World Bank President David Malpass sat down with Yahoo Finance’s Brian Cheung in Jackson Hole, Wyoming to talk about addressing inflation, global inequalities, and the current worry that keeps him up at night.
BRIAN CHEUNG: Welcome to Yahoo Finance Presents, a special here from Jackson Hole, Wyoming. We're at the Federal Reserve's economic symposium here with World Bank President David Malpass. President Malpass, it's a pleasure to have you join us today.
DAVID MALPASS: Very good to see you, Brian.
BRIAN CHEUNG: So we just heard from Jay Powell earlier this morning. He made a pretty harsh speech just talking about how dedicated the Fed is to quelling inflation. Wondering if you have any thoughts on that speech and just kind of what the broad takeaways were for you.
DAVID MALPASS: I think the central banks have to really focus on inflation. So that's good. And it's not easy to get out of inflation. So I think that's the context of the speech. And it's going to-- what everyone's talking about is, how long is that going to take? And I think it depends really on the measures that are taken elsewhere outside of the central bank. Plus, the central bank itself has multiple tools to deal with inflation. And so those are all going to be important as we go forward.
BRIAN CHEUNG: Now, I think the one concern that people are reading from that speech is that, well, not just the Federal Reserve, but other central banks that are tightening as well might be tightening into a recession because higher interest rates and higher borrowing costs may have the effect of actually overdoing it on tightening economic policy or economic activity. Wondering if that from a global view, right, you're at the World Bank, is something that you think about with regards to other countries also experiencing high inflation.
DAVID MALPASS: I don't set interest rates. And in the developing world, there is this huge challenge that they've borrowed a lot, quite a bit in dollar terms or in euro terms, and then as the interest rates go up, it raises their debt service costs. So this is something that's being dealt with globally. I think also we need to think about the prices for all sorts of items. It's not just interest rates. It's energy prices.
Natural gas is vital to the whole food chain because it goes into fertilizer. It goes into food. And so the shortage of natural gas is causing severe restrictions in the developing countries. The advanced economies are able to pay more for money and to pay more for things like natural gas. And so that's leaving a lot of the developing countries short. There's not a lot of supply coming on stream.
BRIAN CHEUNG: That's an excellent point that you bring up there because it kind of illustrates the importance to the global picture of getting this inflation under control because it's having a lot of those nasty ripple effects onto those other countries. Do you think that the central banks are in a place right now where they can wrangle that because, again, a lot of I'm sure developing economies are also watching that because their food and energy prices and other goods and services are also hinging on that as well.
DAVID MALPASS: I think that can help. A lot of the supply side gains that need to be made need to come out of both fiscal policy, regulatory policy, which needs a lot more discussion in order to help create more supply. The central banks can do some on that. They're a major financial regulator. And so that means you could have regulatory policies that help small businesses, for example, rather than the current policies which are very much aimed at bond sales by big governments and big corporations.
So that's one kind of supply chain that could help. I think also the direct ownership of bonds by central banks focuses capital toward bigness. And there needs to be some rethinking of that. Is that really in the interest of the recovery?
BRIAN CHEUNG: So just to kind of-- I mean, there's so many things to unpack here. But on the debt servicing thing, which you just mentioned two questions ago, that's something that I imagine a lot of these developing countries who are in a position, which by the way, they're still dealing with the pandemic, it might constrain future fiscal policies for them that can alleviate whatever they're experiencing in those countries. So from the World Bank's perspective, how are you working with the countries that are the debtors, and then also the ones that are taking out debt to make sure that the rising interest rates don't create really undue burden for them?
DAVID MALPASS: Absolutely. These are severe problems. So we work directly with the countries to try to find debt restructurings. In the case of countries that have excessive debt, debt restructurings that benefit the people of the countries. That's been hard for the international system to really come up with as far as an approach. And then in countries that are not yet at debt distress, try to find ways that they use the government capabilities as best they can. And so that's a dialogue with the countries to try to find the most productive ways to use money.
But that's going on in the advanced economies as well. We have this very unbalanced global system. I've called it that we've gone into uncharted territory in terms of the size of the fiscal deficits and the amount of the national debt. And then we have to keep in mind that any time one of the advanced countries is borrowing, it's taking money out of the global capital supply. So they need to be using that money as well as they can. And I have to say, it's not at that spot right now.
BRIAN CHEUNG: So as a follow up to that, do you feel like the advanced nations are spending too much right now? We just saw a major package in the form of the Inflation Reduction Act passed here in the United States. Does that concern you because it might be crowding out capital from other places around the world?
DAVID MALPASS: Yes, it concerns. And we've seen it in the debt data. There was a good presentation this morning by Valerie Ramey about the differences in the huge run up in debt that's gone on both in the Great Financial Crisis and in the in the COVID pandemic. And so she's got a graph showing the magnitude of that increase. And then it's an upward ratchet. It's always government ends up getting bigger through the crisis. So I think these have to be directly discussed. Agustin Carstens just gave a speech at lunch that was on that topic of how do you get policymakers at the top level to really focus on the need for there has to be restraints on their spending that leads to better supply within the economy rather than constantly boosting demand.
BRIAN CHEUNG: So this kind of overall paints a picture where it's the haves and the have nots. The advanced economies who have the ability to spend and maybe absorb some of the shock of all of these exogenous economic factors that we find ourselves in can do that. But the more developing countries cannot do that. So let's talk about inequality. Where do you see the picture of inequality post-pandemic, but now also post-great inflation, or whatever you want to call it the global phenomenon we're finding ourselves in now?
DAVID MALPASS: These are huge concerns because when there's inequality, then people do things that-- they become desperate. The bottom end of the income scale, it's not just in the poorer countries. Even in the advanced economies, they get locked out. And that means locked out of education. There was some discussion of the importance this morning-- a discussion in the in the conference about the importance of education and the backsliding that's going on in the education number. This is an area that the World Bank is very involved in and very concerned about because it's the future of world growth that's getting shortchanged now.
So the inequality comes from this allocation of capital to parts of the global economy that already have enough capital. So we have a system set up patently to push more money into people that already have huge amounts of money. That's both through the fiscal policy and through the monetary policy. So I think these have to be relooked at in order to get more productivity growth.
BRIAN CHEUNG: Poverty. That's something that the World Bank looks very closely at. All the things that we've talked about seem to point to an exacerbation of that poverty, especially with the food aspect of it. The UN World Food Program flagging this as a major issue with prices going up across the board. What is the World Bank doing about it?
DAVID MALPASS: Yeah. Huge problem. We have some new numbers that will be coming out over the next month showing that rise in poverty. We want to have better food systems. So we're working directly with countries to try to improve their systems. We're talking with the advanced economies. One of the critical variables for the world is to produce more natural gas because it goes into the food chain. And that's so vital for the poor people, wherever they are in the world. And so that's one aspect. In the countries themselves, you can try to deal with the climate changes that are going on.
That means farmers being educated about what they can do to survive droughts and to survive floods, you know, excess and shortages of water, which are frequent within the world. So we're working really holistically with countries on what they can do to respond to the current crises. But then I think also in the thrust of the conference that's going on today is, how do you break out of that downward cycle that's going on in the world?
BRIAN CHEUNG: And then the last question here-- what is the one thing that keeps you up at night? You have such a global perspective on everything. What are you most worried about right now in August, 2022?
DAVID MALPASS: An immediate problem is the outflow of capital from the poorest countries. Their currencies are deteriorating. And the new investment has really stalled. And there's the outflow of capital. And it's being drawn in-- the capital is being drawn in by the policies of the advanced countries. So we have this inherent instability going on that's worrisome from a standpoint of refugees, of people having to move from their homes because there's no jobs, no education. And so that does keep me up. And we try to get countries to do better policies, the developing countries. But I think a huge amount of the burden has to be with the advanced economies.
BRIAN CHEUNG: Do you worry about any-- bonus question. Do you worry about any of those countries collapsing off of that?
DAVID MALPASS: There's a series of countries that are unsustainable debt levels. And they are collapsing in the sense that their international reserves are flowing out and their inflation rates are going sky high. As their currencies depreciate, it's going to show up in higher prices, which hit the poor the hardest. It keeps me up at night.
BRIAN CHEUNG: A big warning from World Bank President David Malpass here in Jackson Hole. Thank you so much for taking the time. Really appreciate it.
DAVID MALPASS: Thanks Brian.