The writer is head of global equities at Bank of America. He writes in a personal capacity.
The toxic trifecta of skyrocketing food and energy prices, coupled with the threat of drought, is having a severe impact on several developing countries. Several countries commonly referred to as emerging markets could perhaps be better described as “shadow markets.”
Sri Lanka, where frustrated citizens stormed the presidential palace in July, may just be the opening act in a wave of instability across the developing world. In 2015, the G7 made a commitment (reiterated in 2022) to lift more than 500 million people out of hunger and malnutrition by 2030. At this point, however, we seem to be headed in the opposite direction. The World Food Program predicts that more than 320 million people are at risk of acute hunger.
Many emerging market countries took advantage of the era of low global interest rates to finance spending by raising debt on international capital markets. But rate hikes by the US Federal Reserve, combined with weaker emerging currencies, are now resulting in a severe debt service burden that is weighing on governments’ discretionary spending on health and education.
The impact of the collapse of emerging markets could be felt in the developed countries of North America and Europe in the form of increased migration flows. As several Central American countries, among others, grapple with a dramatic slowdown in growth and food price inflation, we may again see waves of refugees gathering along the southern border of the US. We could also see more boats full of desperate people from Africa and the Middle East arriving on European shores in search of a better life.
Food insecurity and economic downturns will result in many countries experiencing civil war-type conflicts as local groups compete for scarce resources. And these economic and security challenges will result in migration flows that will negatively affect both potential migrants and the countries that receive them.
There are several steps that can be taken to address the challenges facing emerging market nations.
In the short term, the IMF and sovereign donors should announce a three-year moratorium on debt service for the most vulnerable countries. This will help create much-needed fiscal space and should be accompanied by a requirement that income saved rather than debt payments be invested in agriculture, health and education.
In addition, the IMF, along with the G7 and the EU, should also increase lending to emerging markets to help finance fertilizer, food and energy imports. Countries such as Saudi Arabia and the United Arab Emirates, which benefit from higher energy prices, should be strongly encouraged to contribute to these global efforts, along with China and Japan.
Aid should also be channeled to groups like the World Food Program and the International Rescue Committee, which together operate in more than 120 developing countries and have built-in processes to direct food and other supplies to those most in need. The G7 and the larger trading blocs of Europe, North America and Asia should also encourage duty-free imports from these countries, with the help of the World Trade Organization.
The G7 summit in July announced a $4.5bn increase to fight hunger, but Greek rescue packages in the last decade totaled more than $300bn. While the stabilization of Greece helped stabilize Europe, the gap between these numbers is huge.
We do not want a planet where millions of people go hungry, countries do not pay their debts, the hungry are forced to leave their homes to find subsistence elsewhere, and civil wars break out; in short, a world in which countries are immersed. We can and must do better.