World's finance leaders face problems they can't solve
Every April, the world's finance ministers and other economic policy leaders descend on Washington for the spring meetings of the International Monetary Fund and World Bank. Things feel different this year — and not just because D.C. has had a stubbornly late-arriving spring.
Why it matters: The world is facing profound economic challenges — global supply shortages caused by pandemic and war — that defy the ability of economic policymakers to solve through clever management of spending or interest rates.
State of play: Through the last 15 years years of financial crises and slow recovery, the world faced serious economic problems, but ones that were largely "endogenous," linked to the internal workings of their economies.
- Those sorts of crises are hard, but at least are responsive to the kinds of policy changes that finance ministers and central bankers can enact. Think of the global financial crisis and countless emerging market debt crises.
- The ongoing supply disruptions tied to the pandemic and war in Ukraine amount to "exogenous" events, both driven by non-economic forces but constraining global supplies.
Western finance ministries are acting principally as foreign policy actors in these crises, carrying out sanctions and other efforts to punish Russia financially for its invasion.
- Treasury Secretary Janet Yellen delivered a sternly worded speech last week assailing Russia for its aggression and, in effect, threatening countries that assist it with access to the global economy.
The latest: The IMF on Tuesday released its World Economic Outlook, projecting both lower global growth and higher inflation than it had envisioned as recently as January.
- The fund reduced its 2022 global growth projection by 0.8 percentage points, to 3.6%. It increased its 2022 inflation projection by 1.8 percentage points for advanced economies and 2.8 percentage points for emerging markets.
- But that forecast is premised on the war remaining confined to Ukraine, further sanctions exempting the Russian energy sector, and the pandemic continuing to fade — none of which is a sure thing.
Also Tuesday, Yellen addressed the rising risk of famine due to a collapse of food, fuel, and fertilizer exports from Russia and Ukraine.
- "The war further exacerbates pre-existing price and food supply pressures," she said. "At least 10 million more people could be pushed into poverty in Sub-Saharan Africa due to higher food prices alone."
The bottom line: Throughout the last two years, a common refrain from policymakers has been that the course of the economy depends on the course of the virus. Now, the course of the economy depends on the course of the war.