How war in Gaza will increase world poverty and hit much-needed reform

Reform of the IMF and the World Bank – to better represent a changing globe is needed as part of wider moves to boost development – now looks less likely

The impact of Israel's war on Gaza in the Middle East may pull millions more people into poverty. It will also complicate the reform process of the IMF and the World Bank to better reflect a changing globe.
Aliaa Aboukhaddour
The impact of Israel's war on Gaza in the Middle East may pull millions more people into poverty. It will also complicate the reform process of the IMF and the World Bank to better reflect a changing globe.

How war in Gaza will increase world poverty and hit much-needed reform

The annual meeting of the two biggest global financial institutions has ended without a much-needed consensus to achieve economic recovery and international cooperation to tackle poverty, inflation, debt and climate change.

The International Monetary Fund and the World Bank met in Marrakech and could not make meaningful progress toward the reform needed to fulfil these vital objectives.

Disagreements between the nations the world needs to drive change are worsening as the Middle East slides into a new phase of war and conflict.

The G20 disagrees on the war in Gaza and who is responsible for it. There has been no joint statement from the group on the situation in the Middle East, which points to fragmentation within it, or at least a rift on how to deal with the crisis in the region.

The disagreement is likely between the members of the G7 and the rest of the wider G20, as the established world order favouring the West clashes with the rising powers that will define the next phase in global development.

The crisis in Gaza is making these divisions more apparent. Some comments compared the current situation to the October War of 1973 and its impact on the economy, prices, and growth. Russia, China, and Turkey supported the Arab position, while the United States, the G7, and India supported pro-Israel positions.

A smoke plume erupts during Israeli bombardment in Rafah in the southern Gaza Strip on October 19, 2023.

Read more: Where do China and India stand on Israel's war on Gaza?

Whatever else, the split is making the breakthroughs over international institutions on which proper progress depends all the more difficult to achieve. And the IMF and the World Bank, caught in this stasis, are at the forefront of the need for reform.

Weak growth and great risks

The IMF’s Managing Director Kristalina Georgieva has described Israel's war on Gaza as "another source of uncertainty" for the global economy.

It stands alongside the war between Russia and Ukraine, rising interest rates, inflation and the economic slowdown on the list of risks.

A similar concern was expressed by Japan’s Finance Minister Shunichi Suzuki, who pointed to potential worldwide economic repercussions.

The IMF's Managing Director Kristalina Georgieva has described Israel's war on Gaza as "another source of uncertainty" for the global economy. It stands alongside the war between Russia and Ukraine, rising interest rates, inflation and the economic slowdown on the list of risks.

According to analysis from the Bloomberg news agency and financial data platform, the war in Gaza could mean losses of over $1tn for the global economy. This could add to the wider slowdown, making recession more likely in some regions while also stoking inflation via disruptions to supply, not least via commodity markets.

There are real concerns about the growing scale of the war, which appears to be escalating in terms of human casualties, damage to infrastructure, and economic costs. Aggregate share values on the Tel Aviv stock exchange reached $20bn in the first week of the crisis. Israel's currency, the shekel, collapsed, and the country's central bank had to intervene to support it.

Bloomberg estimates that global economic growth could fall to 1.7% if the war spreads. Such a low rate would hot global industry and trade.

Analysts agree that Israel's economy could collapse if the war becomes prolonged. Gaza faces destruction, especially in the north, and catastrophic human losses.

AP
Wounded Palestinians await treatment at Al-Shifa Hospital in Gaza City, central Gaza Strip, Tuesday, October 17, 2023.

French newspaper Les Echos has already reported that international investors have started to leave the region, due to the war and wider instability. It quoted France's Finance Minister Bruno Le Maire as saying that "geopolitical risks currently pose the greatest threat to the global economy, whether in terms of growth, development, or shared prosperity."

The war in Gaza could mean losses of over $1tn for the global economy. This could add to the wider slowdown, making recession more likely in some regions while also stoking inflation via disruptions to supply, not least via commodity markets.

The threat to oil supplies will become one of the main economic factors if the conflict expands.  The travel and tourism industry is expected to contract to varying degrees in countries in the Middle East and the Mediterranean. The increase in travel between nations in the region after the Abraham Accords is now jeopardised.

The IMF Is in the process of updating its economic forecasts in the context of the war. Previous forecasts, issued at the Marrakech meeting, were for global growth of 2.9%, with 1.4% for developed countries.

The US is expected to grow by 2%, with a rate of 0.7% forecast for the Eurozone. The Middle East and North Africa's rate for 2024 was predicted at 3.4%. It is the region most exposed to the economic consequences of war.

World's poor most exposed

According to the World Bank's President Ajay Banga, for every lost percentage point in the global economic growth rate, over 100 million people will be pulled into poverty. Another 50 million go into extreme poverty.

That will make the United Nation's Sustainable Development Goals even harder to reach. And the higher the level of poverty and frustration, the greater the risks of social and even political instability.

Banga also estimated that in the next ten years, 1.1 billion young people across the Global South will become working-age adults. Yet, in the same period and in the same countries, only 325 million jobs are expected to be created. The world needs higher growth, greater stability, increased development spending, and easier credit conditions to meet this demographic challenge.

The threat to oil supplies will become one of the main economic factors if the conflict expands. The travel and tourism industry is expected to contract to varying degrees in countries in the Middle East and the Mediterranean.

Major powers spilt

Observers at the Marrakech meeting noticed a significant difference in the position of major powers over the reform of the IMF and World Bank governance.

At a delegate meeting of the International Monetary and Financial Committee, US Treasury Secretary Janet Yellen rejected any change to the current distribution of shares and voting rights in the IMF, which has been in place since 2010.

However, she left the door open to the possibility of increasing contributions on the basis of the proportional representation voting system adopted in the institution's structure. The US currently holds 17.4% of the shares in the capital of the IMF, while China holds 6.4%.

The Governor of the People's Bank of China, Yi Gang, said China wants to increase its influence in line with the actual size of member countries' economies. That would enhance the representation of emerging countries. The size of China's economy has tripled in the last fifteen years and is expected to reach $18.7 trillion by the end of 2023. Forecasts suggest it will reach $20.6 trillion by 2025.

Several European countries are concerned about China's expanding influence in many regions of the world via development loans, especially for infrastructure.

In order to strengthen relations with Africa, an additional seat for the continent on the IMF's International Monetary and Financial Committee was agreed. The annual meetings took place in Morocco, an African country, to encourage African countries to take a more prominent place on the world stage.

Current contributions to the IMF only cover about 40% of its estimated financing needs, of about $1tn annually.

And that amount is about three times less than the financing needed to address the main challenges faced by the world: climate change, energy, food, infrastructure, and sustainable development needs.

The IMF's financing capacity seems to be limited compared to 50 years ago. And the demand for loans has increased in recent years due to a series of crises, including the COVID-19 pandemic, the Russian-Ukrainian war, inflation, climate change, drought, natural disasters, and debt problems. 

Reuters
A view of the massive destruction in Gaza.

It is in this context that China and other emerging powers are playing an increasingly important role in providing development loans on several continents, especially Africa. This has caused concern in Western Europe, including in some of the region's former colonial powers. However, the initiatives have been welcomed in the recipient countries.

Faultlines exposed

With all its tragic consequences, the war in Gaza has not unified the international community. It has, instead, exposed the faultiness running between the West and other global power centres at a time of wider geopolitical flux.

As disagreements emerge, the international coordination needed to face crises in the world is impeded. This makes the process of building a world without wars, injustice and poverty and the much-needed progress to a fairer system for all – as called for by the World Bank Development Committee – more difficult to achieve.

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