As the global economy faces unprecedented challenges, the Biden administration is set to introduce a new plan aimed at providing fresh financial support for developing countries in an effort to help them avoid falling into debt crises.
On Friday, October 11th, Jay Shambaugh, the Deputy Secretary of the U.S. Department of the Treasury, delivered a speech at the Atlantic Council, a U.S. think tank, stating that the international community must establish a new “Pathway for Sustainable Growth” plan to manage liquidity pressures when they arise.
Shambaugh criticized China’s economic model for posing challenges to the global economy, especially for developing countries.
While Shambaugh did not elaborate on the specifics of the plan, he mentioned that they are working with partners and international financial institutions to find better solutions for countries facing temporary financing challenges but with sustainable debt in the long term.
His remarks come ahead of the annual meetings of the International Monetary Fund (IMF) and World Bank Group (WBG) board of governors. Finance ministers, central bank governors, lawmakers, private sector executives, academics, and more from around the world are set to attend the 2024 annual meetings in Washington D.C. from October 21st to 26th.
Members of the Group of Twenty (G20), including China, will gather to discuss current global economic issues during the meeting.
The summit is seen as a critical opportunity to drive tangible progress, particularly given China’s sluggish economic growth, escalating tensions in the Middle East, and the far-reaching economic impacts of Russia’s aggression in Ukraine.
According to Shambaugh’s speech, the IMF and World Bank will collaborate with sovereign and private creditors to provide a combined approach of “significant financing and significant reform measures” for these countries.
These supports will include funding sources from bilateral, multilateral, and private sector to help developing countries overcome liquidity shortages and achieve climate change and development goals.
Furthermore, the United Nations estimates that almost all population growth in the coming half-century will occur in current low-income or middle-income countries. Shambaugh stated, “Therefore, the global economy must create job opportunities and incomes where people live.”
Shambaugh highlighted that the IMF acts as a global financial “firefighter,” intervening in economic crises by providing funding and policy advice, while the World Bank has evolved into an indispensable partner for countries worldwide, particularly in supporting infrastructure and development in low- and middle-income countries.
The challenges facing the global economy extend beyond geopolitical risks and demographic changes to include the impact of China’s economic model on global markets.
Shambaugh criticized China’s economic policies, stating, “Despite China’s manufacturing sector accounting for over 30% of global manufacturing, China continues to allocate significant capital to manufacturing and seems to lack domestic demand to drive economic growth, potentially leading to an export-dependent growth.”
Shambaugh pointed out that China’s support for its manufacturing sector through non-market mechanisms and government subsidies is “unlikely to succeed” in the absence of domestic demand and has negative implications for economic growth in other countries. China’s excess capacity beyond global market demand further exacerbates spillover effects, particularly disadvantaging some developing countries.
Shambaugh emphasized that global economic growth and stability are crucial for economic security, “We must utilize all tools to counter forces that may slow global economic growth.”