The impact of epidemics, conflicts, inflation, sharp tightening of monetary policies in Europe and the United States, and the appreciation of the US dollar may cause developing countries to encounter Japan's " lost decade " of the last century.
The "lost decade" refers to Japan's 10 years of economic depression in the 1990s. The appreciation of the yen during the period from 1985 to 1995 led to the transfer of wealth to the United States, the Japanese economy suffered a major blow, the social and economic vitality was lost, and the national debt was high. This was commonly referred to as Japan's "lost decade."
crisis reappears?
Various crises in the past three years have impacted all countries, with emerging and developing countries bearing the brunt.
According to The World Bank released the "Global Economic Prospects 2023", the income gap between poor and rich countries has stopped narrowing.
From 2020 to 2024, the cumulative GDP losses in developing countries are expected to reach 30% of GDP in 2019.
Tighter monetary policy has made the situation worse.
The most vulnerable countries have been hit by the epidemic, rising energy and food prices, soaring inflation, a sharp tightening of monetary policy in the United States, and the subsequent appreciation of the dollar.
Over-indebted developing countries may experience waves of defaults, which may lead to these places experiencing the same "lost decades" as Japan.
Lessons from the past
This situation has happened before.
This is what happened in Latin America after the 1982 debt crisis. That time also occurred after the developed countries in Europe and the United States surged in private lending to Latin American countries. The lending at that time was called "recycling" the surplus of oil exporting countries.
After the debt surge in developing countries, it led to the second "oil crisis" , with inflation soaring, US monetary policy sharply tightened, and the dollar strengthening. This brought about a debt crisis that lasted for ten years.
Current situation
The speed and scale of the recent tightening of monetary policy by various central banks of the Group of Seven (G7) are similar to the tightening in the 1970s.
The recent appreciation of the US dollar has been particularly strong.
For countries with large amounts of foreign debt denominated in US dollars, it will also significantly increase debt servicing costs. There will be a gap in the original funds to repay debts. A sudden cut off of the flow of money would cause a relentless credit crunch .
Since February 2022, bond issuance in emerging and developing countries has fallen sharply compared with a year ago.
Adding insult to injury
Highly indebted countries, already suffering from the impact of the COVID-19 epidemic and a sharp deterioration in terms of trade, are now in more serious and lasting troubles due to soaring food and energy prices.
This will also include a large number of low-income countries, where many people are already on the verge of making ends meet.
According to the World Bank, the number of people suffering from "food insecurity" in low-income countries jumped from 56 million in 2019 to .105 billion in 2022.
The education of many children in these countries was also severely disrupted during the epidemic.
In addition, physical investment dropped significantly. As a result, the World Bank predicts that for emerging and developing countries as a whole, total investment in 2024 will be 8% lower than expected in 2020. If you add in the long-term debt problem and the possibility that external capital will stop flowing in as a result, then for many countries, the possibility of a "lost decade" in catching up with developed countries is very high.
The coronavirus pandemic, lack of global cooperation, lack of adequate external funding, inflation
This has led to a vicious cycle: low credit ratings lead to unaffordable high interest rate spreads, which in turn leads to a debt crisis, which then leads to even lower credit ratings.
Capital flows to the United States, which leads to a cessation of production and investment in developing countries, and the loss of social and economic vitality, eventually turning into an economy as lifeless as Japanese society. How
can escape from this trap requires the efforts of various countries to introduce policy responses.
