Debt, war and AI risks mount, but developing economies get few answers

Developing economies face rising debt payments, geopolitical conflicts and uncertainty over artificial intelligence, but recent meetings of the International Monetary Fund (IMF) and World Bank offered few concrete answers on how they can navigate these challenges.

The meetings took place as the war in West Asia, Russia’s continuing war in Ukraine and concerns over a potential AI bubble added to the risks confronting the global economy. Yet the advice for developing countries remained familiar. The global lenders urged governments to rein in fiscal deficits, accelerate economic reforms and attract more private investment, even as policymakers grappled with the prospect of further economic shocks.

The discussions highlighted a growing dilemma for lower-income countries. They are bearing the consequences of global disruptions while facing higher borrowing costs and limited resources to protect spending on essential public services.

Kristalina Georgieva, managing director of the IMF, pointed to the role of advanced economies in driving global budget imbalances. She noted that debt levels in developing countries had declined in recent years, but rising bond yields elsewhere had pushed up their borrowing costs.

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Average debt service payments in developing economies have more than doubled over the past decade to 14 per cent of government revenue, Georgieva said. The burden leaves governments with less money for priorities such as healthcare and education.

IMF and World Bank struggle to offer a roadmap

Artificial intelligence added another layer of uncertainty to the discussions, with policymakers still grappling with how the technology could reshape economic growth, employment and investment.

Speaking at a panel on Saturday, Georgieva warned against placing too much faith in those claiming to have definitive answers to the challenges ahead.

“We are in a place where we have many more questions than we have answers,” she said, cautioning that those who claimed to have all the solutions could be misleading policymakers.

Josh Lipsky, vice president of international economics at the Atlantic Council, said the meetings had missed an opportunity to provide clearer guidance and practical support to developing economies.

It was difficult to focus on the developing world when advanced economies were themselves facing fiscal risks, Lipsky said. Political pressures in wealthier countries had also pushed development assistance down the list of priorities.

Mauricio Cardenas, Colombia’s former finance minister and a research scholar at Columbia University’s School of International and Public Affairs, said policymakers were worried about the possibility of a major economic disruption but lacked a clear plan to navigate it.

Cardenas said the IMF and World Bank were not particularly well prepared for this new phase of uncertainty. Although the institutions were bringing in experts to examine AI, he said they had yet to offer specific advice on how countries could prepare for developments whose consequences remain difficult to predict.

Geopolitical tensions complicate global cooperation

The meetings also exposed the difficulties of coordinating international economic policy amid deepening geopolitical divisions.

At a meeting of the IMF steering committee, nearly half the delegates walked out when Russia’s finance minister spoke. The episode reflected tensions that have complicated cooperation within the international financial institutions since Russia’s invasion of Ukraine in 2022.

The war in West Asia also disrupted travel, while flooding in Thailand highlighted the economic damage that natural disasters can inflict on developing countries. Floods in September caused almost $200 million in damage to the country’s industrial sector.

Inequality threatens long-term resilience

Economists also warned that fiscal discipline and structural reforms would not be enough if they failed to deliver more inclusive growth.

Kate Pickett, a professor at the University of York, urged policymakers to pay greater attention to inequality and poverty when designing economic policies for developing countries.

Rising inequality and deepening poverty could increase economic and social costs over the long term, she said. An economy could not be considered resilient if the benefits accrued primarily to wealthy and privileged groups.

The warning comes even as the global economy has proved more resilient than expected to the energy shock triggered by the US-Israeli war on Iran.

Ayhan Kose, deputy chief economist at the World Bank, said the global economy had weathered the shock better than anticipated and avoided a recession. However, growth prospects had deteriorated in both advanced and developing economies.

Growth in developing economies as a group had slowed to around 3.6 per cent from 4.4 per cent, while growth had declined in half of advanced economies, Kose said.

He cautioned that an economy’s ability to withstand recent disruptions did not guarantee it would be prepared for the next shock.