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How to deal with the problem of ‘submerging markets’

The writer is Head of Global Equity at Bank of America. He writes in a personal capacity

The toxic trifecta of rising food and energy prices, coupled with the threat of drought, is having serious consequences for a number of developing countries. Several countries commonly referred to as emerging markets may be better described as ‘sunken markets’.

Sri Lanka, where frustrated citizens stormed the presidential palace in July, could just be the start of a wave of instability in the developing world. In 2015, the G7 made a commitment (repeated in 2022) to lift more than 500 million people out of hunger and malnutrition by 2030. At the moment, however, we seem to be going the other way. 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 fund spending by raising debt in the international capital markets. But rate hikes by the US Federal Reserve, coupled with weaker emerging market currencies, are now driving heavy debt burdens that erode governments’ discretionary spending on health care and education.

The impact of the emerging market collapse could be felt in developed countries in North America and Europe in the form of increased migration flows. As several Central American countries, among others, struggle with dramatically slowing growth and food price inflation, we may again see waves of refugees gathering along the US’s southern border. We could also see more boatloads of desperate people from Africa and the Middle East arriving on European shores in search of a better life.

Food insecurity and economic downturn will lead many countries to face civil war-like conflicts as local groups compete for scarce resources. And these economic and security challenges will result in migratory flows that harm both potential migrants and the countries that host them.

There are several steps that can be taken to address the challenges facing emerging market countries.

In the short term, the IMF and sovereign donors should announce a three-year moratorium on debt servicing for the most vulnerable countries. This will help create much-needed fiscal space, and should be accompanied by a requirement that the proceeds saved rather than debt payments be invested in agriculture, health care and education.

Furthermore, 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 join these global efforts along with China and Japan.

Aid should also be channeled to groups such as the World Food Program and the International Rescue Committee, which together operate in more than 120 developing countries and have built-in processes for sending food and other supplies to those most in need. The G7 and larger trading blocs in Europe, North America and Asia should also encourage targeted duty-free imports from these countries, with the help of the World Trade Organization.

The G7 summit in July announced a $4.5 billion to fight hunger, but Greek bailouts over the past decade totaled more than $300 billion. While Greece’s stabilization helped stabilize Europe, the gap between these numbers is huge.

We don’t want a planet where millions are starving, countries defaulting on their debts, the hungry are forced to leave their homes to find livelihood elsewhere, and civil wars rage – in short, a world in which countries sink. We can and must do better.

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