Economy Report

Introduction

As in previous years, the BTI 2022 has identified considerable regression worldwide with regard to transformation processes. The guiding principles of democracy and the market economy have been subjected to intense pressure and are being challenged by corrupt elites, illiberal populism and authoritarian rule. For the first time, the Transformation Index lists more authoritarian states than democratic states. At no time in the last 20 years has the BTI assessed levels of socioeconomic development and economic performance as being so low. The quality of government performance has also continued to decline, particularly with respect to the consensus-related aspects of governance.

While this new low results in part from the coronavirus crisis affecting the entire world, it also represents a continuation of long-standing global trends. Due to the high number of infections and deaths around the world, the severe strain on health care systems and national budgets, and the additional challenges to good governance, the COVID-19 pandemic has represented an extreme stress test and left an indelible mark on the second half of the review period.

All BTI Dimensions at a low point | Average scores of 128 countries, BTI 2012-2022

In the economic and social spheres, in particular, the pandemic’s impact was immediate and severe. In most countries, lockdowns, sharp reductions in demand, and the crippling of entire economic sectors triggered rapid and significant economic downturns. Moreover, in many countries, the pandemic put additional stress on economies that had already been experiencing difficulties and in which growth in recent years had been anemic at best.

In this regard, the pandemic-related setbacks have only reinforced the previous decade’s negative developments and problems. While these current declines in economic transformation (globally, an average decline of 0.16 points on the 10-point BTI scale) are not insignificant given the high level of aggregation, they are not in themselves dire. Rather, their alarming character comes from the fact that they are only the latest dip in a persistently downward course marked by steadily growing indebtedness, impoverishment and inequality.

The pandemic’s economic and social consequences

The global economy, already marked by uncertainty and sluggish growth, has been severely damaged by the pandemic. Measures implemented in almost all countries, such as contact restrictions and lockdowns, significantly weakened global economic momentum and led to reduced demand for certain goods and raw materials. In many countries, this triggered significant declines in economic growth while also boosting unemployment and poverty rates. As significant spending increases were needed to bolster national health sectors, stimulate economies and cushion social hardships, there was also a rise in fiscal deficits and overall debt levels.

Well over half of all countries surveyed (78 out of 137) experienced such pronounced recessions that their overall economic performance scores in the BTI also declined. India, Panama and the Philippines (–3 points each) were hit particularly hard. Conversely, over the last two years, not a single country was able to improve its economic performance relative to the previous period. Ten years ago, the average economic performance score of all 128 countries surveyed in the BTI 2012 was 6.38 points. This average was only 5.98 points in the BTI 2020, and it has now plummeted to 5.28 points in the current edition.

On this issue, however, one must mention three caveats: First, it is true that the recent downturns in many countries represent the continuation of an already seriously weakened economic dynamic. The pandemic came at the end of a decade characterized by global and regional economic crises, volatile global market prices that had recently produced significant declines in commodity revenues, and trade conflicts, such as between the United States and China. By comparison, the slowdowns in growth in East-Central and Southeast Europe and in post-Soviet Eurasia after the global economic and financial crisis, or in the Middle East and North Africa after the Arab Spring, were even more pronounced than those of the current pandemic era. Second, even before the coronavirus crisis, many economies had been structurally vulnerable owing to their dependence on resource-based growth. This made significant leaps in growth possible during the first decade of the 2000s, but these gains proved unsustainable over the subsequent decade. For example, the downturn in Southern and Eastern Africa during the second half of the last decade, which resulted from steep declines in commodity prices, was of a magnitude comparable with the current recession. Third, it is also true that poor governance was a major driver of avoidable economic downturns, whether through premature (India), overly harsh (Philippines), omitted (Brazil) or inconsistent (Russia) lockdowns. Nevertheless, despite these three caveats, the pandemic has proved to be an extremely harsh disruptive shock to the vast majority of economies, especially those that were export-oriented, dependent on tourism, or reliant on remittances from migrant workers. This was particularly true for states in Asia and Latin America.

These slumps in growth led to declining revenues, which strained government budgets even as high levels of unplanned expenditures became necessary to support health care systems and cushion the pandemic’s economic and social impacts. In many places, these additional burdens on fiscal stability fell upon countries that were already heavily indebted or overindebted, which forced them to rely on the deferral, rescheduling or cancellation of debt by international creditors and financial institutions in order to avoid sovereign defaults.

Yet while the widespread declines in economic performance have been both significant and virtually unavoidable, the precarious fiscal conditions now present in many countries have been self-inflicted to a certain extent, even if one takes into account the expenditures necessitated by the pandemic and the associated revenue shortfalls. Over the past decade, irresponsible government spending and speculation on future profits from commodity exports have led many governments to borrow excessively from readily available sources such as China and thereby build up excessive levels of debt. The gradual nature of this erosion of fiscal stability can be seen in the BTI’s scores. The average global score for the relevant indicator has been deteriorating for the past 10 years, from 6.69 points in the BTI 2012 to 5.98 points today. The current review period shows a decline of fully 0.26 points, but this also implies a deterioration of 0.45 points over the preceding eight years.

Zambia offers a particularly striking example of the fiscal-policy consequences of combining a strong dependence on exports and a lack of diversification with poor governance. After benefiting from the partial debt relief provided to heavily indebted poor countries in the middle of the 2000s, along with a subsequent sharp rise in world copper prices, the country’s total external debt stood at just under $5 billion in 2010. This resource boom brought in its wake a rapid rise in government spending, waste and corruption. By the time President Edgar Lungu took office in 2015, the country’s total foreign debt had tripled to $15 billion, and it had subsequently doubled again to $30 billion by 2020, according to World Bank data. Zambia’s public finances then suffered greatly owing to the export declines induced by the pandemic, but these factors were amplifiers, not causes, of the country’s structural overindebtedness. According to the International Monetary Fund (IMF), Zambia’s public debt amounts to nearly 130% of its GDP. At the end of 2021, newly elected President Hakainde Hichilema reached an agreement with the IMF to cut subsidies and direct government spending in favor of investing more in health and education in return for a $1.4 billion loan, which would allow the country greater flexibility in restructuring its debt. Over the last 10 years, Zambia has lost four points in the BTI’s fiscal stability indicator, including two points in the last two years alone.

Lebanon is even worse off, with a decline in the current period of three points and national debt stocks amounting to 150% of the country’s GDP. Its reconstruction following the civil war was largely funded by borrowing from abroad and rentierism while neglecting the sustainability of debt as a policy objective. The self-inflicted gridlock produced by the consociationalist and corrupt elites contributed significantly to the banking crisis of 2019. This, in turn, led to a major economic downturn marked by reduced government revenues and higher deficits, which exacerbated the already high level of overindebtedness.

The mostly negative changes in the overall state of economic transformation are mainly due to declines in growth and further reductions in fiscal stability. Viewed as a global average, neither regulatory frameworks nor welfare state- and sustainability-related features showed any major changes relative to previous BTI editions. This can indicate stability and resilience, as in the case of Taiwan or Uruguay. But it can also be a sign of a perpetuation of clientelistic structures, as in Hungary or Turkey, or of a continuing lack of welfare-state protections, as can particularly be seen in large parts of Africa.

With regard to the organization of the market and competition, there is a clear disparity between democratically and autocratically governed countries. Forty-five autocratically ruled states – 34 hard-line and 11 moderate autocracies – have grossly competition-distorting economic regimes in which free and fair market access is not guaranteed. Moreover, these systems lack sufficient protection against price-fixing and the dominance of monopolies or cartels (mostly state-owned enterprises or enterprises linked to the political leadership), and there is not a reliable legal framework for the protection of private property. Market regimes are comparably weak and unfair in only five democracies – Guinea-Bissau, Lesotho, Niger, Papua New Guinea and Timor-Leste. Conversely, among the 20 countries that offer virtually unrestricted economic freedom and fairness, the only autocracies are Qatar and Singapore.

However, the difference between democracies and autocracies also extends to all areas of output from which autocratic rulers must derive their sole legitimacy in the absence of a democratically granted mandate. Autocracies are less successful at providing public infrastructure and basic services (on average –2.08 points in comparison to democracies) while additionally having a significantly lower level of socioeconomic development (–1.84), weaker economic performance (–1.37), weaker welfare states (–2.00) and weaker education systems (–1.55).

Overall, 40 countries lost a quarter point or more during the current review period with regard to their economic transformation status. Lebanon’s economic transformation score declined the most, with a dramatic drop of 1.43 points overall and deterioration evident in two-thirds of all its BTI economic indicators. Several other countries also suffered significant declines, including: export-dependent Botswana; India, whose economy was stifled by structural deficits, a failed investment program and a premature lockdown; Argentina, with its currency and fiscal-policy difficulties; and overindebted Papua New Guinea and Sri Lanka, both of which suffered from a loss of international investor confidence. Conversely, only three countries – Croatia, Kenya and Morocco – managed to improve by a quarter point or more. Kenya bolstered its regulatory framework, particularly in the areas of competition policy and property rights; Croatia improved its welfare state; and Morocco strengthened its banking system by increasing the independence of the central bank and tightening its banking supervision.

Globally, the average economic transformation score has fallen steadily since the BTI 2008. For the 128 countries surveyed continuously over the last decade, it declined from 5.70 to 5.55 points in the BTI 2020 and has fallen again to 5.38 points today. For many countries, this has resulted in clear changes in the observed quality of economic transformation. Whereas 30 countries were still considered to be at an advanced or highly advanced stage of economic transformation in the BTI 2012, this number has since fallen by almost a third, to 21 countries. Today, the previously advanced economies of Bahrain, Botswana, Brazil, El Salvador, Hungary, Kuwait, Panama, Peru and Turkey all fall into the category of only limited economic transformation. On the other hand, the number of countries at the lowest level of transformation – that is, with only rudimentary transformation – has more than doubled in the last decade, from seven to 16 countries. Iran, Turkmenistan and Venezuela have all been downgraded to this lowest category, joining the civil war-torn countries of Libya, Syria and Yemen and the failing states of the Central African Republic, Haiti and Sudan. Only Myanmar, which is itself now falling again into stagnation, was able to climb from this bottom rung.

Poverty, inequality and a lack of sustainability

The economic declines caused by the coronavirus crisis have had a direct impact on the levels of poverty and inequality in most developing and transformation countries. While this can currently be quantified to only a limited extent, the effect is likely to continue gaining in magnitude over time. According to estimates released by the World Bank in October 2021, the pandemic has led to a historically unprecedented increase in extreme poverty, pushing an additional 97 million people by the end of 2020 into conditions in which they were living on less than $1.50 per day. The ranks of those living on less than $5.50 per day also swelled by an additional 163 million people. In 2020, the global poverty rate rose from 7.8% to 9.1% according to the World Bank, and from 8.4% to 9.5% according to the United Nations. The World Bank estimates that this setback has effectively wiped out the poverty-reduction successes achieved over three to four years.

The two lowest quintiles of income groups suffered particularly severe income losses. This, in turn, contributed to a significant increase in social inequality, which was exacerbated by a loss of access to education among the poorest population groups, in particular.

The BTI 2022 is only partially able to capture these socioeconomic impacts of COVID-19. Relative to the BTI 2020, 19 countries have fallen to a lower level of socioeconomic development. However, in some of these countries, this has not been primarily due to the consequences of the pandemic. Moreover, more than three-quarters of this group – in particular, Iraq, Madagascar, Malawi, Sudan, Timor-Leste, Venezuela and Zambia – have deteriorated from an already very low starting level. In most of these countries, the presence of a large informal sector significantly increases social vulnerability, and social security systems are weak. In countries such as Argentina, Peru and the Philippines, the severity of the coronavirus lockdowns as well as the prolonged and extensive disruption of economic life they caused contributed significantly to the increase in poverty.

Fully 80 of the sample’s 137 countries now display massive, structurally anchored social exclusion, with a level of socioeconomic development accordingly assessed at four points or less on the BTI’s 10-point scale. More than half of these countries (47) are located on the African continent. Thirty-two of the 50 African countries surveyed are ranked at one of the lowest two levels, which are characterized by widespread severe poverty and extreme levels of inequality. Alongside this growing inequality within societies, inequality between countries is also rising again for the first time in a generation of intensified globalization. Moreover, overall poverty rates, which have declined in recent decades, are now showing a steep rise.

Most countries lack the financial means, and often the political will, to counteract impoverishment and social exclusion by expanding their often inadequate social security systems in place. As a consequence, they were only able to cushion the impact of the pandemic and its consequences to a rudimentary degree at best. While many emerging markets and developing countries used social transfers to mitigate the negative income effects of the pandemic, particularly as unemployment rates rose, these programs have been far too limited to fully offset the actual income losses. An aggravating factor, especially in countries with low or very low incomes, is that welfare-state systems generally cover only a minimal share of social risks and a small proportion of the population. In most cases, the majority of the population is at perpetual risk of falling into poverty. The prior neglect or fragmentation of health systems placed a particularly heavy burden on countries that were hit early by massive waves of infection. This was the case in most Latin American countries, for example, where public health systems that are generally starved of resources exist alongside private systems accessible only to the wealthy. This particularly led to dramatic developments in Brazil and Peru, with the latter recording the world’s highest excess mortality rate during the pandemic.

Much the same is true of the education systems, which have not been expanded quantitatively or improved qualitatively in years and, on average, remain at the same level they were at a decade ago. In this case, as well, the pandemic has threatened to exacerbate existing conditions. However, the full impact of this will only be felt in the medium to long term, when the effects of widespread and prolonged schooling disruptions start to be felt. The World Bank estimates that about 1.6 billion students were affected by such disruptions in April 2020, with nearly 700 million still experiencing interruptions at the end of the year. As the education systems in low-income countries have been disproportionately affected, this will not only increase inequality within societies, but also widen the gap between richer and poorer countries. The United Nations has called the impact on schooling a “generational catastrophe,” as another 101 million children and young people have fallen below the minimum level of literacy, wiping out the educational progress made over the last two decades.

Sustainable development is also endangered by the low quality of environmental policy, which registers the second-lowest average score within the BTI’s economic transformation section, trailing only that for the level of socioeconomic development. The quality of environmental policy has not changed over time, and it in no way measures up to the glaring need for action to reduce climate change. Among 137 countries, the average score in this area is currently 4.55, a level indicating that environmental matters receive only sporadic attention and are often subordinated to pro-growth policies, while environmental legislation is weak and rarely enforced. In fact, this score has slightly declined over the last decade, with the democracies and wealthier countries that are generally better positioned in terms of environmental policy tending to also being the larger contributors to this downward trend. Successive editions of the BTI have also shown that after a minimal upswing in the quality of environmental policy, a downturn has taken hold since the middle of the last decade. This hints at a shift in emphasis toward increased efforts to spur economic growth in the context of a more fragile global economy. The experience of the coronavirus crisis also suggests that governance capacities in most countries will be largely insufficient to combat the consequences of climate change with the necessary determination.

Conclusion

The BTI 2022 finds evidence of a new low in terms of political and economic transformation. Poor governance has exacerbated this development. Moreover, the regulatory framework governing the market and competition is neither free nor fair in most countries. Corruption, clientelism and mismanagement by the established elites stand in the way of economic development and social participation.

The near-universal global economic slump has already resulted in severe socioeconomic consequences, which could grow even worse if the recession and inequities in the distribution of vaccines continue. If this were to result in increased polarization and conflict intensity, it would place a heavy burden on future political transformation.