This article first appeared in Forum, The Edge Malaysia Weekly on April 18, 2022 - April 24, 2022

Visiting the UK after a two-year absence has convinced me that there is serious change in the air. The pandemic may have moved to the endemic stage, but the Russia-Ukraine war has made everyone in Europe totally preoccupied with the real possibility of a widening war in Europe. Inflation is already on the rise. And if geopolitical tensions increase to extend sanctions to include China, a global recession is definitely on the cards. All this has happened because war has sharply divided the world.

The United Nations (UN) set up an inter-agency task force to look at sustainable finance goals to 2030. The 2021 report has just come out, and the messages are grim, especially for emerging markets.

The pandemic has set back progress on sustainable development, with around 120 million people having fallen back to extreme poverty, 114 million jobs lost and 60% of emerging markets being near debt distress.

With advanced markets preoccupied by the Ukraine crisis, there is no serious policy attention on the plight of emerging markets. As the UN report stressed, there is one group of countries recovering strongly from the pandemic distress, whereas the rest are falling deeper into a cycle of poverty, hunger, unsustainable debt and austerity — effectively facing another lost decade in the context of sustainable development.

The UN called for more multilateral cooperation to provide concessional financing for developing countries, provision of a new allocation of International Monetary Fund (IMF) special drawing rights, along with voluntary use by surplus countries to support developing countries to fight the pandemic and its economic fallout.

In my humble view, all the UN recommendations are unlikely to happen mainly because there is little cooperation at the Big Power level.

The UN recommendations are: (1) to invest in people and a sustainable recovery; (2) reform of the global financial and policy architecture; and (3) at the domestic level, make serious reforms and recovery packages aligned with sustainable development goals and climate targets.

These are laudable and necessary conditions for global recovery, but these recommendations will neither be heeded nor be attainable because advanced country politics, elections and a looming war are diverting all serious attention away from the plight of the developing countries.

The inconvenient truth is that emerging markets must look after their own interest, or risk falling into failing or failed state conditions.

The East Asian economies will continue to do relatively well, mainly because China is still growing and will continue to rely on raw material imports, including energy. The good news about being in the Asian global supply chain is that as the world shifts towards technology, parts of the supply chain may be hurt due to various bottlenecks, but technology industries will continue to thrive because higher advanced country expenditure in defence industries will still rely on technology.

Thus, in the short run, oil and gas exporters will do much better and use higher oil prices to replenish their depleted reserves, buying time to deal with structural reform issues. The essential raw material exporters in iron, coal, food and key minerals used in technology industries will still do well.

Emerging markets that are net energy importers will be badly hit, because not only will energy prices rise to push up domestic costs in other industries, but the external trade account will also deteriorate. Some developing countries, like Egypt, which rely heavily on wheat and grain imports from Russia and Ukraine, will be badly affected by food price inflation, causing poverty to increase.

Thus, we do not need imagination to conclude that the number of countries needing IMF support will rise sharply. Within East and South Asia, we see Myanmar and Sri Lanka already hurting. The UN estimates that for the 2020-2022 period, GDP per capita growth will be negative for South Asia, Western Asia, Africa and Latin America and the Caribbean.

In other words, if rich countries are likely to be less generous on aid, and multinational companies, banks and fund managers are risk-averse and would want to stick to long-term investments closer to home, the chances are that emerging markets will be starved of long-term investment funds.

This is the big lesson from every financial crisis that we have seen so far since the Latin American debt crises of the 1970s. Once the crisis breaks out, we see an immediate divide between the lenders and the borrowers, with the debtor countries falling into crisis, taking years to recover or even to restore balance.

The big concern is whether such financial or economic shocks disturb the delicate domestic political balance in the developing country. In countries such as Venezuela, Syria, Lebanon and Libya, financial crises erupted into political crises, and with Big Power intervention, the worsening investment environment then sent the country into failing or failed state status. Ethiopia has shifted being from a rising star to being in serious trouble because of domestic civil conflict.

Since the number of distressed economies is growing, who would take the lead to rescue them from debt overhang and internal conflict? It is clearly in the interest of the G20 to start agreeing rather than disagreeing on all the major economic issues facing the developing world. This year, Indonesia will host the G20 Summit. But if the G20 starts objecting to Russia’s presence, especially if the Ukraine war is not resolved by then, then we will not see any global consensus or action on how to get global growth back on track.

In short, I do not see how the UN will have much impact on what advanced countries will do in terms of sensible action to help developing countries.

Only when emerging markets fail and global trade and investments start shrinking and hurting advanced markets will there be serious policy attention again on developing countries.

War makes everyone short-sighted. Having sleep-walked into war, no current leader at the advanced country level is showing that they really care about emerging markets other than Ukraine. Climate change has also been put on the back burner.

The hard fact is that there are no permanent friends or enemies, only permanent interests. Each emerging market must look after its own internal problems, never rely on other countries for aid or support, or risk becoming another submerging market.

Tan Sri Andrew Sheng writes on global issues that affect investors

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