Economic uncertainty is taking a toll on the Sustainable Development Goals. Chief economists explain

This year marks the halfway point to the 2030 deadline for the United Nations’ Sustainable Development Goals (SDGs). As the UN itself notes, the world is “nowhere near” reaching the goals, as compounding geopolitical and geoeconomic issues continue to hinder progress.

The World Economic Forum’s latest Chief Economists Outlook report — published ahead of the Forum’s annual Sustainable Development Impact Meeting in New York, 18-22 September 2023 — also paints a somewhat pessimistic picture of the current trajectory for global development.

Most chief economists surveyed said they expect future progress towards development goals to be undermined by geopolitical tensions (74%) and tighter financial conditions (59%).

Given the gloomy development landscape, we asked five of the chief economists about how tighter financial conditions are impacting global development and how governments and businesses can best work together to tackle development challenges.

Here’s what they had to say.

Rima Bhatia, Group Economic Adviser, Gulf International Bank

“Despite the most concentrated cycle of interest rate hikes in recent times to tackle persistent inflation, most notably by the US Federal Reserve, the global economy has surpassed all expectations. Tightening financial conditions have dampened the growth momentum and increased volatility, but overall economic conditions continue to remain resilient. This is largely attributed to areas such as services enjoying a prolonged resurgence in post-pandemic demand as well as the mainstreaming of potent forces such as technology, innovation, digitalization, clean energy, sustainability, and ESG. As a result, significant structural shifts are unfolding across a broad range of economic sectors and offering new vistas for investment and growth.

“However, further increases in interest rates and/or interest rates staying higher for longer will certainly pose challenges from realizing the full potential of these trends. Recent incidences of financial stresses are also a reminder that tightening financial conditions can generate tensions between central bank policies and financial stability objectives, and fuel unintended consequences.”

Pedro Conceição, Director, Human Development Report Office, United Nations Development Programme

“The impact of tighter financial conditions will depend on their interaction with growth prospects and pressures on public finances. If interest rates remain high (by recent historical standards) and growth prospects subdued, given current historically high levels of public debt, that would imply higher debt servicing costs. Further pressure on public finances comes from projected increases in age-related spending given population ageing in many countries (primarily pension and healthcare spending, although recent evidence from the US shows that at least some healthcare spending has flattened out in recent years), greater demand for defence spending in light of on-going geopolitical tensions, and the imperative of accelerating investments in the mitigation of and adaptation to climate change.

“This scenario implies at least three concerns for global development. First, that it may be more difficult to undertake the investments needed for the sustainability transition, which are also critical to lay the foundation for future sustainable growth. Second, that it will reduce fiscal space to invest in people, another foundation for future equitable prosperity, which is a particular concern for several low-income economies where debt servicing costs (increasing in part as a result of spillovers associated with interest rate hikes in high income economies) are already comparable with health and education spending. Third, that there will be less fiscal space to cope with an emergency of a magnitude comparable to the COVID-19 pandemic – a particularly frightening prospect as the impacts of climate change worsen.”

Beata Javorcik, Chief Economist, European Bank for Reconstruction and Development

“Making progress on global development will become even more challenging in the environment of higher interest rates. Higher rates reduce the present value of future profits, making risky innovation projects less attractive for private investors, so more risk sharing with the public sector may be needed. Tighter financial conditions also increase the importance of solid macroeconomic policies: emerging markets with weaker macroeconomic frameworks may struggle to retain access to financial markets and thus lack funding needed to support green and inclusive growth. External assistance will be vital in these circumstances, especially if it also helps to strengthen the conduct of macroeconomic policies.”

Razia Khan, Chief Economist, Africa and Middle East, Standard Chartered Bank

“The impact of global tightening is unlikely to be uniformly felt. In developed markets, there are key differences between economies where borrowing is more short term and on a floating-rate basis, versus those where fixed-rate mortgages among consumers are more prevalent. Many of the former face a faster transmission of monetary tightening, with some economies already in recession. The latter face a longer policy transmission lag, as fixed-rate mortgages reset only slowly. While there may be more near-term resilience in these economies, there is greater uncertainty attached to eventual outcomes, with the dangers of over-tightening difficult to dismiss.

“Weaker-rated sovereigns in Sub-Saharan Africa have been hit hard by more constrained international capital market access. Global tightening has meant inevitable funding pressures, often necessitating fiscal cuts and – in extreme cases – forcing economies such as Ghana and Zambia into formal debt restructurings. Yet even against this difficult backdrop, reform is underway as sovereigns put in place measures to boost overall creditworthiness. Nowhere in the region saw this as dramatically as in Nigeria, where the new administration of President Tinubu attempted to tackle much-needed fuel and FX subsidy reforms. While greater clarity is needed on further measures to consolidate reform gains, these were nonetheless important steps in the right direction.

“Other strong reformers include Kenya – where long-needed fiscal revenue measures are being rolled out by the administration of President Ruto. In South Africa, increased private-sector participation in the generation of electricity has raised hope that an eventual end to power-sector generation shortfalls may emerge over the next year.”

Eric Parrado, Chief Economist, Inter-American Development Bank

“Tighter financial conditions are likely to slow progress on global development in the coming years. As interest rates rise and financing becomes more expensive, developing countries may struggle to fund critical infrastructure and human capital investments. For instance, interest payments in Latin America and the Caribbean countries represent almost 12% of fiscalrevenues, while in G7 countries it is only 5.2%. This could hamper poverty reduction and sustainable growth.

“Evidently, the impact will vary across countries. Those with stronger fiscal and external positions will be better able to sustain spending. Support from multilateral institutions will be important to cushion the impact on the most vulnerable. Carefully calibrated, time-bound fiscal and monetary policies can help smooth the adjustment. However, if conditions tighten too abruptly, we risk significant setbacks to hard-won gains.”

Rima Bhatia, Group Economic Adviser, Gulf International Bank

“The number of changes that are unfolding from rapid structural shifts in the global economy since 2020 have been the most than at any time in recent decades. For governments and businesses alike, navigating a global landscape of forces that are reshaping trade and investment flows, industry structures, economic partnerships, and most notably political relationships mandates a more strategic and collaborative approach.

“Developing joint framework to collectively assess and manage the impacts of the many systemic megatrends and working together to jointly overcome the immense challenges, as well as benefit from the inevitable opportunities is key. For example, tackling the environmental, economic, and social impact of climate change requires a huge transformation across all sectors. Meeting daunting decarbonization targets requires a bold approach encompassing the whole society, led by governments and businesses working jointly to overcome obstacles and making meaningful progress.”

Pedro Conceição, Director, Human Development Report Office, United Nations Development Programme

“The difficulty lays less in knowing what to do than in getting it done. For example, phasing out fossil fuel subsidies (which tend to be regressive) would generate fiscal revenue, improve incentives towards labour-intensive investments and away from fossil-fuel intensive production, and contribute towards climate change mitigation and reductions in pollution. But socially desirable outcomes such as these are not shared equally, so there is resistance from both businesses and governments that benefit from the status quo.

“Moreover, high and often increasing political polarization in many countries (sometimes exacerbated by those very interests in maintaining the status quo) makes it even more difficult to craft and implement policies that have a good chance of addressing global development challenges. A priority for governments and businesses would be to create the conditions in which this polarization eases.”

Beata Javorcik, Chief Economist, European Bank for Reconstruction and Development

“Tighter financing conditions do not fundamentally change the mix of policies needed ensure that economic growth is both rapid and environmentally friendly. In the short term, this involves government support for greener industries and labour-intensive projects with clear environmental benefits, such as the retrofitting buildings or recycling plastics. In the medium term, adequately pricing energy and pollution is essential for the private sector to allocate capital and labour in a way that is supportive of green growth. In the longer term, governments need to strengthen incentives for innovation, unleashing the creative destruction potential of the private sector.”

Eric Parrado, Chief Economist, Inter-American Development Bank

“Unlocking progress on global development challenges requires coordinated action between governments and businesses. This is particularly important for Latin American and Caribbean countries. The region's long-standing challenges—social, fiscal and growth—have intensified, tasking the discipline and creativity of governments in ways that will help determine their short- and long-term future.

“In this context, the private sector will have to play a pivotal role on all the key development challenges. Governments should foster enabling policy environments, uphold social and environmental standards, and incentivize private sector solutions. Businesses can bring capital, innovation and expertise in delivering goods and services at scale. By aligning government priorities with business incentives, public-private collaboration can accelerate progress across sectors such as healthcare, education, financial inclusion, and climate adaptation. Successful partnerships require building trust, agreeing on shared goals and responsibilities, co-designing interventions and monitoring impacts. With visionary leadership and principled collaboration, governments and businesses can create win-win outcomes for both profit and purpose.”