Emerging Economies Will Sink if US-China Standoff Persists

Unlike developed countries, emerging economies have spent significantly less to tackle the coronavirus pandemic, says Raghuran Rajan. He is a finance professor at the University of Chicago’s Booth School of Business.

However, the ongoing hostility between the US and China stands to sink both emerging economies and poorest countries in the world, if the two world’s largest economies do not step up and  lead united during the coronavirus crisis.

The global economy is reeling from extreme damage from enforced coronavirus spread prevention lockdown measures. Rajan said that the most important distinction is which economies have so far managed to stay afloat during the crisis.

Referencing data from the international monetary fund’s report in June, Rajan said that developed, industrial countries have spent as much as 20% of GPD on fiscal and credit measures to cushion their economies. Meanwhile, many developing nations have spent as little as 5%.

“They all face the same virus. But they have had different capabilities of spending money on it… It is proving very costly around the world,” said Rajan.

Emerging Economies Account For 70% of Total Global Growth

Today, about 70% of global growth comes from the emerging world, according to Tharman Shanmugaratnam, Chairman of Singapore’s central bank.

In the 2020-2021 period, the public debt in these countries has exceeded 48%, as they borrowed more from the IMF. The future of the global economy therefore depends on whether these economies will emerge or submerge after the coronavirus crisis.

“There is today a very real risk of a submerging world … that the gains we made over two to three decades are going to unravel, and we’re going to see consequences which are not merely economic, but consequences which are social, which are political and now which are going to be geopolitical.” Said Shanmugaratnam.

US and China should Present a United Front

The future of the world and positive economic news depend on functional global leadership, which is the role of the US and China, Rajan pointed out.

“It has to come from the two biggest countries in the world — China and the United States. Both have to step up to the plate, both have not … 40 poorest countries in the world clearly … need more resources to fight the virus.” He stated

However the two countries have been participating in hostile exchanges that have raised tension between them to extreme heights, and causing the disrupting of both political and business relations.

Apart from the long standing trade wars, 2020 has seen more conflict over issues such as the new Security law in Hong Kong, the origin of the Covid19 outbreak and rivalry over the South China Sea. The tipping point of the conflict as Rajan stated, will be experienced in November, during the US presidential elections.

“There is really an enormous role for global leadership here. It has to be from both sides.. And hopefully other countries, the smaller democracies of the world can push them to come together in some kind of dialogue.” Said Rajan.

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