlikely to be a world we want to live in.

Translation by Paulo Migliacci