Developing countries have long been told to avoid borrowing from central banks (CBs) to finance government spending. Many have even legislated against CB financing of fiscal expenditure.

Central bank fiscal financing
Such laws are supposedly needed to curb inflation – below 5%, if not 2% – to accelerate growth. These arrangements have also constrained a potential CB developmental role and government ability to respond better to crises.

Anis Chowdhury

A few have pragmatically suspended or otherwise circumvented such self-imposed prohibitions. This allowed them to borrow from CBs to finance pandemic relief and recovery packages.

Such recent changes have re-opened debates over the urgent need for counter-cyclical and developmental fiscal-monetary policy coordination.

Monetary financing rubbished
But financial interests claim this enables national CBs to finance government deficits, i.e., monetary financing (MF). MF is often blamed for enabling public debt, balance of payments deficits, and runaway inflation.

As William Easterly noted, “Fiscal deficits received much of the blame for the assorted economic ills that beset developing countries in the 1980s: over indebtedness and the debt crisis, high inflation, and poor investment performance and growth”.

Hence, calls for MF are typically met with scepticism, if not outright opposition. MF undermines central bank independence (CBI) – hence, the strict segregation of monetary from fiscal authorities – supposedly needed to prevent runaway inflation.

Jomo Kwame Sundaram

Cases of MF leading to runaway inflation have been very exceptional, e.g., Bolivia in the 1980s or Zimbabwe in 2007-08. These were often associated with the breakdown of political and economic systems, as when the Soviet Union collapsed.

Bolivia suffered major external shocks. These included Volcker’s interest rate spikes in the early 1980s, much reduced access to international capital markets, and commodity price collapses. Political and economic conflicts in Bolivian society hardly helped.

Similarly, Zimbabwe’s hyperinflation was partly due to conflicts over land rights, worsened by government mismanagement of the economy and British-led Western efforts to undermine the Mugabe government.

Indian lessons
Former Reserve Bank of India Governor Y.V. Reddy noted fiscal-monetary coordination had “provided funds for development of industry, agriculture, housing, etc. through development financial institutions” besides enabling borrowing by state owned enterprises (SOEs) in the early decades.

For him, less satisfactory outcomes – e.g., continued “macro imbalances” and “automatic monetization of deficits” – were not due to “fiscal activism per se but the soft-budget constraint” of SOEs, and “persistent inadequate returns” on public investments.

Monetary policy is constrained by large and persistent fiscal deficits. For Reddy, “undoubtedly the nature of interaction between [fiscal and monetary policies] depends on country-specific situation”.

Reddy urged addressing monetary-fiscal policy coordination issues within a broad common macroeconomic framework. Several lessons can be drawn from Indian experience.

First, “there is no ideal level of fiscal deficit, and critical factors are: How is it financed and what is it used for?” There is no alternative to SOE efficiency and public investment project financial viability.

Second, “the management of public debt, in countries like India, plays a critical role in development of domestic financial markets and thus on conduct of monetary policy, especially for effective transmission”.

Third, “harmonious implementation of policies may require that one policy is not unduly burdening the other for too long”.

Lessons from China?
Zhou Xiaochuan, then People’s Bank of China (PBoC) Governor, emphasized CBs’ multiple responsibilities – including financial sector development and stability – in transition and developing economies.

China’s CB head noted, “monetary policy will undoubtedly be affected by balance of international payments and capital flows”. Hence, “macro-prudential and financial regulation are sensitive mandates” for CBs.

PBoC objectives – long mandated by the Chinese government – include maintaining price stability, boosting economic growth, promoting employment, and addressing balance of payments problems.

Multiple objectives have required more coordination and joint efforts with other government agencies and regulators. Therefore, “the PBoC … works closely with other government agencies”.

Zhou acknowledged, “striking the right balance between multiple objectives and the effectiveness of monetary policy is tricky”. By maintaining close ties with the government, the PBoC has facilitated needed reforms.

He also emphasized the need for policy flexibility as appropriate. “If the central bank only emphasized keeping inflation low and did not tolerate price changes during price reforms, it could have blocked the overall reform and transition”.

During the pandemic, the PBoC developed “structural monetary” policy tools, targeted to help Covid-hit sectors. Structural tools helped keep inter-bank liquidity ample, and supportive of credit growth.

More importantly, its targeted monetary policy tools were increasingly aligned with the government’s long-term strategic goals. These include supporting desired investments, e.g., in renewable energy, while preventing asset price bubbles and ‘overheating’.

In other words, the PBoC coordinates monetary policy with fiscal and industrial policies to achieve desired stable growth, thus boosting market confidence. As a result, inflation in China has remained subdued.

Consumer price inflation has averaged only 2.3% over the past 20 years, according to The Economist. Unlike global trends, China’s consumer price inflation fell to 2.5% in August, and rose to only 2.8% in September, despite its ‘zero-Covid’ policy and measures such as lockdowns.

Needed reforms
Effective fiscal-monetary policy coordination needs appropriate arrangements. An IMF working paper showed, “neither legal independence of central bank nor a balanced budget clause or a rule-based monetary policy framework … are enough to ensure effective monetary and fiscal policy coordination”.

Appropriate institutional and operational arrangements will depend on country-specific circumstances, e.g., level of development and depth of the financial sector, as noted by both Reddy and Zhou.

When the financial sector is shallow and countries need dynamic structural transformation, setting up independent fiscal and monetary authorities is likely to hinder, not improve stability and sustainable development.

Understanding each other’s objectives and operational procedures is crucial for setting up effective coordination mechanisms – at both policy formulation and implementation levels. Such an approach should better achieve the coordination and complementarity needed to mutually reinforce fiscal and monetary policies.

Coherent macroeconomic policies must support needed structural transformation. Without effective coordination between macroeconomic policies and sectoral strategies, MF may worsen payments imbalances and inflation. Macro-prudential regulations should also avoid adverse MF impacts on exchange rates and capital flows.

Poorly accountable governments often take advantage of real, exaggerated and imagined crises to pursue macroeconomic policies for regime survival, and to benefit cronies and financial supporters.

Undoubtedly, much better governance, transparency and accountability are needed to minimize both immediate and longer-term harm due to ‘leakages’ and abuses associated with increased government borrowing and spending.

Citizens and their political representatives must develop more effective means for ‘disciplining’ policy making and implementation. This is needed to ensure public support to create fiscal space for responsible counter-cyclical and development spending.

IPS UN Bureau

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Widespread adverse reactions to the UK government’s recent ‘mini-budget’ forced new Prime Minister Liz Truss to resign. The episode highlighted problems of macroeconomic policy coordination and the interests involved.

Macro-policy coordination
But macroeconomic, specifically fiscal-monetary policy coordination almost became “taboo” as central bank independence (CBI) became the new orthodoxy. It has been accused of enabling CBs to finance government deficits. Critics claim inflation, even hyperinflation, becomes inevitable.

Anis Chowdhury

Fiscal policy – notably variations in government tax and spending – mainly aims to influence long-term growth and distribution. CB monetary policy – e.g., variations in short-term interest rates and credit growth – claims to prioritize price and exchange rate stability.

By the early 1990s, the ‘Washington consensus’ implied the two macro-policy actors should work independently due to their different time horizons. After all, governments are subject to short-term political considerations inimical to monetary stability needed for long-term growth.

Claiming to be “technocratic”, CBs have increasingly set their own goals or targets. CBI has involved both ‘goal’ and ‘instrument’ independence, instead of ‘goal dependence’ with ‘instrument independence’.

CBI was ostensibly to avoid ‘fiscal dominance’ of monetary policy. Meanwhile, government fiscal policy became subordinated to CB inflation targets. For former Reserve Bank of Australia Deputy Governor Guy Debelle, monetary policy became “the only game in town for demand management”.

Debelle noted that except for rare and brief coordinated fiscal stimuli in early 2009, after the onset of the global financial crisis, “demand management continued to be the sole purview of central banks. Fiscal policy was not much in the mix”.

Jomo Kwame Sundaram

Adam Posen found the costs of disinflation, or keeping inflation low, higher in OECD countries with CBI. Carl Walsh found likewise in the European Community.

For Guy Debelle and Stanley Fischer, CBs have sought to enhance their credibility by being tougher on inflation, even at the expense of output and employment losses.

Committed to arbitrary targets, independent CBs have sought credit for keeping inflation low. They deny other contributory factors, e.g., labour’s diminished bargaining power and globalization, particularly cheaper supplies.

John Taylor, author of the ‘Taylor rule’ CB mantra, concluded CB “performance was not associated with de jure [legislated] central bank independence”. De jure CB independence has not prevented them from “deviating from policies that lead to both price and output stability”.

The de facto independent US Fed has also taken “actions that have led to high unemployment and/or high inflation”. As single-minded independent CBs pursued low inflation, they neglected their responsibility for financial stability.

CBs’ indiscriminate monetary expansion during the 2000s’ Great Moderation enabled asset price bubbles and dangerous speculation, culminating in the global financial crisis (GFC).

Since the GFC, “the financial sector has become [increasingly] dependent on easy liquidity… To compensate for quantitative easing (QE)-induced low return…, [holders of safe long-term government bonds] increased the risk profile of their other assets, taking on more leverage, and hedging interest rate risk with derivatives”.

Independent CBs also never acknowledge the adverse distributional consequences of their policies. This has been true of both conventional policies, involving interest rate adjustments, and unconventional ones, with bond buying, or QE. All have enabled speculation, credit provision and other financial investments.

They have also helped inefficient and uncompetitive ‘zombie’ enterprises survive. Instead of reversing declining long-term productivity growth, the slowdown since the GFC “has been steep and prolonged”.

Workers’ real wages have remained stagnant or even declined, lowering labour’s income share and widening income inequality. As crises hit and monetary policies were tightened, workers lost jobs and incomes. Workers are doubly hit as governments pursue fiscal austerity to keep inflation low.

Dire consequences
The pandemic has seen unprecedented fiscal and monetary responses. But there has been little coordination between fiscal and monetary authorities. Unsurprisingly, greater pandemic-induced fiscal deficits and monetary expansion have raised inflationary pressures, especially with supply disruptions.

This could have been avoided if policymakers had better coordinated fiscal and monetary measures to unlock key supply bottlenecks. War and economic sanctions have made the supply situation even more dire.

Government debt has been rising since the GFC, reaching record levels due to pandemic measures. CBs hiking interest rates to contain inflation have thus worsened public debt burdens, inviting austerity measures.

Thus, countries go through cycles of debt accumulation and output contraction. Supposed to contain inflation, they adversely impact livelihoods. Many more developing countries face debt crises, further setting back progress.

Needed reforms
Sixty years ago, Milton Friedman asserted, “money is too important to be left to the central bankers”. He elaborated, “One economic defect of an independent central bank … is that it almost invariably involves dispersal of responsibility… Another defect … is the extent to which policy is … made highly dependent on personalities… third … defect is that an independent central bank will almost invariably give undue emphasis to the point of view of bankers”.

Thus, government-sceptic Friedman recommended, “either to make the Federal Reserve a bureau in the Treasury under the secretary of the Treasury, or to put the Federal Reserve under direct congressional control.

“Either involves terminating the so-called independence of the system… either would establish a strong incentive for the Fed to produce a stabler monetary environment than we have had”.

Undoubtedly, this is an extreme solution. Friedman also suggested replacing CB discretion with monetary policy rules to resolve the problem of lack of coordination. But, as Alan Blinder has observed, such rules are “unlikely to score highly”.

Effective fiscal-monetary policy coordination requires appropriate supporting institutions and operating arrangements. As IMF research has shown, “neither legal independence of central bank nor a balanced budget clause or a rule-based monetary policy framework … are enough to ensure effective monetary and fiscal policy coordination”.

Although rules-based policies may enhance transparency and strengthen discipline, they cannot create “credibility”, which depends on policy content, not policy frameworks.

For Debelle, a combination of “goal dependence” and “instrument or operational independence” of CBs under strong democratic or parliamentary oversight may be appropriate for developed countries.

There is also a need to broaden membership of CB governing boards to avoid dominance by financial interests and to represent broader national interests.

But macro-policy coordination should involve more than merely an appropriate fiscal-monetary policy mix. A more coherent approach should also incorporate sectoral strategies, e.g., public investment in renewable energy, education & training, healthcare. Such policy coordination should enable sustainable development and reverse declining productivity growth.

As Buiter urges, it is up to governments “to make appropriate use of … fiscal space” created by fiscal-monetary coordination. Democratic checks and balances are needed to prevent “pork-barrelling” and other fiscal abuses and to protect fiscal decision-making from corruption.

IPS UN Bureau

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Preoccupied with enhancing their own ‘credibility’ and reputations, central banks (CBs) are again driving the world economy into recession, financial turmoil and debt crises.

Wall Street ‘cred’
Most CB governors believe ‘credibility’ is desirable and must be achieved by fighting inflation at any cost. To justify their own more harmful policies, they warn inflation is ‘damaging’.

Anis Chowdhury

The US Fed deepened the 1930s’ Great Depression, the 1970s’ stagflation and the early 1980s’ contraction, besides contributing to the 2008-09 global financial crisis (GFC). Hence, CB notions of ‘credibility’ and ‘independence’ need to be reconsidered.

Milton Friedman – whom many central bankers revere – blamed the 1930s’ Great Depression on US Fed actions and inactions. Instead of providing liquidity support for businesses struggling with short-term cash-flow problems, it squeezed credit and economies.

But why did the Fed behave as it did? Some economic historians insist it was “to promote the interests of commercial banks, rather than economic recovery”.

Monetary policy before and during the Great Depression “was designed to cause the failure of non-member banks, which would enhance the long-run profits of the Fed’s member banks and enlarge the [Fed’s] regulatory domain”.

Others concluded, “Federal Reserve errors seem largely attributable to the continued use of flawed policies” to defend the ‘gold standard’, and its poor understanding of monetary conditions.

Central banks contractionary
Worse, few lessons were learnt. Instead of protecting the gold standard, or being counter-cyclical, fighting inflation is the new CB preoccupation. Even worse, most CBs now commit to an arbitrarily-set inflation target of 2%, first promoted by the Reserve Bank of New Zealand over three decades ago.

Jomo Kwame Sundaram

Ben Bernanke’s research team found the major damage from the 1970s’ oil price shocks was due to the “tightening of monetary policy” response. Other research attributed the 1970s’ stagflation largely to the Fed’s “go-stop” monetary policy, worsened by policymakers’ “misperceptions” and “faulty doctrine”.

Hence, “in substantial part the Great Stagflation of the 1970s could have been avoided, had the Fed not permitted major monetary expansions in the early 1970s”.

Labour pays
Likewise, Fed chair Paul Volcker sharply raised interest rates during 1979-81 “to a crushing level of nearly 20 per cent by the middle of 1981”.

This precipitated the “ensuing recession that started in July 1981 [which] became the most severe downturn since the second world war”. US unemployment reached nearly 11% in late 1982, the highest since the Great Depression.

Volcker’s actions betrayed the Fed’s dual mandate to pursue both full employment and price stability. First in the Employment Act of 1946, it was re-codified in the 1978 ‘Humphrey-Hawkins’ Full Employment and Balanced Growth Act.

Eventually, the long-term unemployed “became invisible to both the labour market and to policymakers”. Many became deskilled as others fell victim to criminality, substance abuse, and mental illness, even suicide.

The overall health of Americans became “poorer for years as a result of the deep economic recession in 1981 and 1982”.

Sending Global South south
Volcker’s actions caused developing country debt crises, with decades lost in Latin America and Africa. A recent New York Times opinion-editorial warned, “The Powell pivot to tighter money in 2021 is the equivalent of Mr. Volcker’s 1981 move”, and “the 2020s economy could resemble the 1980s”.

Yet, invoking CB credibility, many with power and influence are urging the Fed to stick to its guns with Volcker’s “courage to take out the baseball bat to slam the economy and slay inflation”!

The World Bank warns of dire developing country debt crises following policy-induced recessions. Meanwhile, the International Monetary Fund has warned developing economies with dollar-denominated debt of imminent foreign exchange crises.

Stop-go new norm
Fed, Bank of England and European Central Bank policy approaches still justify “go-stop” monetary policy reversals. Resulting booms or bubbles and busts also feature in other recent crises, e.g., the GFC.

Following the 1997 East Asian financial crises, Mexican, Russian and post-US ‘dotcom bubble’ bust, the Fed eased monetary policy too much for too long during the ‘Great Moderation’.

CBs enabled credit expansion in the 2000s, culminating in the GFC. More worryingly, the “near-consensus view” is that independent CBs have failed to achieve – let alone protect – financial stability.

Easy credit and rising stock and housing markets have involved rapid credit and loan growth worsening asset price bubbles. Regulatory oversight became increasingly lax as investors ‘chased yield’. Leverage grew, using dodgy ‘derivative’ products, making proper risk assessment difficult.

Guy Debelle, once Deputy Governor of Australia’s CB, noted, “The goal of financial stability has generally been left vague”. Hence, CBs failed to see significant build-up of financial instability”. Soon after, the Lehman Brothers’ collapse precipitated the GFC.

QE magic from bubble to bust
Governments withdrew fiscal ‘stimuli’ too soon. So, major CBs aggressively pursued ‘unconventional monetary policies’, especially ‘quantitative easing’, to keep economies afloat.

Extraordinary monetary expansion provided vital liquidity, but poor coordination also fuelled asset price bubbles. Thus, unviable enterprises survived, undermining productivity growth.

With less investment in the real economy, supply capacity is falling behind still growing demand. Pandemic, war and sanctions have also disrupted supplies.

Raising interest rates, CBs now race to reverse earlier monetary expansion. Credit contractions are squeezing economies, hitting poorer countries especially hard.

Reviewing historical data, the author of the ‘Taylor rule’ – whom many CBs profess to follow – concluded, “The classic explanation of financial crises, going back hundreds of years, is that they are caused by excesses – frequently monetary excesses – which lead to a boom and an inevitable bust”.

Independence for what?
CB independence (CBI) advocates often claim low inflation during the Great Moderation was due to CB credibility. But inflation in most countries declined from the mid-1990s, with or without CBI.

The alleged causation has been much exaggerated, and is certainly not as strong as argued. Claiming CBI ensures low inflation also denies other relevant variables, e.g., labour market casualization and globalization.

Debelle observed, “How much [low inflation] can be attributable to central bank independence or the inflation target is difficult to disentangle …[Favourable] assessment mostly relies on assertion, rather than empirical proof”.

Milton Friedman argued crisis responses involve inherently political decisions, best not left to the unelected. A modern CB’s “responsibilities overlap with other government functions”. So, CBs must be subject to political authority while maintaining operational independence.

CBI fetishism has also allowed central bankers to ignore distributional consequences of monetary policies. This has often enabled financial asset owners, speculators and creditors. CBI has also meant neglecting development responsibilities.

Emphasizing CBI also implies “a very narrow view of central bank functions”. This has made economies more prone to financial instability and crisis. Clearly, CBI is no harmless ‘elixir’ ensuring low inflation.

IPS UN Bureau

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The dogmatic obsession with and focus on fighting inflation in rich countries are pushing the world economy into recession, with many dire consequences, especially for poorer countries. This phobia is due to myths shared by most central bankers.

Anis Chowdhury

“Once-in-a-generation inflation in the US and Europe could choke off global growth, with a global recession possible in 2023”, claimed the World Economic Forum Chief Economist’s Outlook under the headline, “Inflation Will Lead Inexorably To Recession”.

The Atlantic recently warned, “Inflation Is Bad… raising the prospect of a period of economic stagnation or even a recession”. The Economist claims, “It hurts investment and makes most people poorer”.

Jomo Kwame Sundaram

World Bank chief economist Michael Bruno and William Easterly asked, “Is inflation harmful to growth?” With data from 31 countries for 1961-94, they concluded, “The ratio of fervent beliefs to tangible evidence seems unusually high on this topic, despite extensive previous research”.

OECD evidence for 1961-2021 – Figures 1a & 1b – updates Bruno & Easterly, again contradicting the ‘standard narrative’ of major CBs, BWIs, BIS and others. The inflation-growth relationship is strongly positive when 1974-75 – severe oil spike recession years – are excluded.

The relationship does not become negative even when 1974-75 are included. Also, the “Great Inflation” of 1965-82 did not harm growth. Hence, there is no empirical basis for setting a particular threshold, such as the now standard 2% inflation target – long acknowledged as “plucked from the air”!

Developing countries also have a positive inflation-growth relationship if extreme cases – e.g., inflation rates in excess of 20%, or ‘excessively’ impacted by commodity price volatilities, civil strife, war – are omitted (Figures 2a & 2b).

Figure 2a summarizes evidence for 82 developing countries during 1991-2021. Although slightly weakened, the positive relationship remained, even if the 1981-90 debt crises years are included (Figure 2b).

Myth 2: Inflation always accelerates
Another popular myth is that once inflation begins, it has an inherent tendency to accelerate. As inflation supposedly tends to speed up, not acting decisively to nip it in the bud is deemed dangerous. So, the IMF chief economist advises, “Don’t let inflation ‘genie’ out of the bottle”. Hence, inflation has to be ‘nipped in the bud’.

But, in fact, OECD inflation has never exceeded 16% in the past six decades, including the 1970s’ oil shock years. Inflation does not accelerate easily, even when labour has more bargaining power, or wages are indexed to consumer prices – as in some countries.

Bruno & Easterly only found a high likelihood of inflation accelerating when inflation exceeded 40%. Two MIT economists – Rüdiger Dornbusch and Stanley Fischer, later International Monetary Fund Deputy Managing Director – came to a similar conclusion, describing 15–30% inflation as “moderate”.

Dornbusch & Fischer also stressed, “Most episodes of moderate inflation were triggered by commodity price shocks and were brief; very few ended in higher inflation”. Importantly, they warned, “such [moderate] inflations can be reduced only at a substantial … cost to growth”.

Myth 3: Hyperinflation threatens
Although extremely rare, avoiding hyperinflation has become the pretext for central bankers prioritizing inflation prevention. Hyperinflation – at rates over 50% for at least a month – is undoubtedly harmful for growth. But as IMF research shows, “Since 1947, hyperinflations in market economies have been rare”.

Many of the worst hyperinflation episodes in history were after World War Two and the Soviet demise. Bruno & Easterly also mention breakdowns of economic and political systems – as in Iran or Nicaragua, following revolutions overthrowing corrupt despotic regimes.

A White House staff blog noted, “The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off”.

Myth 4: Evidence-based policymaking
Central bankers love to claim their policymaking is evidence-based. They cite one another and famous economists to enhance the aura of CB “credibility”.

Unsurprisingly, the Reserve Bank of New Zealand promoted its arbitrary 2% inflation target mainly by endless repetition – not strong evidence or superior logic. They simply “devoted a huge amount of effort” to preaching the new mantra “to everybody who would listen – and some who were reluctant to listen”.

The narrative also suited those concerned about wage pressures. Fighting inflation has provided an excuse to further weaken workers’ working conditions and pay. Thus, labour’s share of income has been declining since the 1970s.

Greater central bank independence (from the executive) has enhanced the influence and power of financial interests – largely at the expense of the real economy. Output and employment growth weakened as a result, worsening the lot of the many, especially in the global South.

Fact: Central banks induce recessions
Inappropriate CB policies have often slowed economic growth without mitigating inflation. Hawkish CB responses to inflation can become self-fulfilling prophecies with high inflation seemingly associated with recessions or growth collapses.

Before becoming Fed chair, Ben Bernanke’s research team concluded, “an important part of the effect of oil price shocks [in the 1970s] on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy”.

Thus, central bank interventions have caused contractions without reducing inflation. The longest US recession after the Great Depression – in the early 1980s – was due to Fed chair Paul Volcker’s 1979-81 interest rate hikes.

A New York Times opinion-editorial recently warned, “The Powell pivot to tighter money in 2021 is the equivalent of Mr. Volcker’s 1981 move”, and “the 2020s economy could resemble the 1980s”.

Fearing an “extremely severe” world recession, Columbia University history professor Adam Tooze has summed up the current CBs’ interest rate hike frenzy as “the single most dramatic simultaneous tightening of monetary policy ever”!

Phobias, especially if based on unfounded beliefs, never offer good bases for sound policymaking.

IPS UN Bureau

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Inflation phobia among central banks (CBs) is dragging economies into recession and debt crises. Their dogmatic beliefs prevent them from doing right. Instead, they take their cues from Washington: the US Fed, Treasury and Bretton Woods institutions (BWIs).

Costly recessions
Both BWIs – the International Monetary Fund (IMF) and World Bank – have recently raised the alarm about the likely dire consequences of the ensuing contractionary ‘race to the bottom’. But their dogmas stop them from being pragmatic. Hence, their policy analyses and advice come across as incoherent, even contradictory.

Anis Chowdhury

Warning “Increased interest rates will bite”, the IMF Managing Director has urged countries to “buckle up”, acknowledging anti-inflationary measures threaten recovery. “For hundreds of millions of people it will feel like a recession, even if the world economy avoids” two consecutive quarters of contracting output.

She also noted US Fed rate hikes have strengthened the dollar, raising import costs and making it costlier to service dollar-denominated debt. But reciting the mantra, she claims if inflation “gets under control, then we can see a foundation for growth and recovery”.

This contradicts all evidence that low inflation comes at the expense of robust growth. Per capita output growth and productivity growth both fell during three decades of low inflation. Also, low inflation has not prevented financial crises.

Even if growth recovers, recessions’ scars remain. For example, an IMF study found, “the Great Recession of 2007–09 has left gaping wounds”. Over 200 million people are unemployed worldwide, over 30 million more than in 2007.

A 2018 San Francisco Fed study assessed the Great Recession cost Americans about $70,000 each. The Harvard Business Review estimated, over 2008-10, it cost the US government “well over $2 trillion, more than twice the cost of the 17-year-long war in Afghanistan”.

Jomo Kwame Sundaram

Studies have documented its harmful impacts on wellbeing, particularly mental health. Recessions in Europe and North America caused over 10,000 more suicides, greater drug abuse and other self-harming behaviour. Adverse socio-economic and health impacts are worse in developing countries with poor social protection.

Interest rate hikes during 1979-82 triggered debt crises in over 40 developing countries. The 1982 world recession “coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020”. A “decade of lost growth in many developing economies” followed.

But Bank research shows interest rate hikes “may not be sufficient to bring global inflation back down”. The Bank even warns major CBs’ anti-inflationary measures may trigger “a string of financial crises in emerging market and developing economies”, which “would do them lasting harm”.

Developing country governments’ external debt – increasingly commercial, costing more and repayable sooner – has ballooned since the 2008-09 global financial crisis. The pandemic has caused more debt to become unsustainable as rich countries oppose meaningful relief.

No policy consensus
The Bank correctly notes, “A slowdown … typically calls for countercyclical policy to support activity”. It acknowledges, “the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply”.

It also suggests, “policymakers could shift their focus from reducing consumption to boosting production…to generate additional investment and improve productivity and capital allocation…critical for growth and poverty reduction.”

However, it does not offer much policy guidance besides the usual irrelevant platitudes, e.g., CBs “must communicate policy decisions clearly while safeguarding their independence”.

It even blames “labor-market constraints”. For decades, the Bank promoted measures to promote labour market flexibility, ostensibly to increase participation rates, reduce prices, via wages, and re-employ displaced workers.

Such policies since the 1980s have accelerated declining productivity growth and real incomes for most. They have reduced labour’s share of national income, increasing inequality. To make matters worse, the Bank misleadingly attributes many policy-induced economic woes to high inflation.

In May, the IMF Deputy Managing Director argued wages did not have to be suppressed to avoid inflation. She called for CB vigilance and “forceful” actions against inflation, which “will remain significantly above central bank targets for a while”.

No more Washington Consensus
In June, a Fund policy note advised allowing “a full pass-through of higher international fuel prices to domestic users”. It advised recognizing the supply shock causes of contemporary inflation and protecting the most vulnerable.

But more alarmist Fund staff urge otherwise. In July, its ‘chief economist’ urged, “bringing [inflation] back to central bank targets should be the top priority … Central banks that have started tightening should stay the course until inflation is tamed”.

Although he acknowledged, “[t]ighter monetary policy will inevitably have real economic costs”, without any evidence, he insisted, “delaying it will only exacerbate the hardship”.

In August, the Bank of International Settlements (BIS) head urged shifting attention from managing demand to enabling supply. He warned central bankers had for too long assumed that supply adjusts automatically and smoothly to shifts in demand.

He warned, “Continuing to rely primarily on aggregate demand tools [i.e., the interest rate] to boost growth in this environment could increase the danger, as higher and harder-to-control inflation could result”.

But the BIS ‘chief economist’ soon urged major economies to “forge ahead with forceful” interest rate hikes despite growing threats of recession. He did not seem to care that the rate hike gamble to fight inflation may not work and its costs could be astronomical.

Inflation fear mongering
Influential economists at the US Fed, Bank of England, Fund and BIS fear “second-round” effects of mainly supply-shock inflation due to “wage-price spirals”.

But Fund research acknowledged, “little empirical research …[on]… the effects of oil price shocks on wages and factors affecting their strength”. It found very low likelihood of such ‘pass-through’ effects due to significant labour market changes, including drastic declines in unionization and collective bargaining.

It reported “almost zero pass-through for 1980-1999” and negligible effects during 2000-19, before concluding, “In a broad stroke, the pass-through has declined over time in Europe”. Similar findings have been reported by others.

Reserve Bank of Australia (RBA) research found “the current episode has many differences to the 1970s, when a wage-price spiral did emerge”. It concluded, “There are a number of factors that work against a wage-price spiral emerging, … implying that the overall risk in most advanced economies is probably quite low”.

Australian professor Ross Garnaut has suggested, “the spectre of a virulent wage-price spiral comes from our memories and not current conditions”. Sadly, despite all the evidence, including their own, the Fund and RBA still urge firm CB actions against inflation!

IPS UN Bureau

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Policymakers have become obsessed with achieving low inflation. Many central banks adopt inflation targeting (IT) monetary policy (MP) frameworks in various ways. Some have mandates to keep inflation at 2% over the medium term. Many believe this ensures sustained long-term prosperity.

Anis Chowdhury

IT discord
Heads of major central banks – such as the US Federal Reserve Bank (Fed), Bank of England (BoE) and German Bundesbank – committed to keep inflation at 2% soon after NZ. Although typically ‘medium-term’, IT’s high costs are portrayed as necessary, but brief. Worse, promised growth benefits have not materialized.

The Articles of Agreement of the International Monetary Fund (IMF) never endorsed any fixed inflation target. Article IV states, “each member shall: (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances”.

This makes clear much depends on conditions and circumstances. The sensible priority then would be to sustain prosperity with “reasonable price stability”, and not to commit to an arbitrary universal IT at any cost. Yet, many IMF officials promote the 2% target.

Jomo Kwame Sundaram

For him, “Monetary policy needs to look beyond its core focus on low and stable inflation” to promote balanced and equitable growth, while minimizing adverse spill-overs on developing economies.

An IMF chief economist even asserted low inflation and economic progress was a “divine coincidence”, and insisted a 2% inflation target was too low. After the GFC, an IMF working paper argued for a long-run inflation target of 4% for advanced countries.

A Bank of Canada working paper concluded, “the current state of economic research – both empirical and theoretical – provides little basis for believing in significant observable benefits of low inflation such as an increase in the growth rate of real GDP”.

IT benefits?
Any objective consideration of actual IT experiences would have led to its rejection long ago. IT is clearly inimical to growth and equity, let alone the Sustainable Development Goals (SDGs). Four central bank (CB) experiences offer valuable lessons about IT’s likely consequences.

The US Fed is, by far, the most important CB globally, while the BoE has been historically important. The Bundesbank has been the most inflation averse in the post-war period, while the RBNZ was the world’s IT pioneer.

NZ’s inflation during 1961-90 averaged 9%, more than the US’s 5.1% and the UK’s 8%. Yet, the mighty Fed and the venerable BoE sought to emulate the miniscule RBNZ! Germany’s well-known inflation-phobia is attributed to its inter-war ‘hyperinflation’ and its bloody aftermath. Inflation there averaged 3.4% over 1960-90, i.e., even before IT.

None achieved sustained economic prosperity despite reaching inflation targets of 2% or less. Average per capita GDP growth declined sharply in the US, UK and Germany, while rising negligibly in NZ (Table 1).

Long-term declines in their growth rates followed declining investments (Table 2). IT advocates claim high inflation causes uncertainty, thus reducing investments, but lower inflation has clearly done worse.

As the investment rate declined with IT, so did productivity growth in the UK, Germany and NZ (Table 3). While productivity growth has risen negligibly with IT in the US, it has trended down in all four economies (Figures 1-4). US hourly output grew at only 1.4% after 2004, “half its pace in the three decades after World War II”.

Most advanced economies have experienced productivity slowdowns since the 1970s. With the European Central Bank’s strict IT framework, the euro zone also saw marked slowdowns in productivity growth during 1999-2019.

Declining productivity growth often becomes the pretext for depressing real wages and working conditions, compelling workers to work more to compensate for lost earnings. Productivity and growth slowdowns are seen as “secular stagnation”.

All this has been blamed on inflation. But lowering inflation has not reversed this trend, which has actually accelerated since the GFC. Many explanations have been offered, but the reasons for this failure remain moot.

IT, low inflation, tax cuts and market reforms are supposed to improve economic performance. Weaker investment and economic growth, due to contractionary macroeconomic policies, slowed US productivity growth.

Similarly, The Economist observed, “Drooping demand crimped incentives to invest and innovate”. It ascribed declining UK productivity growth to cuts in innovation investments due to “austerity policies” and “severe reduction in credit”, inter alia.

Concluding “no doubt … the cost … was huge”, it estimated, “Britain’s GDP per person in 2019 would have been £6,700 ($8,380) higher than it turned out to be” had productivity growth not fallen further after the GFC.

There is growing acknowledgement that widespread “unconditional” CB commitment to 2% inflation targets – in the face of the current inflationary upsurge – is likely to worsen slowdowns. This is likely to compound debt crises in many developing countries.

The adverse socio-economic impacts of recessions are well documented. Policy-induced recessions – supposedly to curb inflation – will compound the effects of pandemic, war and sanctions.

Pragmatism, not dogma
Central bankers should not be dogmatic. Instead, pragmatic approaches are urgently needed to address the current inflationary surges. This is especially necessary when inflation worldwide is mainly due to supply shocks.

Western policymakers must consider the adverse spill-over impacts on developing countries, already on the brink of debt crises due to protracted slowdowns. Government debt – with more higher cost commercial borrowings – has been rising since the GFC, Western ‘quantitative easing’ and Covid-19.

Almost all central bankers know it is almost impossible to achieve 2% inflation in current circumstances. Yet, they insist not raising interest rates now will cause much economic damage later.

But such claims clearly have no theoretical or empirical bases. Hence, it is recklessly dogmatic to enforce a 2% target by falsely claiming inaction would be even more harmful.

IPS UN Bureau

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Elizabeth II dancing with Nkrumah, 1961.

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 13 2022 (IPS)

After a quarter century of economic stagnation, African economic recovery early in the 21st century was under great pressure even before the pandemic, due to new trade arrangements, falling commodity prices and severe environmental stress.

European scramble for Africa
Africa’s borders were drawn up by European powers, especially following their ‘Scramble for Africa’ from 1881 ending by World War One. Various culturally, linguistically and religiously different ‘ethnic’ groups were forced together into colonies, to later become post-colonial ‘nations’.

Europeans came to Africa seeking slaves and minerals, later building colonial empires. The US attended the 1884 Berlin Congress, dividing Africa among European powers. Colony-less ‘latecomer’ Germany got Southwest Africa and Tanganyika, now Namibia and mainland Tanzania respectively.

Namibia’s Herero and Nama peoples revolted unsuccessfully against German occupation in 1904. General Lothar von Trotha then ordered “every Herero … shot”. Four-fifths of the Herero and half the Nama died!

Communities were surrounded, with many killed. Others were held, with many dying in concentration camps, or driven into the desert to die of starvation. In 1984, the UN Whitaker Report concluded the atrocities were among the worst 20th century genocides.

Asymmetric interdependence?
Europe’s post-Second World War recovery benefited immensely from their primary commodity exporting colonies. After the wartime devastation, European imperial powers relied on colonial currency arrangements for precious foreign exchange.

Imperial power also ensured captive colonial markets for uncompetitive post-war European manufactures. Recovery and competition brought down commodity prices, especially after the Korean War boom. For well over a century, such prices have declined against those for manufactures.

As decolonization became inevitable, French politicians promoted the notion of ‘Eurafrica’, mimicking the US Monroe Doctrine’s claim to Latin America. French elite discourse insisted African independence should be defined by (asymmetric) ‘interdependence’, not ‘sovereignty’.

Although Germany lost its few colonies in Africa after losing the First World War, the influential West German Die Welt wondered wistfully in 1960, “Is Africa getting away from Europe?”

From decolonization to Cold War
The US was the first nation to recognize Belgian King Leopold II’s personal claim to the Congo River basin in 1884. When Leopold’s brutal atrocities and exploitation of his private Congo Free State domain, killing millions, could no longer be denied, other European powers forced Belgium to directly colonize the country!

Since then, the US has shaped the Congo’s destiny. The US has been keenly interested in its massive mineral resources. Congolese uranium, the richest in the world, was used in the Hiroshima and Nagasaki nuclear bombs. But Washington would not allow Africans control of their own strategic materials.

Patrice Lumumba became the first elected prime minister of the Democratic Republic of the Congo (DRC). An advocate of pan-African economic independence, his wish for genuine independence and sovereign control of DRC resources threatened powerful interests.

Lumumba was brutally humiliated, tortured and murdered in January 1961. The shameful assassination involved both US and Belgian governments which collaborated with Lumumba’s Congolese rivals.

Struggling to stand up
Pan-Africanist leader Kwame Nkrumah wanted independent Ghana to chart an ‘anti-imperialist’ path, staying non-aligned in the Cold War. He wanted hydroelectric dams to power Ghana’s industrial progress, beginning by smelting its bauxite to develop an aluminium value chain.

The US, UK and World Bank agreed to finance the Akosombo Dam, on condition it provided cheap energy to a Kaiser Aluminium subsidiary to process alumina for export to Kaiser. This arrangement was only rescinded decades later, early this century.

Ghana made technical cooperation agreements with the Czechs and Soviets to build two other dams. But both were ended after Nkrumah was overthrown in a military coup abetted by Washington in February 1966. Thus, Nkrumah’s development ambitions for Ghana were killed.

A scaled-down Bui dam was finally built by Chinese contractors decades later. Nkrumah’s 1965 book, Neo-colonialism: The Last Stage of Imperialism, was probably the final straw in embarrassing the West.

Elsewhere, Tanzania’s Julius Nyerere’s Ujamaa ‘African socialism’ focused on developing villages and food security. Western antagonism ensured Ujamaa’s failure, while his efforts were harshly condemned to deter other Africans from trying to chart their own paths.

Meanwhile, Nyerere’s pro-Western contemporaries were supported by the West. Such countries, e.g., neighbouring Kenya and Uganda, received much more Western aid although their development records have not been much better.

A luta continua
At independence, Zambia had no universities, with only 0.5% completing primary education. The country’s copper mines were mostly in British hands. Most people survived on limited land for the villagers, without electricity and other amenities.

Hemmed in by Western-supported racist states, President Kenneth Kaunda – a devout Christian – sought foreign help to bypass hostile South Africa and Rhodesia (now Zimbabwe) to change the landlocked nation’s fate.

After the US and World Bank refused to help, he reached out to the Soviet bloc and China. China built a $500 million railway linking Zambia to the Indian Ocean through Tanzania.

Côte d’Ivoire has long been a major producer of cocoa and coffee. But three decades of misrule by its pro-Western founding father, Felix Houphouet-Boigny, ensured endemic poverty and stark inequalities, culminating in civil war.

In 2020, almost 40% of its people lived in ‘extreme poverty’. In 2019, the middle-income country’s human development index score was a low 0.538, which dropped to 0.346, when adjusted for inequality.

Both Kaunda and Houphouet-Boigny later abandoned their early, more neo-colonial policies. Zambia nationalized copper mines, hoping to improve living conditions, instead of enriching foreign investors.

Meanwhile, Ivorian cocoa was withheld to secure better prices. But both efforts failed, as copper and cocoa prices collapsed. Thus, both nations were severely punished for trying to better their fates.

Non-alignment best
During the first Cold War, Western hostility to African aspirations forced many to turn to the ‘socialist camp’ to build infrastructure and develop human resources. Washington then was as concerned with economic gain as countering ‘Reds’.

The Kennedy administration had increased foreign aid, urging allies to do likewise. But instead of supporting African aspirations, the West pursued its own economic interests while claiming to support post-colonial aspirations.

Increasing African government indebtedness over the 1970s forced many to accept structural adjustment programme policy conditions imposed by international financial institutions from the 1980s. Of course, developing countries following International Monetary Fund (IMF) and World Bank prescriptions became Western darlings.

Nyerere observed: “The IMF … makes conditions and says, ‘if you follow these examples, your economy will improve’. But where are the examples of economies booming in the Third World because they accepted the conditions of the IMF?”

Cold War considerations have also meant US interest in Africa has waxed and waned. Now, the West warns of imminent Chinese ‘take-overs’ and nefarious Russian designs. China seems more interested in financing and building infrastructure, while Putin promotes Russian exports.

Neglected by the US after the first Cold War until its 21st century African initiatives, including Africom, African nations have increasingly welcomed alternatives to the West, albeit somewhat warily.

Together, the world can help Africa progress. But if support for the long cruelly exploited continent remains hostage to new Cold War considerations, Africans will choose accordingly. Non-alignment is now the pan-African choice.

IPS UN Bureau

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As rich countries raise interest rates in double-edged efforts to address inflation, developing countries are struggling to cope with slowdowns, inflation, higher interest rates and other costs, plus growing debt distress.

Rich countries’ interest rate hikes have triggered capital outflows, currency depreciations and higher debt servicing costs. Developing country woes have been worsened by commodity price volatility, trade disruptions and less foreign exchange earnings.

Anis Chowdhury

Developing countries’ external debt has risen since the 2008-09 global financial crisis (GFC) – from $2 trillion (tn) in 2000 to $3.4tn in 2007 and $9.6tn in 2019! External debt’s share of GDP fell from 33.1% in 2000 to 22.8% in 2008. But with sluggish growth since the GFC, it rose to 30% in 2019, before the pandemic.

The pandemic pushed up developing countries’ external debt to $10.6tn, or 33% of GDP in 2020, the highest level on record. The external debt/GDP ratio of developing countries other than China was 44% in 2020.

Borrowing from international capital markets accelerated after the GFC as interest rates fell. But commercial debt is generally of shorter duration, typically less than ten years. Private lenders also rarely offer restructuring or refinancing options.

Lenders in international capital markets charge developing countries much higher interest rates, ostensibly for greater risk. But changes in public-private debt composition and associated costs have made such debt riskier.

Private short-term debt’s share rose from 16% of total external debt in 2000 to 26% in 2020. Meanwhile, international capital markets’ share of public external debt rose from 43% to 62%. Also, much corporate debt, especially of state-owned enterprises, is government-guaranteed.

Meanwhile, unguaranteed private debt now exceeds public debt. Although private debt may not be government-guaranteed, states often have to take them on in case of default. Hence, such debt needs to be seen as potential contingent government liabilities.

Jomo Kwame Sundaram

Private borrowings for less than ten years were 60% of Lankan debt in April 2021. The average interest rate on commercial loans in January 2022 was 6.6% – more than double the Chinese rate. In 2021, Lankan interest payments alone came to 95.4% of its declining government revenue!

Commercial debt – mostly Eurobonds – made up 30% of all African external borrowings with debt to China at 17%. Zambian commercial debt rose from 1.6% of foreign borrowings in 2010 to 30% in 2018; 57% of Ghana’s foreign debt payments went to private lenders, with Eurobonds getting 60% of Nigeria’s and over 40% of Kenya’s.

More commercial borrowing
Thus, external debt increasingly involved more speculative risk. Public bond finance, foreign debt’s most volatile component, rose relative to commercial bank loans and other private credit. Meanwhile, more stable and less onerous official credit has declined in significance.

Various factors have made things worse. First, most rich countries have failed to make their promised annual aid disbursements of 0.7% of their gross national income, made more than half a century ago.

Worse, actual disbursements have actually declined from 0.54% in 1961 to 0.33% in recent years. Only five nations have consistently met their 0.7% promise. In the five decades since promising, rich economies have failed to deliver $5.7tn in aid!

Second, the World Bank and donors have promoted private finance, urging ‘public-private partnerships’ and ‘blended finance’ in “From billions to trillions: converting billions of official assistance to trillions in total financing”.

Sustainable development outcomes of such private financing – especially in promoting poverty reduction, equity and health – have been mixed at best. But private finance has nonetheless imposed heavy burdens on government budgets.

Third, since the GFC, developed economies have resorted to unconventional monetary policies – ‘quantitative easing’, with very low or even negative real interest rates. With access to cheap funds, managers seeking higher returns invested lucratively in emerging markets before the recent turnaround.

Large investment funds and their collaborators, e.g., credit rating agencies, have profitably created new means to get developing countries to float more bonds to raise funds in international capital markets.

Making things worse
Policy advice from donors and multilateral development banks (MDBs), rating agencies’ biases and the lack of an orderly and fair sovereign debt restructuring mechanism have shaped commercial lending practices.

Favouring private market solutions, donors, MDBs and the IMF have discouraged pro-active development initiatives for over four decades. Hence, many developing countries remain primary producers with narrow export bases and volatile earnings.

They have urged debilitating reforms, e.g., arguing tax cuts are necessary to attract foreign direct investment (FDI). Meanwhile, corporate tax evasion and avoidance have worsened developing countries’ revenue losses. Thus, net revenue has fallen as such reforms fail to generate enough growth and revenue.

Credit rating agencies often assess developing countries unfavourably, raising their borrowing costs. Quick to downgrade emerging markets, they make it costlier to get financing, even if economic fundamentals are sound.

The absence of orderly and fair debt restructuring mechanisms has not helped. Commercial lenders charge higher interest rates, ostensibly for default risks. But then, they refuse to refinance, restructure or provide relief, regardless of the cause of default.

When will we learn?
Following the 1970s’ oil price hikes, western, especially US banks were swimming in liquidity as oil exporters’ dollar reserves swelled. These banks pushed debt, getting developing country governments to borrow at low real interest rates.

After the US Fed began raising interest rates from 1977 to fight inflation, other major central banks followed, raising countries’ debt service burdens. Ensuing economic slowdowns cut commodity exporters’ earnings.

In the past, the IMF and World Bank imposed ‘one-size-fits-all’ ‘stabilization’ and ‘structural adjustment’ measures, impairing development. Developing countries had to implement severe austerity measures, liberalization and privatization. As real incomes declined, progress was set back.

With the pandemic, developing countries have seen massive capital outflows, more than in 2008. Meanwhile, surging food, fertilizer and fuel prices are draining developing countries’ foreign exchange earnings and reserves.

As the US Fed raises interest rates, capital flight to Wall Street is depreciating other currencies, raising import costs and debt burdens. Thus, many countries need financial help.

Debt-distressed countries once again seek support from the Washington-based lenders of last resort. But without enough debt relief, a temporary liquidity crisis threatens to become a debt sustainability, and hence, a solvency crisis, as in the 1980s.

IPS UN Bureau

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Most sub-Saharan African French colonies got formal independence in the 1960s. But their economies have progressed little, leaving most people in poverty, and generally worse off than in other post-colonial African economies.

Decolonization?
Pre-Second World War colonial monetary arrangements were consolidated into the Colonies Françaises d’Afrique (CFA) franc zone set up on 26 December 1945. Decolonization became inevitable after France’s defeat at Dien Bien Phu in 1954 and withdrawal from Algeria less than a decade later.

Anis Chowdhury

CFA countries are now in two currency unions. Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo belong to UEMOA, the French acronym for the West African Economic and Monetary Union.

Its counterpart CEMAC is the Economic and Monetary Community of Central Africa, comprising Cameroon, the Central African Republic, the Republic of the Congo, Gabon, Equatorial Guinea and Chad.

Both UEMOA and CEMAC use the CFA franc (FCFA). Ex-Spanish colony, Equatorial Guinea, joined in 1985, one of two non-French colonies. In 1997, former Portuguese colony, Guinea-Bissau was the last to join.

Such requirements have ensured France’s continued exploitation. Eleven of the 14 former French West and Central African colonies remain least developed countries (LDCs), at the bottom of UNDP’s Human Development Index (HDI).

French African colonies
Guinea was the first to leave the CFA in 1960. Before fellow Guineans, President Sékou Touré told President Charles de Gaulle, “We prefer poverty in freedom to wealth in slavery”.

Guinea soon faced French destabilization efforts. Counterfeit banknotes were printed and circulated for use in Guinea – with predictable consequences. This massive fraud brought down the Guinean economy.

Jomo Kwame Sundaram

Ex-French espionage documentation service (SDECE) head Maurice Robert later acknowledged, “France launched a series of armed operations using local mercenaries, with the aim of developing a climate of insecurity and, if possible, overthrow Sékou Touré”.

In 1962, French Prime Minister Georges Pompidou warned African colonies considering leaving the franc zone: “Let us allow the experience of Sékou Touré to unfold. Many Africans are beginning to feel that Guinean politics are suicidal and contrary to the interests of the whole of Africa”.

Togo independence leader, President Sylvanus Olympio was assassinated in front of the US embassy on 13 January 1963. This happened a month after he established a central bank, issuing the Togolese franc as legal tender. Of course, Togo remained in the CFA.

Mali left the CFA in 1962, replacing the FCFA with the Malian franc. But a 1968 coup removed its first president, radical independence leader Modibo Keita. Unsurprisingly, Mali later re-joined the CFA in 1984.

Resource-rich
The eight UEMOA economies are all oil importers, exporting agricultural commodities, such as cotton and cocoa, besides gold. By contrast, the six CEMAC economies, except the Central African Republic, rely heavily on oil exports.

CFA apologists claim pegging the FCFA to the French franc, and later, the euro, has kept inflation low. But lower inflation has also meant “slower per capita growth and diminished poverty reduction” than in other African countries.

The CFA has “traded decreased inflation for fiscal restraint and limited macroeconomic options”. Unsurprisingly, CFA members’ growth rates have been lower, on average, than in non-CFA countries.

With one of Africa’s highest incomes, petroleum producer Equatorial Guinea is the only CFA country to have ‘graduated’ out of LDC status, in 2017, after only meeting the income ‘graduation’ criterion.

Its oil boom ensured growth averaging 23.4% annually during 2000–08. But growth has fallen sharply since, contracting by -5% yearly during 2013–21! Its 2019 HDI of 0.592 ranked 145 of 189 countries, below the 0.631 mean for middle-ranking countries.

Poor people
With over 70% of its population poor, and over 40% in ‘extreme poverty’, inequality is extremely high in Equatorial Guinea. The top 1% got over 17% of pre-tax national income in 2021, while the bottom half got 11.5%!

Four of ten 6–12 year old children in Equatorial Guinea were not in school in 2012, many more than in much poorer African countries. Half the children starting primary school did not finish, while less than a quarter went on to middle school.

CFA member Gabon, the fifth largest African oil producer, is an upper middle-income country. With petroleum making up 80% of exports, 45% of GDP, and 60% of fiscal revenue, Gabon is very vulnerable to oil price volatility.

One in three Gabonese lived in poverty, while one in ten were in extreme poverty in 2017. More than half its rural residents were poor, with poverty three times more there than in urban areas.

Côte d’Ivoire, a non-LDC CFA member, enjoyed high growth, peaking at 10.8% in 2013. With lower cocoa prices and Covid-19, growth fell to 2% in 2020. About 46% of Ivorians lived on less than 750 FCFA (about $1.30) daily, with its HDI ranked 162 of 189 in 2019.

CFA’s neo-colonial role
Clearly, the CFA “promotes inertia and underdevelopment among its member states”. Worse, it also limits credit available for fiscal policy initiatives, including promoting industrialization.

Credit-GDP ratios in CFA countries have been low at 10–25% – against over 60% in other Sub-Saharan African countries! Low credit-GDP ratios also suggest poor finance and banking facilities, not effectively funding investments.

By surrendering exchange rate and monetary policy, CFA members have less policy flexibility and space for development initiatives. They also cannot cope well with commodity price and other challenges.

The CFA’s institutional requirements – especially keeping 70% of their foreign exchange with the French Treasury – limit members’ ability to use their forex earnings for development.

More recent fiscal rules limiting government deficits and debt – for UEMOA from 2000 and CEMAC in 2002 – have also constrained policy space, particularly for public investment.

The CFA has also not promoted trade among members. After six decades, trade among CEMAC and UEMOA members averaged 4.7% and 12% of their total commerce respectively. Worse, pegged exchange rates have exacerbated balance of payments volatility.

Unrestricted transfers to France have enabled capital flight. The FCFA’s unlimited euro convertibility is supposed to reduce foreign investment risk in the CFA. However, foreign investment is lower than in other developing countries.

Total net capital outflows from CFA countries during 1970–2010 came to $83.5 billion – 117% of combined GDP! Capital flight from CFA economies was much more than from other African countries during 1970–2015.

IPS UN Bureau

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After four years of Trump’s ‘America first’ isolationism, US President Joe Biden announced “America is back”. His White House has since tried to find allies against China and Russia.

But it has not found many, especially in the Global South. His summit with Southeast Asian leaders was well attended, but promised little. Worse, his Summit of the Americas revealed fading US influence in its long-time backyard.

Anis Chowdhury

Biden’s strategy explicitly seeks to “counter harmful activities” by China and Russia, and “to expose and highlight the risks of negative PRC and Russian activities in Africa”. But it offers no evidence of such threats.

It asserts China “sees the region as an important arena to challenge the rules-based international order, advance its own narrow commercial and geopolitical interests, undermine transparency and openness”.

Similarly, it insists “Russia views the region as a permissive environment for parastatals and private military companies, often fomenting instability for strategic and financial benefit.”

Presenting Biden’s SSA strategy in South Africa (SA), US Secretary of State Anthony Blinken claimed, “Our commitment to a stronger partnership with Africa is not about trying to outdo anyone else”. He emphasized, “our purpose is not to say you have to choose”.

While “glad” the US was not forcing Africa to choose, SA foreign minister Naledi Pandor reminded the Blinken mission no African country can be “bullied” or threatened thus: “either you choose this or else.” The host also reminded her guests of the plight of the Palestinian people and life under apartheid.

Jomo Kwame Sundaram

Pandor described the US Congressional bill, ‘Countering Malign Russian Activities in Africa Act’ as “offensive legislation”. The bill, the 2021 Strategic Competition Act and the US Innovation and Competition Act have all been criticized by Africans, including governments, as “Cold War-esque”.

Calling for diplomacy, not war, Pandor urged, “African countries that wish to relate to China, let them do so, whatever the particular form of relationships would be.”

US credibility in doubt
Biden’s SSA strategy has four explicit objectives – foster openness and open societies, deliver democratic and security dividends, advance pandemic recovery and economic opportunity, and support conservation, climate adaptation, and a just energy transition.

The US strategy paper refers to the 2022 G7 Partnership for Global Infrastructure and Investment (PGII) promising $600bn. Confident the PGII will “advance U.S. national security”, the White House has pledged $200bn “to deliver game-changing projects to strengthen economies”.

After all, the 2005 G7 Gleneagles Summit promise – to double aid by 2010, with $50bn yearly for Africa – remains unfulfilled. Actual aid has been woefully short, with no transparent reporting or accountability.

Over half a century ago, rich nations promised 0.7% of their national income in development aid. The US has long ranked lowest among the G7, spending only 0.18% in 2021. Worse, US aid effectiveness is worst among the world’s 27 wealthiest nations.

Meanwhile, rich countries have fallen far short of their 2009 pledges to provide $100bn in climate finance annually until 2020 to help developing countries adapt to and mitigate global warming.

After his stillborn Build Back Better World initiative, many doubt how much Congress will approve, and what will be for SSA. Likewise, before mid-2021, the Biden administration promised support for pandemic containment.

But it did not support developing countries’ request to the World Trade Organization (WTO) for a temporary waiver of related patents. The June 2022 WTO compromise was nothing less than “shameful”.

Supplies of Covid pandemic needs from China and Russia have been decried as “vaccine diplomacy”. Sanctions against Russia have disrupted contracted delivery of 110 million doses of its vaccine. This jeopardizes UNICEF efforts to vaccinate many countries, including Zambia, Uganda, Somalia and Nigeria.

With 43.87 vaccine doses per 100 people – less than a third of the 157.71 world average, or under a quarter of the US mean of 183 doses per 100 people – Africa had the lowest Covid-19 vaccination rate, by far, in mid-August 2022.

The SSA strategy paper highlights US-Africa HIV-AIDS partnerships. But it is silent about Big Pharma getting a US sanctions threat against SA for producing generic HIV-AIDS drugs. The US only backed down after a worldwide backlash as Nelson Mandela stood firm.

West still exploiting Africa
Biden’s SSA strategy promises to “engage with African partners to expose and highlight the risks of negative PRC and Russian activities in Africa” in line with the US 2022 National Defense Strategy.

But it ignores why Africa remains underdeveloped and poor. After all, Africa has around 30% of the world’s known mineral reserves, and 60% of its arable land. Yet, 33 of its 54 nations are deemed least developed countries.

The New Colonialism report showed British companies control Africa’s key mineral resources, with 101 mostly UK companies listed on the London Stock Exchange having mining operations in 37 SSA countries.

Together, they controlled over a trillion dollars’ worth, while $192 billion is drained yearly from Africa via profit transfers and tax dodging by foreign companies.

France retains control of its former colonies’ monetary systems, requiring them to deposit foreign exchange reserves with the French Treasury. It has never hesitated to topple ‘unfriendly’ governments through coups and its military.

Recently, the US promised to continue providing intelligence, surveillance and reconnaissance support on Africa to France, using its advanced drone and satellite technology.

As ex-colonial powers continue to control and exploit SSA, policies imposed by donors, the International Monetary Fund and multilateral development banks have ensured its continuing underdevelopment and impoverishment.

Once a net food exporter, Africa has become a net food importer. With more pronounced Washington Consensus policies since the 1980s, food insecurity has worsened. SSA has also deindustrialized, making it more resource dependent and vulnerable to international commodity price volatility.

Forget the past?
Many Africans have suffered much due to colonialism, racism, apartheid and other oppressions. Pan-Africanism contributed much to the non-aligned movement during the old Cold War. Julius Nyerere famously declared in 1965, “We will not allow our friends to choose our enemies”.

Half a century later, Mandela reminded the West not to presume its “enemies should be our enemies”. Older Africans still remember the former Soviet Union and China for their support through past struggles, when most of the West remained on the wrong side of history.

Africans are correctly wary of the new “Greeks bearing gifts” and promises. While most do not want a new Cold War, many see China and Russia offering more tangible benefits. Unsurprisingly, 25 of Africa’s 54 states did not support the March 2022 UN General Assembly resolution condemning Russia’s invasion of Ukraine.

IPS UN Bureau

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Half a century after the 1970s’ stagflation, economies are slowing, even contracting, as prices rise again. Thus, the World Bank warns, “Surging energy and food prices heighten the risk of a prolonged period of global stagflation reminiscent of the 1970s.”

In March, Reuters reported, “With surging oil prices, concerns about the hawkishness of the Federal Reserve and fears of Russian aggression in Eastern Europe, the mood on Wall Street feels like a return to the 1970s”.

Anis Chowdhury

When growth is weak and many are jobless, prices rarely rise, keeping inflation low. The converse is true when growth is strong. This inverse relationship between economic activity and inflation broke down with supply shocks, particularly oil and other primary commodity price surges during 1972-75.

Non-oil primary commodity prices on The Economist index more than doubled between mid-1972 and mid-1974. Prices of some commodities, e.g., sugar and urea fertilizer, rose more than five-fold!

As costlier energy pushed up production expenses, businesses raised prices and cut jobs. With higher food, fuel and other prices, rising costs, coupled with income losses, reduced aggregate demand, further slowing the economy.

Fed chokes economy to cut inflation
Years before becoming US Fed chair in 2006, a Ben Bernanke co-authored paper noted, “Looking more specifically at individual recessionary episodes associated with oil price shocks, we find that … oil shocks, per se, were not a major cause of these downturns”.

Jomo Kwame Sundaram

Following Milton Friedman and Anna Schwartz, other economists also found “in the postwar era there have been a series of episodes in which the Federal Reserve has in effect deliberately attempted to induce a recession to decrease inflation”.

The US Fed began raising interest rates from 1977, inducing an American economic recession in 1980. The economy briefly turned around when the Fed stopped raising interest rates. But this nascent recovery soon ended as Fed chair Paul Volcker raised interest rates even more sharply.

The federal funds target rate rose from around 10% to nearly 20%, triggering an “extraordinarily painful recession”. Unemployment rose to nearly 11% nationwide – the highest in the post-war era – and as high as 17% in some states, e.g., Michigan, leaving long-term scars.

Interest rate hikes reduced needed investments. Outside the US economy, these sharp and rapid interest rate hikes triggered debt crises in Poland, Latin America, sub-Saharan Africa, South Korea and elsewhere.

Earlier open economic policies meant “the increase in world interest rates, the increased debt burden of developing countries, the growth slowdown in the industrial world…contributed to the developing countries’ stagnation”.

Countries seeking International Monetary Fund (IMF) financial support had to agree to severe fiscal austerity, liberalization, deregulation and privatization policy conditionalities. With per capita incomes falling and poverty rising, Latin America and Africa “lost two decades”.

Stagflation reprise
The IMF chief economist recently reiterated, “Inflation is a major concern”. The Bank of International Settlements has warned, “We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched.”

Central bankers’ anti-inflationary efforts mainly involve raising interest rates. This approach slows economies, accelerating recessions, often triggering debt crises without quelling rising prices due to supply shocks.

Economic recoveries from the 2008-09 global financial crisis (GFC) remained tepid for a decade after initially bold fiscal responses were quickly abandoned. Meanwhile, ‘quantitative easing’, other unconventional monetary policies and the Covid-19 pandemic raised debt to unprecedented levels.

GFC trade protectionist responses, US and Japanese ‘reshoring’ of foreign investment in China, the pandemic, the Ukraine war and sanctions against Russia and its allies have reversed earlier trade liberalization.

Higher interest rates in the rich North have triggered capital flight, causing developing country currencies to depreciate, especially against the US dollar. The slowing world economy has reduced demand for many developing country exports, while most migrant worker remittances decline.

Interest rate hikes have worsened debt crises, particularly in the global South. The poorest countries have seen an $11bn surge in debt payments due while grappling with looming food crises. Thus, developing country vulnerabilities have been worsened by international trends over which they have little control.

Lessons not learned
Supply-side cost-push inflation is very different from the demand-pull variety. Without evidence, inflation ‘hawks’ insist that not acting urgently will be costlier later.

This may happen if surging demand is the main cause of inflation, especially if higher costs are easily passed on to consumers. However, episodes of dangerously accelerating inflation are very rare.

Acting too quickly against supply-shock inflation can be unwise. The 1970s’ energy crises sparked greater interest in energy efficiency. But higher interest rates in the 1980s deterred needed investments, even to reverse declining or stagnating productivity growth.

Raising interest rates also accelerated recessions. But similar commodity price rises before the 1970s’ and imminent stagflation episodes – involving energy and food respectively – obscure major differences.

For instance, ‘wage indexing’ – linking wage increases to price rises – enhanced the 1970s’ inflation spiral. But labour market deregulation since the 1980s has largely ended such indexation.

The IMF acknowledges globalization, ‘offshoring’ and labour-saving technical change have weakened unionization and workers’ bargaining power. With both elements of the 1970s’ wage-price spirals now insignificant, inflation is more likely to decline once supply bottlenecks ease.

But the wage-price spiral has also been replaced by a profit-price swirl. Reforms since the 1980s have also enhanced large corporations’ market power. Greater corporate discretion and reduced employees’ strength have thus increased profit shares, even during the pandemic.

In November 2021, Bloomberg observed the “fattest profits since 1950 debunks wage-inflation story of CEOs”. Meanwhile, the Guardian found “Companies’ profit growth has far outpaced workers’ wages”.

Corporations are taking advantage of the situation, passing on costs to customers. The net profits of the top 100 US corporations were “up by a median of 49%, and in one case by as much as 111,000%”!

Meanwhile, many more consumers struggle to meet their basic needs. Interest rate hikes have also hurt wage-earners, as falling labour shares of national income have been exacerbated by real wage stagnation, even contraction.

Hence, policymakers should ease supply bottlenecks and address imbalances to accelerate progress, not raise interest rates causing the converse. Thus, they should rein in corporate power, improve competition and protect the vulnerable.

Allowing international price rises to pass through, while protecting the vulnerable, can accelerate the transition to more sustainable consumption and production, including cleaner renewable energy.

IPS UN Bureau

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Colonial-style currency board arrangements have enabled continuing imperialist exploitation decades after the end of formal colonial rule. Such neo-colonial monetary systems persist despite modest reforms.

In 2019, Italian Deputy Prime Minister Luigi Di Maio accused France of using currency arrangements to “exploit” its former African colonies, “impoverishing Africa” and causing refugees to “leave and then die in the sea or arrive on our coasts”.

Anis Chowdhury

The ostensible intent of the ‘Franc of the French Colonies of Africa’ (FCFA) was to cushion its colonies from the drastic French franc (FF) devaluation required to peg its value to the US dollar, as agreed at Bretton Woods.

Then French finance minister René Pleven claimed, “In a show of her generosity and selflessness, metropolitan France, wishing not to impose on her faraway daughters the consequences of her own poverty, is setting different exchange rates for their currency”.

In December 1958, the CFA franc became the ‘Franc of the Communauté Financière Africaine’ (still FCFA). In 1960, President Charles de Gaulle made CFA membership a pre-condition for French decolonization in West and Central Africa.

The CFA recently involved 14 mainly Francophone sub-Saharan African countries belonging to two currency unions, both using the CFA franc (FCFA): the West African Economic and Monetary Union (UEMOA) and the Economic and Monetary Community of Central Africa (CEMAC).

UEMOA comprises Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, while CEMAC includes Cameroon, the Central African Republic, Republic of Congo, Gabon, Equatorial Guinea and Chad.

Jomo Kwame Sundaram

First, France could pay for imports from CFA countries with its own currency, saving foreign exchange for other international obligations. This became especially advantageous when the FF was weak and unstable.

Second, the French Treasury often paid negative real interest rates for CFA reserves. Thus, CFA countries have been paying it to hold their foreign reserves! Investment income is then deployed as French aid to CFA countries in the form of loans to be repaid with interest!

But CFA countries themselves cannot use their own reserves as collateral to secure credit as these are held by the French Treasury. Thus, during the global financial crisis, they had to borrow, mainly from France, at commercial rates.

Third, by supplying FCFA at the fixed rate, seigniorage – the difference between the cost of issuing currency and its face value – has effectively accrued to France and, more recently, the European Central Bank.

For every euro so deposited, the FCFA equivalent is issued and made available to the depositing country. When France joined the euro in 1999, one euro fetched 6.55957 FFs, or 655.957 FCFA.

CFA economies have thus effectively ceded monetary sovereignty to the French Treasury. Unsurprisingly, France’s monetary control has served its own, rather than CFA members’ economic interests.

Fourth, French companies operating in the CFA have been able to freely repatriate funds without incurring any foreign exchange risk. Worse, when CFA countries have faced foreign exchange problems, France has made things worse!

CFA elites, French patrons
The CFA not only benefits France, but also elites in CFA countries. Their appetite for faux French lifestyles explains their preference for overvalued exchange rates.

The CFA also facilitates financial outflows, no matter how illicitly acquired, as long as they do not challenge the neo-colonial status quo. For decades, all manner of French governments have consistently backed these elites, typically supporting despotic rule.

When its interests in Africa have been threatened, France has unilaterally deployed combat troops and superior armaments, always insisting on its ‘legitimate’ right to do so.

France is alleged to be behind military coups and even assassinations of prominent personalities critical of its interests, policies and stratagems. On 13 January 1963, only two days after issuing its own currency, Togo President Sylvanus Olympio was killed in a coup.

In 1968, six years after withdrawing Mali from the CFA, its independence leader and first President, Modibo Keita was ousted in a coup after trying to develop its economy along more independent and progressive lines.

Plus ça change, plus c’est la même chose
When the CFA was first created in 1945, the colonies deposited 100% of their foreign exchange reserves in a special French Treasury ‘operating account’. This requirement was reduced to 65% from 1973 to 2005, and then to 50%, plus an additional 20% for daily foreign currency transactions or “financial liabilities”.

Thus, CFA states are still deprived of most of their foreign exchange earnings, retaining only 30%! Meanwhile, Banque de France holds 90% of CFA gold reserves, making it the world’s fourth largest holder of gold reserves.

The FCFA arrangement was supposed to end for UEMOA countries from 20 May 2020. While only six former French colonies in Central Africa formally remain in the CFA, the reform is less than meets the eye.

France remains UEMOA’s ‘financial guarantor’, appointing an ‘independent’ member to its central bank board. Meanwhile, the proposed West African ‘eco’ currency is still not yet in circulation, while the transfer of euro reserves from the French Treasury to the West African Central Bank has yet to happen.

After its creation, FCFA parity was set at 50 to one FF. On 12 January 1994, the FCFA was devalued by half, as demanded by the International Monetary Fund, with support from France. This followed problems due to commodity price slumps.

The devaluation shocked CFA economies as the FCFA’s value fell by half overnight! This pushed up prices of imported goods, including food, while increasing the FF’s purchasing power.

Meanwhile, eight FF devaluations between 1948 and 1986 against the US dollar and gold have also meant great losses to the value of CFA reserves. CFA countries have ostensibly benefitted from anchoring the FCFA to a supposedly stable FF. But in fact, the FF experienced a 70% cumulative devaluation over this period!

Less inflation, no development
CFA advocates also claim that pegging the West and Central African FCFA to the FF, and later the euro, has ensured less inflation than in other African countries. But CFA members “traded decreased inflation for fiscal restraint and limited macroeconomic options”.

The cost of lower inflation “has been slower per capita growth and diminished poverty reduction”. They have had lower growth, on average, than in non-CFA countries. Eleven of the 14 CFA member states are least developed countries at the bottom of UNDP’s Human Development Index.

The CFA has also limited credit for economic growth and industrialization. This has been seen in lower credit-GDP ratios of between 10% to 25% in CFA countries, against over 60% in other Sub-Saharan African countries. These lower ratios also reflect weak financial and banking sectors, unable to be effectively developmental.

The CFA has also not enhanced trade among members. After six decades, trade among CEMAC and UEMOA members averaged 4.7% and 12% of total trade respectively – much less than, say, ASEAN’s 23%. Low intra-CFA trade and pegged exchange rates have ensured persistent balance of payments imbalances.

The currency arrangement also encourages capital outflows. Aggregate net capital flight out of CFA countries during 1970-2010 averaged $83.5 billion, 117% of combined GDP! Unregulated capital transfers between CFA countries and France have enabled much more capital flight than elsewhere during 1970-2015.

No sovereignty, no development
Socialist Party President François Mitterrand was no less neo-colonial. He warned that without control of Africa, France would become irrelevant in the 21st century.

In January 2001, French President Jacques Chirac reputedly admitted, “While speaking of Africa, we must check our memory. We started draining the continent four and a half centuries ago with the slave trade. Next, we discovered their raw materials and seized them.

“Having deprived Africans of their wealth, we sent in our elites who destroyed their culture. Now, we are depriving them of their brains thanks to scholarships … [as] the most intelligent students do not go back to their countries … In the end, noticing that Africa is not in a good state … we are giving lectures”.

In 2008, Chirac reportedly noted, “We have to be honest and acknowledge that a big part of the money in our banks comes precisely from the exploitation of the African continent. Without Africa, France will slide down [to] the rank of a Third World power.”

Claiming to be from a different generation, President Emmanuel Macron promised to end such neo-colonial arrangements. Yet, at the 2017 G20 Summit, he patronizingly declared Africa’s problem “civilizational”.

Such neo-colonial condescension refuses to acknowledge France’s continued exploitation of its West and Central African ex-colonies. Clearly, CFA currency arrangements have limited their economic policy space and progress.

Colonial style exploitation has thus continued in Africa long after decolonization. Unsurprisingly, Chad President Idriss Deby declared, “we must have the courage to say there is a cord preventing development in Africa that must be severed”.

IPS UN Bureau

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Like so many others, Africans have long been misled. Alleged progress under imperialism has long been used to legitimize exploitation. Meanwhile, Western colonial powers have been replaced by neo-colonial governments and international institutions serving their interests.

‘Shithole’ pots of gold
US President Donald Trump’s “shitholes”, mainly in Africa, were and often still are ‘pots of gold’ for Western interests. From 1445 to 1870, Africa was the major source of slave labour, especially for Europe’s ‘New World’ in the Americas.

Anis Chowdhury

The ‘scramble for Africa’ from the late nineteenth century saw European powers racing to secure raw materials monopolies through direct colonialism. Western powers all greatly benefited from Africa’s plunder and ruin.

European divide-and-conquer tactics typically also had pliant African collaborators. Colonial powers imposed taxes and forced labour to build infrastructure to enable raw material extraction.

Racist ideologies legitimized European imperialism in Africa as a “civilizing mission”. Oxford-trained, former Harvard history professor Niall Ferguson – an unabashed apologist for Western imperialism – insists colonialism laid the foundations for modern progress.

Richest, but poorest and hungriest!
A recent blog asks, “Why is the continent with 60% of the world’s arable land unable to feed itself? … And how did Africa go from a relatively self-sufficient food producer in the 1970s to an overly dependent food importer by 2022?”

Deeper analyses of such uncomfortable African realities seem to be ignored by analysts influenced by the global North, especially the Washington-based international financial institutions. UNCTAD’s 2022 Africa report is the latest to disappoint.

Jomo Kwame Sundaram

With 30% of the world’s mineral resources and the most precious metal reserves on Earth, Africa has the richest concentration of natural resources – oil, copper, diamonds, bauxite, lithium, gold, tropical hardwood forests and fruits.

Yet, Africa remains the poorest continent, with the average per capita output of most countries worth less than $1,500 annually! Of 46 least developed countries, 33 are in Africa – more than half the continent’s 54 nations.

Africa remains the world’s least industrialized region, with only South Africa categorized as industrialized. Incredibly, Africa’s share of global manufacturing fell from about 3% in 1970 to less than 2% in 2013.

About 60% of the world’s arable land is in Africa. A net food exporter until the 1970s, the continent has become a net importer. Structural adjustment reform conditionalities – requiring trade liberalization – have cut tariff revenue, besides undermining import-substituting manufacturing and food security.

Sub-Saharan Africa accounts for 24% of the world’s hungry. Africa is the only continent where the number of undernourished people has increased over the past four decades. About 27.4% of Africa’s population was ‘severely food insecure’ in 2016.

In 2020, 281.6 million Africans were undernourished, 82 million more than in 2000! Another 46 million became hungry during the pandemic. Now, Ukraine sanctions on wheat and fertilizer exports most threaten Africa’s food security, in both the short and medium-term.

Structural adjustment
Many of Africa’s recent predicaments stem from structural adjustment programs (SAPs) much of Africa and Latin America have been subjected to from the 1980s. The Washington-based international financial institutions, the African Development Bank and all donors support the SAPs.

SAP advocates promised foreign direct investment and export growth would follow, ensuring growth and prosperity. Now, many admit neoliberalism was oversold, ensuring the 1980s and 1990s were ‘lost decades’, worsened by denial of its painfully obvious consequences.

Instead, ‘extraordinarily disadvantageous geography’, ‘high ethnic diversity’, the ‘natural resource curse’, ‘bad governance’, corrupt ‘rent-seeking’ and armed conflicts have been blamed. Meanwhile, however, colonial and neo-colonial abuse, exploitation and resource plunder have been denied.

While World Bank SAPs were officially abandoned in the late 1990s following growing criticism, replacements – such as Poverty Reduction Strategy Papers – have been like “old wine in new bottles”. Although purportedly ‘home-grown’, they typically purvey bespoke versions of SAPs.

With trade liberalization and greater specialization, many African countries are now more dependent on fewer export commodities. With more growth spurts during commodity booms, African economies have become even more vulnerable to external shocks.

Can the West be trusted?
Earlier, G7 countries reneged on their 2005 Gleneagles pledge – to give $25 billion more yearly to Africa to ‘Make Poverty History’ – within the five years they gave themselves. Since then, developed countries have delivered far less than the $100 billion of climate finance annually they had promised developing nations in 2009.

The Hamburg G20’s 2017 ‘Compact with Africa’ (CwA) promised to combat poverty and climate change effects. In fact, CwA has been used to promote the business interests of donor countries, particularly Germany.

Primarily managed by the World Bank and the International Monetary Fund, CwA has actually failed to deliver significant foreign investment, instead sowing confusion among participating countries.

Powerful Organization for Economic Cooperation and Development governments successfully blocked developing countries’ efforts at the 2015 Addis Ababa UN conference on financing for development for inclusive UN-led international tax cooperation and to stem illicit financial outflows.

Africa lost $1.2–1.4 trillion in illicit financial flows between 1980 and 2009 – about four times its external debt in 2013. This greatly surpasses total official development assistance received over the same period.

Africa must unite
Under Nelson Mandela’s leadership, Africa had led the fight for the ‘public health exception’ to international intellectual property law. Although Africa suffers most from ‘vaccine apartheid’, Western lobbyists blocked developing countries’ temporary waiver request to affordably meet pandemic needs.

African solidarity is vital to withstand pressures from powerful foreign governments and transnational corporations. African nations must also cooperate to build state capabilities to counter the neoliberal ‘good governance’ agenda.

Africa needs much more policy space and state capabilities, not economic liberalization and privatization. This is necessary to unlock critical development bottlenecks and overcome skill and technical limitations.

IPS UN Bureau

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Joining or ratifying dubious trade deals is supposed to offer miraculous solutions to recent lacklustre economic progress. Such naïve advocacy is misleading at best, and downright irresponsible, even reckless, at worst.

TPP ‘pivot to Asia’
US President Barack Obama’s ‘pivot to Asia’ after his 2012 re-election sought to check China’s sustained economic growth and technological progress. Its economic centrepiece was the Trans-Pacific Partnership (TPP).

Jomo Kwame Sundaram

The ITC report found projected TPP growth gains to be paltry over the long-term. Its finding was in line with the earlier 2014 findings of the Economic Research Service of the US Department of Agriculture.

Meanwhile, many US manufacturing jobs have been lost to corporations automating and relocating abroad. Worse, Trump’s rhetoric has greatly transformed US public discourse. Many Americans now blame globalization, immigration, foreigners and, increasingly, China for the problems they face.

Trump U-turn
The TPP was believed to be dead and buried after Trump withdrew the US from it immediately after his inauguration in January 2017. After all, most aspirants in the November 2016 election – including Hillary Clinton, once a TPP cheerleader – had opposed it in the presidential campaign.

Trump National Economic Council director Gary Cohn has accused presidential confidantes of ‘dirty tactics’ to escalate the trade war with China.

Cohn acknowledged “he didn’t quit over the tariffs, per se, but rather because of the totally shady, ratfucking way Commerce Secretary Wilbur Ross and economic adviser Peter Navarro went about convincing the president to implement them.”

Cohn, previously Goldman Sachs president, insisted it “was a terrible idea that would only hurt the US, and not extract the concessions from Beijing Trump wanted, or do anything to shrink the trade deficit.”

Anis Chowdhury

This was later rebranded the Comprehensive and Progressive TPP (CPTPP), with no new features to justify its ‘progressive’ pretensions. Following its earlier support for the TPP, the PIIE has been the principal cheerleader for the CPTPP in the West.

Although US President Joe Biden was loyal as Vice-President, he did not make any effort to revive Obama’s TPP initiative during his campaign, or since entering the White House. Apparently, re-joining the TPP is politically impossible in the US today.

Panning the Trump approach, Biden’s US Trade Representative has stressed, “Addressing the China challenge will require a comprehensive strategy and more systematic approach than the piecemeal approach of the recent past.” Now, instead of backing off from Trump’s belligerent approach, the US will go all out.

Favouring foreign investors
Rather than promote trade, the TPP prioritized transnational corporation (TNC)-friendly rules. The CPTPP did not even eliminate the most onerous TPP provisions demanded by US TNCs, but only suspended some, e.g., on intellectual property (IP). Suspension was favoured to induce a future US regime to re-join.

Onerous TPP provisions – e.g., for investor-state dispute settlement (ISDS) – remain. This extrajudicial system supersedes national laws and judiciaries, with secret rulings by private tribunals not bound by precedent or subject to appeal.

Lawyers have been advising TNCs on how to sue host governments for resorting to extraordinary COVID-19 measures since 2020. Most countries can rarely afford to incur huge legal costs fighting powerful TNCs, even if they win.

The Trump administration cited vulnerability to onerous ISDS provisions to justify US withdrawal from the TPP. Now, citizens of smaller, weaker and poorer nations are being told to believe ISDS does not pose any real threat to them!

After ratifying the CPTPP, TNCs can sue governments for supposed loss of profits due to policy changes – even if in the national or public interest, e.g., to contain COVID-19 contagion, or ensure food security.

Thus, supposed CPTPP gains mainly come from expected additional foreign direct investment (FDI) due to enhanced investor benefits – not more trade. This implies more host economy concessions, and hence, less net benefits for them.

Who benefits?
Those who have seriously studied the CPTPP agree it offers even fewer benefits than the TPP. After all, the main TPP attraction was access to the US market, now no longer a CPTPP member. Thus, the CPTPP will mainly benefit Japanese TNC exports subject to lower tariffs.

Unsurprisingly, South Korea and Taiwan want to join so that their TNCs do not lose out. China too wants to join, but presumably also to ensure the CPTPP is not used against it. However, the closest US allies are expected to block China.

The Soviet Union sought to join NATO in the 1950s before convening the Warsaw Pact to counter it. Russian President Vladimir Putin also tried to join NATO years after Vaclav Havel ended the Warsaw Pact and Boris Yeltsin dissolved the Soviet Union in 1991.

Unlike Northeast Asian countries, Southeast Asian economies seek FDI. But when foreign investors are favoured, domestic investors may relocate abroad, e.g., to ‘tax havens’ within the CPTPP, often benefiting from special incentives for foreign investment, even if ‘roundtrip’.

Stay non-aligned
The ‘pivot to Asia’ has become more explicitly military. As the new Cold War unfolds, foreign policy considerations – rather than serious expectations of significant economic benefits from the CPTPP – have become more important.

Trade protectionism in the North has grown since the 2008 global financial crisis. More recently, the pandemic has disrupted supply chains. With the new Cold War, the US, Japan and others are demanding their TNCs ‘onshore’, i.e., stop investing in and outsourcing to China, also hurting transborder suppliers.

Hence, net gains from joining the CPTPP – or from ratifying it for those who signed up in 2018 – are dubious for most, especially with its paltry benefits. After all, trade liberalization only benefits everyone when ‘winners’ compensate ‘losers’ – which neither the CPTPP nor its requirements do.

With big powers clashing in the new Cold War, developing countries should remain ‘non-aligned’ – albeit as appropriate for these new times. They should not take sides between the dominant West and its adversaries – led by China, the major trading partner, by far, for more and more countries.

IPS UN Bureau

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Long a means for powerful nations to influence developing countries, development finance has gained renewed significance in the new Cold War. Unlike during the US-Soviet Cold War, the rivalry now is between mixed market capitalist systems.

Development aid rivalry
After reneging repeatedly on development aid and climate finance promises, the G7 big rich nations dutifully lined up behind US President Biden’s Partnership for Global Infrastructure and Investment (PGII) at their 2022 Summit in Schloss Elmau, Germany.

Anis Chowdhury

The White House denounces BRI, claiming the PGII offers “values driven, high-quality, and sustainable infrastructure”. Hence, G7 funding is more likely to have strings attached, e.g., taking sides in the new Cold War.

A Chinese foreign ministry spokesman emphasized, “China continues to welcome all initiatives to promote global infrastructure development”, but insisted China is “opposed to pushing forward geopolitical calculations under the pretext of infrastructure construction or smearing the Belt and Road Initiative”.

US national security priority
At the 2021 G7 Summit, Biden had unveiled a similar Build Back Better World (B3W) initiative, insisting it would define the G7 alternative to China’s BRI. Based on his domestic Build Back Better (BBB) programme, B3W was soon ‘dead in the water’ when the Senate rejected BBB.

The White House’s claim that with the B3W, the “United States is rallying the world’s democracies to deliver for our people, meet the world’s biggest challenges, and demonstrate our shared values” has also been dropped from PGII.

Jomo Kwame Sundaram

At the EU-African Union Summit in February 2022, the EU announced €150bn financing for the Africa-Europe Investment Package, half the Global Gateway budget.

EU leaders have touted their Global Gateway, suggesting G7 initiatives should be not only complementary, but also mutually reinforcing. But the EU’s African priority is not necessarily shared by other G7 members.

EU funding of €135bn will be from the European Fund for Sustainable Development. The UK Clean Green Initiative, from the 2021 Glasgow Climate Summit, and Japan’s $65bn for regional connectivity may also not be additional.

Acknowledging scepticism about how much is new money, German Chancellor Olaf Scholz urged G7 members to present their pledges consistently to allay doubts about double-counting and the low grants share viz loans.

When the PGII was announced to replace the B3W, it “created significant confusion”. Making clear its purpose, the White House unequivocally asserted PGII will “advance U.S. national security”.

Far-fetched, risky, conditional
The G7 also urges using public money to leverage private sector funds. But such initiatives have previously failed to mobilize significant private funding – hardly inspiring hope of meeting the trillion-dollar financing gap.

The Economist has found blended finance – mixing public, charitable and private money – “starry-eyed” and “struggling to take off”. Even the International Monetary Fund (IMF) and World Bank warn public-private partnerships (PPPs) incur contingent fiscal risks.

Worse, PPPs distort national priorities, favour private investors and worsen debt crises. They have also not improved equity of access, reduced poverty or enhanced sustainability.

Developing country debt crises typically involve commercial loans or private sector money. For example, the 1980s’ Latin American debt crises were triggered by US Fed interest rate hikes to kill inflation.

Private sector loans usually involve higher interest rates and shorter repayment periods than loans from governments and multilateral development banks. Unsurprisingly, they lack equitable restructuring or refinancing mechanisms.

Ignoring yet another UN resolution, powerful nations disregard developing countries’ appeals for fair and orderly multilateral sovereign debt restructuring arrangements. Similarly, the West refuses to fix unfair trade, tax and other rules disadvantaging poorer countries.

Trust deficit
Over half a century ago, rich nations promised 0.7% of their gross national income (GNI) as development aid. But total overseas development assistance (ODA) from rich Organization for Economic Development and Cooperation (OECD) members has barely exceeded half the promised amount.

Worse, the share has actually declined from 0.54% in 1961, with only five nations consistently meeting their 0.7% commitment in many years. Oxfam estimated 50 years of unkept promises meant a $5.7 trillion aid shortfall by 2020!

At the 2005 Gleneagles Summit, G7 leaders pledged to double their aid by 2010, earmarking $50bn yearly for Africa. But actual delivery has been woefully short, with no transparent reporting or accountability.

Most development aid is neither transparent nor predictable. After some earlier progress in untying, aid is increasingly being ‘tied’ again – requiring recipients to implement donor projects or to buy from donor country suppliers – compromising effectiveness.

The US ranked lowest among the G7, giving only 0.18% in 2021. To make things worse, US aid effectiveness is worst among the world’s 27 wealthiest nations. Clearly, besides aid volume shortfalls, quality is also at issue.

The Syrian refugee crisis and Covid-19 pandemic have provided some recent pretexts to cut aid. Some powerful countries have turned to ‘creative accounting’, e.g., counting refugee settlement and ‘peace-keeping’ military operations costs as ODA.

Unsurprisingly, the UN Deputy Secretary-General is “deeply troubled over recent decisions and proposals to markedly cut” ODA to service Ukraine war impacts on refugees.

Controversies over what climate finance is ‘new and additional’ to ODA have not been resolved since the 1992 adoption of the UN Framework Convention on Climate Change at the Rio Earth Summit.

G7 countries also fell far short of rich countries’ 2009 pledge to annually give $100bn in climate finance until 2020 to help developing countries adapt to and mitigate global warming.

The OECD’s reported $79.6bn in climate finance in 2019 was the highest ever. But OECD estimates are much disputed – e.g., for double counting and including non-concessional commercial loans, ‘rolled-over’ loans and private finance.

Cooperation, not conflict
Although China is new to development finance, it is now among the world’s biggest development financiers. Following broken promises and duplicity, even betrayal, China’s significance has increased as OECD donor funding declined relatively.

China is now a bigger player in international development finance than the world’s six major multilateral financial institutions together. Many developing countries have few options but to engage with, if not rely on, China.

Undoubtedly, there are justifiable concerns over China’s development finance and practices. These have included adverse environmental impacts, poor transparency and a high share of commercial loans – even if at concessional rates.

In 2019, IMF Managing Director Christine Lagarde suggested the new BRI phase would “benefit from increased transparency, open procurement with competitive bidding, and better risk assessment in project selection”.

Lagarde approved of China’s new debt sustainability framework and green investment principles to evaluate BRI projects. She expected “BRI 2.0 … will be guided by a spirit of collaboration, transparency, and a commitment to sustainability that will serve all of its members well, both today and tomorrow”.

The new Cold War may well spur more healthy and peaceful rivalry, inadvertently improving development aid and prospects for developing countries.

IPS UN Bureau

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Rich country governments claim the high moral ground on climate action. But many deny their far greater responsibility for both historic and contemporary greenhouse gas (GHG) emissions, once acknowledged by the Kyoto Protocol.

Climate injustice
Worse, responsibility has not been matched by commensurate efforts, especially by the largest rich economies in the G7, which dominates the G20. Its continued control of international economic resources and policymaking blocks progress on climate justice.

Anis Chowdhury

On a per capita basis, the US and close allies – Saudi Arabia, the United Arab Emirates, Australia and Canada – produce more than a hundred times the planet-warming greenhouse gas (GHG) emissions of some African countries.

The African population produced about 1.1 metric tonnes of carbon (dioxide equivalent) emissions per person in 2019, under a quarter of the 4.7 tonnes global average. The US emitted 16.1 tonnes – nearly four times the global average.

GHG emissions accumulate over time and trap heat, warming the planet. The US has emitted over a quarter of all GHG emissions since the 1750s, while Europe accounts for 33%. By contrast, Africa, South America and India contributed about 3% each, while China contributed 12.7%.

Wealth inequalities worsen climate injustice. The world’s richest 5% were responsible for 37% of GHG emissions growth during 1990-2015, while the bottom half of the world’s population accounted for 7%!

Poor regions and people take the brunt of global warming. The tropical zone is much more vulnerable to rapid climate change. Most of these countries and communities bear little responsibility for the GHG emissions worsening global warming, but also have the least means to cope and protect themselves.

Thus, climate justice demands wealthy nations – most responsible for cumulative and current GHG emissions – not only reduce the harm they cause, but also help those with less means to cope.

Jomo Kwame Sundaram

The OECD club of rich countries has been criticized for exaggerating climate finance, but acknowledges, “Australia, Japan and the United States consider financing for high-efficiency coal plants as a form of climate finance.”

It reports climate finance of US$79.6bn in 2019, but these figures are hotly contested. However, ‘commercial credit’ is typically not concessional. But when it is, it implies official subsidies for “bankable”, “for profit” projects.

Many also doubt much of this funding is truly additional, and not just diverted (‘repurposed’) from other ends. Private finance also rarely goes where it is most needed while increasing debt burdens for borrowers.

Leading from behind
At the COP26 Climate Summit in Glasgow in November 2021, US President Joe Biden described climate change as “an existential threat to human existence” and pledged to cut US emissions by up to 51% by 2030.

Biden had claimed his ‘Build Back Better’ (BBB) package of proposed social and climate spending would be a cornerstone of restoring international trust in the US commitment to stem global warming.

At the G7 Summit in June 2021, Biden announced his vision of a “Build Back Better World” (B3W) would define the G7 alternative to China’s multitrillion USD Belt and Road Initiative (BRI).

All this was premised on US ability to lead from the front, with momentum growing once BBB became law. But his legislative package has stalled. Unable to attract the needed votes in the Senate, BBB is ‘dead in the water’.

Putting on a brave face, US Senate majority leader Chuck Schumer promises to bring the legislation to a vote early next year. But with their party’s declining political fortunes, likely ‘horse-trading’ to pass the bill will almost certainly further undermine Biden’s promises.

Meanwhile, breaking his 2020 campaign promise, Biden approved nearly 900 more permits to drill on public land in 2021, more than President Trump in 2017. While exhorting others to cut fossil fuel reliance, his administration is now urging US companies and allies to produce more, invoking Ukraine war sanctions.

Aid laggard
At COP26, Biden promised to help developing nations reduce carbon emissions, pledging to double US climate change aid. But even this is still well short of its proportionate share of the grossly inadequate US$100bn yearly rich nations had pledged in 2009 in concessional climate finance for developing countries.

Considering its national income and cumulative emissions, the US should provide at least US$43–50bn in climate finance annually. Others insist the US owes the developing world much more, considering their needs and damages due to US emissions, e.g., suggesting US$800bn over the decade to 2030.

In 2017-18, the US delivered US$10bn to the pledged US$100bn annual climate finance – less than Japan’s US$27bn, Germany’s US$20bn and France’s US$15bn, despite the US economy being larger than all three combined.

President Obama pledged US$3bn to the Green Climate Fund (GCF) – the UN’s flagship climate finance initiative – but delivered only US$1bn. Trump totally repudiated this modest pledge.

At the April 2021 Earth Day leaders’ summit, Biden vowed to nearly double Obama’s pledge to US$5.7bn, with US$1.5bn for adaptation. But even this amount is far short of what the US should contribute, given its means and total emissions.

After the European Commission president highlighted this in September 2021, Biden vowed to again double the US contribution to US$11.4bn yearly by 2024, boasting this would “make the US a leader in international climate finance”.

At COP26, the US cited this increased GCF promise to block developing countries’ call for a share of revenue from voluntary bilateral carbon trading. The US has also opposed developing countries’ call for a funding facility to help vulnerable nations cope with loss and damage due to global warming.

Worse, the US Congress has approved only US$1bn for international climate finance for 2022 – only US$387m more than in the Trump era. At that rate, it would take until 2050 to get to US$11.4bn. Unsurprisingly, Biden made only passing mention of climate and energy in his last State of the Union address.

IPS UN Bureau

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After decades of rejecting international tax cooperation under multilateral auspices, rich countries have finally agreed. But, by insisting on their own terms, progressive corporate income tax remains distant.

Tax avoidance and evasion by transnational corporations (TNCs) are facilitated by ‘tax havens’ – jurisdictions with very low ‘effective’ taxation rates. Intense competition among developing countries to attract foreign direct investment (FDI) makes things worse.

Anis Chowdhury

Minimal minimum rate
TNCs exploit legal loopholes to avoid or minimize tax liabilities. Such practices are referred to as ‘base erosion and profit shifting’ (BEPS).

Tax havens collectively cost governments US$500–600bn yearly in lost revenue. Low-income countries (LICs) will lose some US$200bn, more than the foreign aid, of around US$150bn, they receive annually.

Corporate income tax represents 15% of total tax revenue in Africa and Latin America, compared to 9% in OECD countries. Developing countries’ greater reliance on this tax means they suffer disproportionately more from BEPS.

A GMCTR requires TNCs to pay tax on their worldwide income. This discourages hiding profits in tax havens. The Independent Commission for the Reform of International Corporate Taxation (ICRICT) recommended a 25% GMCTR.

This 25% rate was around the current GDP-weighted average statutory corporate tax rate for 180 countries. Slightly below the OECD countries’ average, it is much less than the developing countries’ average. So, a GMCTR below 25% implies major revenue losses for most developing countries.

To reverse President Trump’s 2017 tax cut, the Biden administration proposed, in April 2021, to tax foreign corporate income at 21%. In June, the G7 agreed to a 15% GMCTR, endorsed by G20 finance ministers in July. This poor G7 rate is now sold as a “ground-breaking” tax deal.

Jomo Kwame Sundaram

The OECD also wants to distribute taxing rights and revenue by sales, and not where their goods and services are produced. Critics, including The Economist, have pointed out that large rich economies would gain most. Small and poor developing economies, particularly those hosting TNC production, will lose out.

The OECD proposals could reduce small developing economies’ (SDEs) tax bases by 3%, while four-fifths of the revenue would likely go to high income countries (HICs). Hence, developing countries prefer revenue distribution by contribution to production, e.g., employees, rather than sales.

Undemocratic inclusion
Developing countries have never had a meaningful say in international tax matters. G20 members should have asked multilateral organizations, such as the UN and the IMF, which the G7 dominated OECD has long blocked.

Instead, the G20 BEPS initiative asked the OECD to work out its rules. After decades of keeping developing countries out of tax governance, its compromise Inclusive Framework on BEPS (IF) promotes lop-sided international tax cooperation.

Developing countries were only involved “after the agenda had been set, the action points were agreed on, the content of the initiatives had been decided and the final reports were delivered”.

Developing countries have been allowed to engage with OECD and G20 members, supposedly “on an equal footing”, to develop some BEPS standards. To become an IF member, a country or jurisdiction must first commit to the BEPS outcome.

Thus, the non-OECD, non-G20 countries must enforce a policy framework they had little role in designing. Unsurprisingly, with little real choice or voice, the 15% GMCTR was agreed to, in October 2021, by 136 of the 141 IF members.

FDI vs taxes
The proposed OECD tax reforms are supposed to be implemented from 2023 or 2024. The United Nations Conference on Trade and Development (UNCTAD) Investment Division recognizes it will have major implications for international investment and investment policies affecting developing countries.

UNCTAD’s World Investment Report 2022, on International tax reforms and sustainable investment, offers guidance for developing country policymakers to navigate the complex new rules and to adjust their investment and fiscal strategies.

Committed to promoting investments in the real economy, especially by FDI, UNCTAD recognizes most developing countries lack the technical capacity to address the complex tax proposal. Implementing BEPS reports and related documents via legislation will be difficult, especially for LICs.

Existing investment treaty commitments also constrain fiscal policy reform. “The tax revenue implications for developing countries of constraints posed by international investment agreements (IIA) are a major cause for concern”, the Report notes.

Although tax regimes influence investment decisions, tax incentives are far from being the most important factor. Other factors – such as political stability, legal and regulatory environments, skills and infrastructure quality – are more significant.

Nonetheless, tax incentives have been important for FDI promotion. Such incentives inter alia include tax holidays, accelerated depreciation and ‘loss carry-forward’ provisions – reducing tax liability by allowing past losses to offset current profits.

With the GMCTR, many tax incentives will be less attractive to much FDI. Tax incentives will be affected to varying degrees, depending on their features. UNCTAD estimates productive cross-border investments could decline by 2%.

Hence, policymakers will need to review their incentives for both existing and new investors. The GMCTR may prevent developing countries from offering fiscal inducements to promote desired investments, including locational, sectoral, industry or even employment-creating incentives.

Investors rule
With generally lower rates, ‘top-up taxes’ could significantly augment SDEs’ revenue. Top-up taxes would apply to profits in any jurisdiction where the effective tax rate falls below the minimum 15% rate. This ensures large TNCs pay a minimum income tax in every jurisdiction where they operate.

However, host countries may be prevented by IIAs – especially Investor State Dispute Settlement (ISDS) provisions – from imposing ‘top-up taxes’. If so, they will be imposed by TNCs’ mainly rich ‘home countries’.

Thus, FDI-hosting countries would lose tax revenue without benefiting by attracting more FDI. Existing IIAs – of the type found in most developing countries – are likely to be problematic.

Hence, the GMCTR’s implications are very important for FDI promotion policies. Reduced competition from low-tax locations could benefit developing economies, but other implications may be more relevant.

As FDI competition relies less on tax incentives, developing countries will need to focus on other determinants, such as supplies of skilled labour, reliable energy and good infrastructure. However, many cannot afford the significant upfront financial commitments required to do so.

Many important details of reforms required still need to be clarified. Thus, developing countries must strengthen their cooperation and technical capabilities to more effectively negotiate GMCTR reform details. This is crucial to ‘cut losses’, to minimize the regressive consequences of this supposedly progressive tax reform.

IPS UN Bureau

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US-led sanctions are inadvertently undermining the dollar’s post-Second World War dominance. The growing number of countries threatened by US and allied actions is forcing victims and potential targets to respond pro-actively.

SWIFT strengthened dollar
The instant messaging system of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) informs users, both payers and payees, of payments made. Thus, it enables the smooth and rapid transfer of funds across borders.

Anis Chowdhury

Co-owned by more than 2,000 BFIs, it is run by the National Bank of Belgium, together with the G-10 central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and the US. Joint ownership was supposed to avoid involvement in geopolitical disputes.

Many parties use USD accounts to settle dollar-denominated transactions. Otherwise, banks of importing and exporting countries would need accounts in each other’s currencies in their respective countries in order to settle payments.

SWIFT abuse
US and allied – including European Union (EU) – sanctions against Russia and Belarus followed their illegal invasion of Ukraine. Created during the US-Soviet Cold War, SWIFT remains firmly under Western control. It is now used to block payments for Russian energy and agriculture exports.

But besides stopping income flows, it inadvertently erodes USD dominance. As sanctions are increasingly imposed, such actions intimidate others as well. While intimidation may work, it also prompts other actions.

This includes preparing for contingencies, e.g., by joining other payments arrangements. Such alternatives may ensure not only smoother, but also more secure cross-border financial transfers.

As part of US-led sanctions against the Islamic Republic, the EU stopped SWIFT services to Iranian banks from 2012. This blocked foreign funds transfers to Iran until a compromise was struck in 2016.

Jomo Kwame Sundaram

About 40% of worldwide cross-border payments are in USD. CHIPS settles US$1.8 trillion in claims daily. As all CHIPS members maintain US offices, they are subject to US law regardless of headquarters location or ownership.

Hence, over nearly two decades, CHIPS members like BNP Paribas, Standard Chartered and others have paid nearly US$13 billion in fines for Iran-related sanctions violations under US law!

Exorbitant privilege
The USD remains the currency of choice for international trade and foreign reserve holdings. Hence, the US has enjoyed an “exorbitant privilege” since World War Two after the 1944 Bretton Woods conference created the gold-based ‘dollar standard’ – set at US$35 for an ounce of gold.

With the USD remaining the international currency of choice, the US Treasury could pay low interest rates for bonds that other countries hold as reserves. It thus borrows cheaply to finance deficits and debt. Hence, it is able to spend more, e.g., on its military, while collecting less taxes.

Due to USD popularity, the US also profits from seigniorage, namely, the difference between the cost of printing dollar notes and their face value, i.e., the price one pays to obtain them.

In August 1971, President Nixon unilaterally ‘ended’ US obligations under the Bretton Woods international monetary system, e.g., to redeem gold for USD, as agreed. Soon, the fixed USD exchange rates of the old order – determining other currencies’ relative values – became flexible in the new ‘non-system’.

In the ensuing uncertainty, the US ‘persuaded’ Saudi King Feisal to ensure all oil and gas transactions are settled in USD. Thus, OPEC’s 1974 ‘petrodollar’ deal strengthened the USD following the uncertainties after the Nixon shock.

Nevertheless, countries began diversifying their reserve portfolios, especially after the euro’s launch in 1999. Thus, the USD share of foreign currency reserves worldwide declined from 71% in 1999 to 59% in 2021.

With US rhetoric more belligerent, dollar apprehension has been spreading. On 20 April 2022, Israel – a staunch US ally – decided to diversify its reserves, replacing part of its USD share with other major trading partners’ currencies, including China’s renminbi.

Sanction reaction
The EU decision to bar Iranian banks from SWIFT prompted China to develop its Cross-border Interbank Payment System (CIPS). Operational since 2015, CIPS is administered by China’s central bank. By 2021, CIPS had 80 financial institutions as members, including 23 Russian banks.

At the end of 2021, Russia held nearly a third of world renminbi reserves. Some view the recent Russian sanctions as a turning point, as those not entrenched in the US camp now have more reason to consider using other currencies instead.

After all, before seizing about US$300 billion in Russian assets, the US had confiscated about US$9.5 billion in Afghan reserves and US$342 million of Venezuelan assets.

Threatened with exclusion from SWIFT following the 2014 Crimea crisis, Russia developed its own SPFS (Financial Message Transfer System) messaging system. Launched in 2017, SPFS uses technology similar to SWIFT’s and CIPS’s.

Both CIPS and SPFS are still developing, largely serving domestic BFIs. By April 2022, most Russian banks and 52 foreign institutions from 12 countries had access to SPFS. Ongoing developments may accelerate their progress or merger.

The National Payments Corporation of India (NPCI) has its own domestic payments systems, RuPay. It clears millions of daily transactions among domestic BFIs, and can be used for cross-border transactions.

Sanctions cut both ways
Unsurprisingly, those not allied to the US want to change the system. Following the 2008-9 global financial crisis, China’s central bank head called for “an international reserve currency that is disconnected from individual nations”.

Meanwhile, China’s USD assets have declined from 79% in 2005 to 58% in 2014, presumably falling further since then. More recently, China’s central bank has been progressively expanding use of its digital yuan or renminbi, e-CNY.

With over 260 million users, its app is now ‘technically ready’ for cross-border use as no Western bank is needed to move funds across borders. Such payments for imports from China using e-CNY will bypass SWIFT, and CHIPS will not need to clear them.

Russia has long complained of US abuse of dollar hegemony. Moscow has tried to ‘de-dollarize’ by avoiding USD use in trade with other BRICS – i.e., Brazil, India, China and South Africa – and in its National Wealth Fund holdings.

Last year, Vladimir Putin warned the US is biting the hand feeding it, by undermining confidence in the US-centric system. He warned, “the US makes a huge mistake in using dollar as the sanction instrument”.

The scope of US financial payments surveillance and USD payments will decline, although not immediately. Thus, Western sanctions have unwittingly accelerated erosion of US financial hegemony.

Besides worsening stagflationary trends, such actions have prompted its targets – current and prospective – to take pre-emptive, defensive measures, with yet unknown consequences.

IPS UN Bureau

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Food crises, economic stagnation and price increases are worsening unevenly, almost everywhere, following the Ukraine war. Sanctions against Russia have especially hurt those relying on wheat and fertilizer imports.

Unilateral sanctions illegal
Unilateral sanctions – not approved by the UN Security Council – are illegal under international law. Besides contravening the UN Charter, unilateral sanctions inflict much human loss. Countless civilians – many far from target countries – are at risk, depriving them of much, even life itself.

Jomo Kwame Sundaram

Like laying siege on enemy settlements, sanctions are ‘weapons of mass starvation’. They “are silent killers. People die in their homes, nobody is counting”. The human costs are considerable and varied, but largely overlooked. Knowing they are mere collateral damage will not endear any victim to the sanctions’ ‘true purpose’.

US sanctions’ victims
The US has imposed more sanctions, for longer periods, than any other nation. During 1990-2005, the US imposed a third of sanctions regimes worldwide. These were inflicted on more than 1,000 entities or individuals yearly in 2016-20 – nearly 80% more than in 2008-15. Thus, the Trump administration raised the US share of all sanctions to almost half!

Tens of millions of Afghans now face food insecurity, even starvation, as the US has seized its US$9.5 billion central bank reserves. President Biden’s 11 February 2022 executive order gives half of this to 9/11 victims’ families, although no Afghan was ever found responsible for the atrocity.

Biden claims the rest will be for ‘humanitarian crises’, presumably as decided by the White House. But he remains silent about the countless victims of the US’s two-decade long war in Afghanistan, where airstrikes alone killed at least 48,308 civilians.

Anis Chowdhury

The six decade-long US trade embargo has cost Cuba at least US$130 billion. It causes shortages of food, medicine and other essential items to this day. Meanwhile, Washington continues to ignore the UN General Assembly’s call to lift its blockade.

The US-backed Israeli blockade of the densely populated Gaza Strip has inflicted at least US$17 billion in losses. Besides denying Gaza’s population access to many imported supplies – including medicines – bombing and repression make life miserable for its besieged people.

Meanwhile, the US supports the Saudi-led coalition’s war on Yemen with its continuing blockade of the poorest Arab nation. US arms sales to Saudi Arabia and the United Arab Emirates have ensured the worst for Yemenis under siege.

Blocking essential goods – including food, fuel and medical supplies – has intensified the “world’s worst ongoing humanitarian crisis”. Meanwhile, “years of famine” – including “starving to death a Yemeni child every 75 seconds” – have been aggravated by the “largest cholera outbreak anywhere in history”.

Humanitarian disasters and destroying lives and livelihoods are excused as inevitable “collateral damage”. Acknowledging hundreds of thousands of Iraqi child deaths, due to US sanctions after the 1991 invasion, an ex-US Secretary of State deemed the price “worth it”.

Poverty levels in countries under US sanctions are 3.8 percentage points higher, on average, than in other comparable countries. Such negative impacts rose with their duration, while unilateral and US sanctions stood out as most effective!

Clearly, the US government has not hesitated to wage war by other means. Its recent sanctions threaten living costs worldwide, reversing progress everywhere, especially for the most vulnerable.

Yet, US-led unilateral sanctions against Iran, Venezuela, North Korea and other countries have failed to achieve their purported objectives, namely, to change regimes, or at least, regime behaviour.

Changing US policy?
Although unilateral sanctions are not valid under the UN Charter, many US reformers want Washington to “lead by example, overhaul US sanctions, and ensure that sanctions are targeted, proportional, connected to discrete policy goals and reversible”.

Last year, the Biden administration began a comprehensive review of US sanctions policies. It has promised to minimize their adverse humanitarian impacts, and even to consider allowing trade – on humanitarian grounds – with heavily sanctioned nations. But actual policy change has been wanting so far.

US sanctions continue to ruin Iran’s economy and millions of livelihoods. Despite COVID-19 – which hit the nation early and hard – sanctions have continued, limiting access to imported goods and resources, including medicines.

A US embargo has also blocked urgently needed humanitarian aid for North Korea. Similarly, US actions have repeatedly blocked meeting the urgent needs of the many millions of vulnerable people in the country.

The Trump administration’s sanctions against Venezuela have deepened its massive income collapse, intensifying its food, health and economic crises. US sanctions have targeted its oil industry, providing most of its export earnings.

Besides preventing Venezuela from accessing its funds in foreign banks and multilateral financial institutions, the US has also blocked access to international financial markets. And instead of targeting individuals, US sanctions punish the entire Venezuelan nation.

Russia’s Sputnik-V was the first COVID-19 vaccine developed, and is among the world’s most widely used. Meanwhile, rich countries’ “vaccine apartheid” and strict enforcement of intellectual property rights – augmenting corporate profits – have limited access to ‘Western’ vaccines.

The US has not spared Sputnik-V from sanctions, disrupting not only shipments from Russia, but also production elsewhere, e.g., in India and South Korea, which planned to produce 100 million doses monthly. Denying Russia use of the SWIFT international payments system makes it hard for others to buy them.

Rethinking sanctions
Economic sanctions – originally conceived a century ago to wage war by non-military means – are increasingly being used to force governments to conform. Sanctions are still portrayed as non-violent means to induce ‘rogue’ states to ‘behave’.

But this ignores its cruel paradox – supposedly avoiding war, sanctions lay siege, an ancient technique of war. Yet, despite all the harm caused, they typically fail to achieve their intended political objectives – as Nicholas Mulder documents in The Economic Weapon: The Rise of Sanctions as a Tool of Modern War.

As Cuba, Iran, Afghanistan and Venezuela were not major food or fertilizer exporters, their own populations have suffered most from the sanctions against them. But Russia, Ukraine and even Belarus are significant producers and exporters.

Hence, sanctions against Russia and Belarus have much wider international implications, especially for European fuel supplies. More ominously, they threaten food security not only now, but also in the future as fertilizer supplies are cut off.

With tepid growth since the 2008 global financial crisis, the West now blocks economic recovery. Vaccine apartheid, deliberate supply disruptions and deflationary policies now disrupt international economic integration, once pushed by the West.

As war increasingly crowds out international diplomacy, commitments to the UN Charter, multilateralism, peace and sustainable development are being drowned by their enemies, often invoking misleadingly similar rhetoric.

IPS UN Bureau

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US and allied economic sanctions against Russia for its illegal invasion of Ukraine have not achieved their declared objectives. Instead, they are worsening economic stagnation and inflation worldwide. Worse, they are exacerbating hunger, especially in Africa.

Sanctions cut both ways
Unless approved by the UN Security Council (UNSC), sanctions are not authorized by international law. With Russia’s veto in the UNSC, unilateral sanctions by the US and its allies have surged following the Ukraine invasion.

During 1950-2016, ‘comprehensive’ trade sanctions have cut bilateral trade between sanctioning countries and their victims by 77% on average. The US has imposed more sanctions regimes, and for longer periods, than any other country.

Unilateral imposition of sanctions has accelerated over the past 15 years. During 1990-2005, the US imposed about a third of sanctions regimes around the world, with the European Union (EU) also significant.

The US has increased using sanctions since 2016, imposing them on more than 1,000 entities or individuals yearly, on average, from 2016 to 2020 – nearly 80% more than in 2008-2015. The one-term Trump administration raised the US share of all new sanctions to almost half from a third before.

During January-May 2022, 75 countries implemented 19,268 restrictive trade measures. Such measures on food and fertilizers (85%) greatly exceed those on raw materials and fuels (15%). Unsurprisingly, the world now faces less supplies and higher prices for fuel and food.

Monetary authorities have been raising interest rates to curb inflation, but such efforts do not address the main causes of higher prices now. Worse, they are likely to deepen and prolong stagnation, increasing the likelihood of ‘stagflation’.

Sanctions were supposed to bring Russia to its knees. But less than three months after the rouble plunged, its exchange rate is back to pre-war levels, rising from the ‘rouble rubble’ promised by Western economic warmongers. With enough public support, the Russian regime is in no hurry to submit to sanctions.

Sanctions pushing up food prices
War and sanctions are now the main drivers of increased food insecurity. Russia and Ukraine produce almost a third of world wheat exports, nearly 20% of corn (maize) exports and close to 80% of sunflower seed products, including oil. Related Black Sea shipping blockades have helped keep Russian exports down.

All these have driven up world prices for grain and oilseeds, raising food costs for all. As of 19 May, the Agricultural Price Index was up 42% from January 2021, with wheat prices 91% higher and corn up 55%.

The World Bank’s April 2022 Commodity Markets Outlook notes the war has changed world production, trade and consumption. It expects prices to be historically high, at least through 2024, worsening food insecurity and inflation.

Western bans on Russian oil have sharply increased energy prices. Both Russia and its ally, Belarus – also hit by economic sanctions – are major suppliers of agricultural fertilizers – including 38% of potassic fertilizers, 17% of compound fertilizers, and 15% of nitrogenous fertilizers.

Fertilizer prices surged in March, up nearly 20% from two months before, and almost three times higher than in March 2021! Less supplies at higher prices will set back agricultural production for years.

With food agriculture less sustainable, e.g., due to global warming, sanctions are further reducing output and incomes, besides raising food prices in the short and longer term.

Sanctions hurt poor most
Even when supposedly targeted, sanctions are blunt instruments, often generating unintended consequences, sometimes contrary to those intended. Hence, sanctions typically fail to achieve their stated objectives.

Many poor and food insecure countries are major wheat importers from Russia and Ukraine. The duo provided 90% of Somalia’s imports, 80% of the Democratic Republic of Congo’s, and about 40% of both Yemen’s and Ethiopia’s.

It appears the financial blockade on Russia has hurt its smaller and more vulnerable Central Asian neighbours more: 4.5 million from Uzbekistan, 2.4 million from Tajikistan, and almost a million from Kyrgyzstan work in Russia. Difficulties sending remittances cause much hardship to their families at home.

Although not their declared intent, US measures during 1982–2011 hurt the poor more. Poverty levels in sanctioned countries have been 3.8 percentage points higher than in similar countries.

Sanctions also hurt children and other disadvantaged groups much more. Research in 69 countries found sanctions lowered infant weight and increased the likelihood of death before age three. Unsurprisingly, economic sanctions violate the UN Convention on the Rights of Children.

A study of 98 less developed and newly industrialized countries found life expectancy in affected countries reduced by about 3.5 months for every additional year under UNSC sanctions. Thus, an average five-year episode of UNSC approved sanctions reduced life expectancy by 1.2–1.4 years.

World hunger rising
As polemical recriminations between Russia and the US-led coalition intensify over rising food and fuel prices, the world is racing to an “apocalyptic” human “catastrophe”. Higher prices, prolonged shortages and recessions may trigger political upheavals, or worse.

The UN Secretary-General has emphasized, “We need to ensure a steady flow in food and energies through open markets by lifting all unnecessary export restrictions, directing surpluses and reserves to those in need and keeping a lead on food prices to curb market volatility”.

Despite declining World Bank poverty numbers, the number of undernourished has risen from 643 million in 2013 to 768 million in 2020. Up to 811 million people are chronically hungry, while those facing ‘acute food insecurity’ have more than doubled since 2019 from 135 million to 276 million.

With the onset of the Covid-19 pandemic, OXFAM warned, the “hunger virus” could prove even more deadly. The pandemic has since pushed tens of millions into food insecurity.

In 2021, before the Ukraine war, 193 million people in 53 countries were deemed to be facing ‘food crisis or worse’. With the war and sanctions, 83 million – or 43% – more are expected to be victims by the end of 2022.

Source: 2022 Global Report on Food Crises; 2022: projected

Economic sanctions are the modern equivalent of ancient sieges, trying to starve populations into submission. The devastating impacts of sieges on access to food, health and other basic services are well-known.

Sieges are illegal under international humanitarian law. The UNSC has unanimously adopted resolutions demanding the immediate lifting of sieges, e.g., its 2014 Resolution 2139 against civilian populations in Syria.

But veto-wielding permanent Council members are responsible for invading Ukraine and unilaterally imposing sanctions. Hence, the UNSC will typically not act on the impact of sanctions on billions of innocent civilians. No one seems likely to protect them against sanctions, today’s weapons of mass starvation.

IPS UN Bureau

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A class war is being waged in the name of fighting inflation. All too many central bankers are raising interest rates at the expense of working people’s families, supposedly to check price increases.

Forced to cope with rising credit costs, people are spending less, thus slowing the economy. But it does not have to be so. There are much less onerous alternative approaches to tackle inflation and other contemporary economic ills.

Short-term pain for long-term gain?
Central bankers are agreed inflation is now their biggest challenge, but also admit having no control over factors underlying the current inflationary surge. Many are increasingly alarmed by a possible “double-whammy” of inflation and recession.

Nonetheless, they defend raising interest rates as necessary “preemptive strikes”. These supposedly prevent “second-round effects” of workers demanding more wages to cope with rising living costs, triggering “wage-price spirals”.

In central bank jargon, such “forward-looking” measures convey clear messages “anchoring inflationary expectations”, thus enhancing central bank “credibility” in fighting inflation.

They insist the resulting job and output losses are only short-term – temporary sacrifices for long-term prosperity. Remember: central bankers are never punished for causing recessions, no matter how deep, protracted or painful.

But raising interest rates only makes recessions worse, especially when not caused by surging demand. The latest inflationary surge is clearly due to supply disruptions because of the pandemic, war and sanctions.

Raising interest rates only reduces spending and economic activity without mitigating ‘imported’ inflation, e.g., rising food and fuel prices. Recessions will further disrupt supplies, aggravating inflation and worsening stagflation.

Wage-price spirals?
Some central bankers claim recent instances of wage increases signal “de-anchored” inflationary expectations, and threaten ‘wage-price spirals’. But this paranoia ignores changed industrial relations and pandemic effects on workers.

With real wages stagnant for decades, the ‘wage-price spiral’ threat is grossly exaggerated. Over recent decades, most workers have lost bargaining power with deregulation, outsourcing, globalization and labour-saving technologies. Hence, labour shares of national income have declined in most countries since the 1980s.

Labour market recovery, even tightening in some sectors, obscures adverse overall pandemic impacts on workers. Meanwhile, millions of workers have gone into informal self-employment – now celebrated as ‘gig work’ – increasing their vulnerability.

Pandemic infections, deaths, mental health, education and other impacts, including migrant worker restrictions, have all hurt many. Contagion has especially hurt vulnerable workers, including youth, migrants and women.

Ideological central bankers
Economic policies by supposedly independent and knowledgeable technocrats are presumed to be better. But such naïve faith ignores ostensibly academic, ideological beliefs.

Typically biased, albeit in unstated ways, policy choices inevitably support some interests over – even against – others. Thus, for example, an anti-inflation policy emphasis favours financial asset owners.

Politicians like the notion of central bank independence. It enables them to conveniently blame central banks for inflation and other ills – even “sleeping at the wheel” – and for unpopular policy responses.

Of course, central bankers deny their own role and responsibility, instead blaming other economic policies, especially fiscal measures. But politicians blaming central bankers after empowering them is simply shirking responsibility.

In the rich West, governments long bent on fiscal austerity left the heavy lifting for recovery after the 2008-2009 global financial crisis (GFC) to central bankers. Their ‘unconventional monetary policies’ involved keeping policy interest rates very low, enabling corporate shenanigans and zombie business longevity.

This enabled unprecedented increases in most debt, including private credit for speculation and sustaining ‘zombie’ businesses. Hence, recent monetary tightening – including raising interest rates – will trigger more insolvencies and recessions.

German social market economy
Inflation and policy responses inevitably involve social conflicts over economic distribution. In Germany’s ‘free collective bargaining’, trade unions and business associations engage in collective bargaining without state interference, fostering cooperative relations between workers and employers.

The German Collective Bargaining Act does not oblige ‘social partners’ to enter into negotiations. The timing and frequency of such negotiations are also left to them. Such flexible arrangements are said to have helped SMEs.

Although Germany’s ‘social market economy’ has no national tripartite social dialogue institution, labour unions, business associations and government did not hesitate to democratically debate crisis measures and policy responses to stabilize the economy and safeguard employment, e.g., during the GFC.

Dialogue down under
A similar ‘social dialogue’ approach was developed by Australian Labor Prime Minister Bob Hawke from 1983. This contrasted with the more confrontational approaches pursued in Margaret Thatcher’s UK and Ronald Reagan’s USA – where punishing interest rates inflicted long recessions.

Although Hawke had been a successful trade union leader, he began by convening a national summit of workers, businesses and other stakeholders. The resulting Prices and Incomes Accord between the government and unions moderated wage demands in return for ‘social wage’ improvements.

This consisted of better public health provisioning, pension and unemployment benefit improvements, tax cuts and ‘superannuation’ – involving required employees’ income shares and matching employer contributions to a workers’ retirement fund.

Although business groups were not formally party to the Accord, Hawke brought big businesses into other new initiatives such as the Economic Planning Advisory Council. This consensual approach helped reduce both unemployment and inflation.

Such consultations have also enabled difficult reforms – including floating exchange rates and reducing import tariffs. They also contributed to the developed world’s longest uninterrupted economic growth streak – without a recession for nearly three decades, ending in 2020 with the pandemic.

Social partnerships
A variety of such approaches exist. For example, Norway’s kombiniert oppgjior, from 1976, involved not only industrial wages, but also taxes, salaries, pensions, food prices, child support payments, farm support prices, and more.

‘Social partnerships’ have also been important in Austria and Sweden. A series of political understandings – or ‘bargains’ – between successive governments and major interest groups enabled national wage agreements from 1952 until the mid-1970s.

Consensual approaches undoubtedly underpinned post-Second World War reconstruction and progress, of the so-called Keynesian ‘Golden Age’. But it is also claimed they have created rigidities inimical to further progress, especially with rapid technological change.

Economic liberalization in response has involved deregulation to achieve more market flexibilities. But this approach has also produced more economic insecurity, inequalities and crises, besides stagnating productivity.

Such changes have also undermined democratic states, and enabled more authoritarian, even ethno-populist regimes. Meanwhile, rising inequalities and more frequent recessions have strained social trust, jeopardizing security and progress.

Policymakers should consult all major stakeholders to develop appropriate policies involving fair burden sharing. The real need then is to design alternative policy tools through social dialogue and complementary arrangements to address economic challenges in more equitably cooperative ways.

IPS UN Bureau

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Central bank policies have often worsened economic crises instead of resolving them. By raising interest rates in response to inflation, they often exacerbate, rather than mitigate business cycles and inflation.

Neither gods nor maestros
US Federal Reserve Bank chair Jerome Powell has admitted: “Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.” He conceded, “What we can control is demand, we can’t really affect supply with our policies. And supply is a big part of the story here”.

Anis Chowdhury

Thus, Milton Friedman – whom many central bankers still worship – blamed the 1930s’ Great Depression on the US Fed. Instead of providing liquidity support to businesses struggling with short-term cash-flow problems, it squeezed credit, crushing economic activity.

Similarly, before becoming Fed chair, Ben Bernanke’s research team concluded, “an important part of the effect of oil price shocks [in the 1970s] on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy”.

Adverse impacts of the 1970s’ oil price shocks were worsened by the reactions of monetary policymakers, which caused stagflation. That is, US Fed and other central bank interventions caused economic stagnation without mitigating inflation.

Likewise, the longest US recession after the Great Depression, during the 1980s, was due to interest rate hikes by Fed chair Paul Volcker. A recent New York Times op-ed warned, “The Powell pivot to tighter money in 2021 is the equivalent of Mr. Volcker’s 1981 move” and “the 2020s economy could resemble the 1980s”.

Monetary policy for supply shocks?
Food prices surged in 2011 due to weather-related events ruining harvests in major food producing nations, such as Australia and Russia. Meanwhile, fuel prices soared with political turmoil in the Middle East.

Jomo Kwame Sundaram

Referring to Boston Fed research, he noted commodity price changes did not affect the long-run inflation rate. Other research has also concluded that commodity price shocks are less likely to be inflationary.

This reduced inflationary impact has been attributed to ‘structural changes’ such as workers’ diminished bargaining power due to labour market deregulation, technological innovation and globalization.

Hence, central banks are no longer expected to respond strongly to food and fuel price increases. Policymakers should not respond aggressively to supply shocks – often symptomatic of broader macroeconomic developments.

Instead, central banks should identify the deeper causes of food and fuel price rises, only responding appropriately to them. Wrong policy responses can compound, rather than mitigate problems.

Appropriate innovations
A former Philippines central bank Governor Amando M. Tetangco, Jr noted it had not responded strongly to higher food and fuel prices in 2004. He stressed, “authorities should ignore changes in the price of things that they cannot control”.

Tetangco warned, “the required policy response is not… straightforward… Thus policy makers will need to make a choice between bringing down inflation and raising output growth”. He emphasized, “a real sector supply side response may be more appropriate in addressing the pressure on prices”.

Thus, instead of restricting credit indiscriminately, financing constraints on desired industries (e.g., renewable energy) should be eased. Enterprises deemed inefficient or undesirable – e.g., polluters or those engaged in speculation – should have less access to the limited financing available.

This requires designing macroeconomic policies to enable dynamic new investments, technologies and economic diversification. Instead of reacting with blunt interest rate policy tools, policymakers should know how fiscal and monetary policy tools interact and impact various economic activities.

Used well, these can unlock supply bottlenecks, promote desired investments and enhance productivity. As no one size fits all, each policy objective will need appropriate, customized, often innovative tools.

Lessons from China
China’s central bank, the People’s Bank of China (PBOC), developed “structural monetary policy” tools and new lending programmes to help victims of COVID-19. These ensured ample interbank liquidity, supported credit growth, and strengthened domestic supply chains.

Outstanding loans to small and micro businesses rose 25% to 20.8 trillion renminbi by March 2022 from a year before. By January, the interest rate for loans to over 48 million small and medium enterprises had dropped to 4.5%, the lowest level since 1978.

The PBOC has also provided banks with loan funds for promising, innovative and creditworthy companies, e.g., involved in renewable energy and digital technologies. It thus achieves three goals: fostering growth, maintaining debt at sustainable levels, and ‘green transformation’.

Defying global trends, China’s ‘factory-gate’ (or producer price) inflation fell to a one-year low in April 2022 as the PBOC eased supply chains and stabilized commodity prices. Although consumer prices have risen with COVID-19 lockdowns, the increases have remained relatively benign so far.

In short, the PBOC has coordinated monetary policy with both fiscal and industrial policies to boost confidence, promote desired investments and achieve stable growth. It maintains financial stability and policy independence by regulating capital flows, thus avoiding sudden outflows, and interest rate hikes in response.

Improving policy coordination
Central bankers monitor aggregate indicators, such as wages growth. However, before reacting to upward wage movements, the context needs to be considered. For example, wages may have stagnated, or the labour share of income may have declined over the long-term.

Moreover, wage increases may be needed for critical sectors facing shortages to attract workers with relevant skills. Wage growth itself may not be the problem. The issue may be weak long-term productivity growth due to deficient investments.

Input-output tables can provide information about sectoral bottlenecks and productivity, while flow-of-funds information reveals what sectors are financially constrained, and which are net savers or debtors.

Such information can helpfully guide design of appropriate, complementary fiscal and monetary policy tools. Undoubtedly, pursuing heterodox policies is challenging in the face of policy fetters imposed by current orthodoxies.

Central bank independence – with dogmatic mandates for inflation targeting and capital account liberalization – precludes better coordination, e.g., between fiscal and monetary authorities. It also undercuts the policy space needed to address both demand- and supply-side inflation.

Monetary authorities are under tremendous pressure to be seen to be responding to rising prices. But experience reminds us they can easily make things worse by acting inappropriately. The answer is not greater central bank independence, but rather, improved economic policy coordination.

IPS UN Bureau

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As China increases lending to other developing countries, ‘debt trap’ charges are growing quickly. As it greatly augments financing for development while other sources continue to decline, condemnation of China’s loans is being weaponized in the new Cold War.

Debt-trap diplomacy?
The catchy term ‘debt-trap diplomacy’ was coined by Indian geo-strategist Brahma Chellaney in 2017. According to him, China lends to extract economic or political concessions when a debtor country is unable to meet payment obligations. Thus, it overwhelms poor countries with loans, to eventually make them subservient.

Anis Chowdhury

But even Western researchers generally wary of China dispute the new narrative. A London Chatham House study concluded it is simply wrong – flawed, with scant supporting evidence.

Studying China’s loan arrangements for 13,427 projects in 165 countries over 18 years, AidData – at the US-based Global Research Institute – could not find a single instance of China seizing a foreign asset following loan default.

China has been the ‘new kid on the block’ of development financing for more than a decade. Its growing loans have helped fill the yawning gap left by the decline and increasing private business orientation of financing by the global North.

Instead of tied aid pushing exports, as before, it now shamelessly promotes foreign direct investment from donor nations. Unless disbursed via multilateral institutions, China’s increased lending to support businesses abroad has not really helped developing countries cope with renewed ‘tied’ concessional aid.

Grand ‘debt trap diplomacy’ narratives make for great propaganda, but obscure debt flows’ actual impacts. Most Chinese lending is for infrastructure and productive investment projects, not donor-determined ‘policy loans’. Some countries ‘over-borrow’, but most do not. Deals can turn sour, but most apparently don’t.

Jomo Kwame Sundaram

Sri Lanka
Sri Lanka’s Hambantota Port is the most frequently mentioned China debt trap case. The typical media account presumes it lent money to build the port expecting Sri Lanka to get into debt distress. China then supposedly seized it – in exchange for providing debt relief – enabling use by its navy.

But independent studies have debunked this version. Last year, The Atlantic insisted, ‘The Chinese “Debt Trap” Is a Myth’. The subtitle elaborated, “The narrative wrongfully portrays both Beijing and the developing countries it deals with”.

It elaborated: “Our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country, much less the port of Hambantota”.

The project was initiated by then President Mahindra Rajapaksa – not China or its bankers. Feasibility studies by the Canadian International Development Agency and the Danish engineering firm Rambol found it viable. The Chinese Harbour Group construction firm only got involved after the US and India both refused Sri Lankan loan requests.

Sri Lanka’s later debt crisis has been due to its structural economic weaknesses and foreign debt composition. The Chatham House report blamed it on excessive borrowing from Western-dominated capital markets – not Chinese banks.

Even the influential US Foreign Policy journal does not blame Sri Lanka’s undoubted economic difficulties on Chinese debt traps. Instead, “Sri Lanka has not successfully or responsibly updated its debt management strategies to reflect the loss of development aid that it had become accustomed to for decades”.

As the US Fed tapered ‘quantitative easing’, borrowing costs – due to Sri Lanka’s persistent balance of payment problems – rose, forcing it to seek International Monetary Fund help. Some argue borrowing even more from China is the best option available to the island republic.

To set the record straight, there was no debt-for-asset swap after Sri Lanka could no longer service its foreign debt. Instead, a Chinese state-owned enterprise leased the port for US$1.1 billion. Sri Lanka has thus boosted its foreign reserves and paid down its debt to other – mainly Western – creditors.

Also, Chinese navy vessels cannot use the port – home to Sri Lanka’s own southern naval command. “In short, the Hambantota Port case shows little evidence of Chinese strategy, but lots of evidence for poor governance on the recipient side”.

Malaysia
China has also been accused by the media of seeking influence over the Straits of Malacca, through which some 80% of its oil imports pass. Debt-trap proponents claim Beijing therefore inflated lending for Malaysia’s controversial East Coast Rail Link (ECRL).

The Chatham House report notes, “The real issue here is not one of geopolitics, but rather – as in Sri Lanka – the recipient government’s efforts to harness Chinese investment and development financing to advance domestic political agendas, reflecting both need and greed”.

ECRL was initiated by convicted former Malaysian prime minister Najib Razak. Ostensibly to develop the less developed East Coast of Peninsular Malaysia as part of China’s Belt and Road Initiative, it rejected other less costly, but much needed options.

Borrowings are far more than needed – probably for nefarious purposes. Loan terms were structured to delay repayment – to Najib’s political advantage by ‘passing the buck’ to later generations. But such abuse is by the borrower – not the lender – unless Chinese official connivance is involved.

Non-alignment for our times
There is undoubtedly much room for improving development finance, especially to achieve more sustainable development. Instead of mainly lending to the US, as before, China’s growing role can still be improved. To begin, all involved should respect the United Nations’ principles on responsible sovereign lending and borrowing.

After more than half a century of Western donors’ largely betrayed promises, China’s development finance has significantly improved ‘South-South cooperation’. Meanwhile, sustainable development finance needs – compounded by global warming, the pandemic and Ukraine war – have increased.

After decades of the West denying China commensurate voice in decision making, even under rules it made, its role on the world stage has grown. But instead of working together for the benefit of all, rich countries seem intent on demonizing it. Unsurprisingly, most developing country governments seem undeterred.

As the new Cold War and the scope of economic sanctions spread, collateral damage is undermining development finance and developing countries. To cope with the new situation, developing countries need to consider building a new non-aligned movement for our dark times.

IPS UN Bureau

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“If your only tool is a hammer, every problem looks like a nail”. Still haunted by the clever preaching of monetarist guru Milton Friedman’s ghost, all too many monetary authorities address every inflationary threat or sign they see by raising interest rates.

Anis Chowdhury

No central banker consensus
The threat of higher inflation has risen with Russia’s Ukraine incursion and the punitive Western ‘sanctions from hell’ in response. International Monetary Fund (IMF) Managing Director Kristalina Georgieva warns wide-ranging sanctions on Russia will worsen inflation.

European Central Bank (ECB) President Christine Lagarde fears, “The Russia-Ukraine war will have a material impact on economic activity and inflation”. US Treasury Secretary Janet Yellen has also acknowledged the new threat.

She recognizes tighter monetary policy could be contractionary, but expresses confidence in the Federal Reserve’s ability to balance that. Meanwhile, US Federal Reserve chair Jerome Powell has pledged to be “careful”.

Terming Russia’s invasion “a game changer”, with unpredictable consequences, he stressed readiness to move more aggressively if needed. On 16 March, the Fed raised its benchmark short-term interest rate while signalling up to six more rate hikes this year.

But other central bankers do not agree on how best to respond. Bank of Japan Governor Kuroda has ruled out tightening monetary policy. He recently noted, “It’s inappropriate to deal with [cost-push inflation] by scaling back stimulus or tightening monetary policy”. For Kuroda, an interest rate hike is inappropriate to deal with inflation due to surging fuel and food prices.

Friedman’s disciples at some central banks began tightening monetary policy from mid-2021. The Reserve Bank of New Zealand, the first to adopt strict inflation targeting in 1989, raised interest rates in August for the second time in two months.

Jomo Kwame Sundaram

Anticipating interest rate rises in the US and under pressure from financial markets, central banks in some emerging market and developing economies (EMDEs) – such as Brazil, Russia and Mexico – began raising policy interest rates after inflation warning bells went off in mid-2021. Indonesia and South Africa joined the bandwagon in January 2022.

Ukraine effect
With inflation surging after the Ukraine incursion, the Bank of Canada doubled its key rate on 2 March – its first increase since October 2018.

The ECB has a more hawkish stance, dropping its more cautious earlier language. Its governing council has reiterated an old pledge to “take whatever action is needed” to pursue price stability and safeguard financial stability.

Following the US Fed’s move, the BOE raised its interest rate the next day. A month before, in February, the BOE Chief Economist was against raising interest rates, favouring a more nuanced approach.

However, instead of kneejerk interest rate responses, Reserve Bank of Australia’s Governor Philip Lowe is “prepared to be patient” while monitoring developments.

EMDE central bankers have also responded differently. Brazil has raised its benchmark interest rate after the Fed, and signalled more increases could follow this year. But Indonesia has been more circumspect.

Interest rate not inflation cure-all
The interest rate is a blunt policy tool. It does not differentiate between activities facing rising demand and those experiencing supply disruptions. Thus, interest rate hikes adversely impact investments in sectors facing supply bottlenecks needing more investment.

In short, the interest rate is indiscriminate. But the prevailing policy orthodoxy of the past four decades does not differentiate among causes of inflation, prescribing higher interest rates as the miracle ‘cure-all’.

This monetarist policy orthodoxy does not even recognize multiple causes or sources of inflation. Most observers believe that current inflationary pressures are due to both demand and supply factors.

Some sectors may be experiencing surging demand while others are facing supply disruptions and rising production costs. All this has now been exacerbated by the Ukraine crisis and the ensuing sanctions interrupting supplies.

Old lessons forgotten
Well over half a century ago, the UN’s World Economic Survey 1956 warned, “A single economic policy seems no more likely to overcome all sources of imbalance which produce rising prices and wages than is a single medicine likely to cure all diseases which produce a fever”.

Addressing ‘cost-push’ inflation using measures designed for ‘demand-pull’ phenomena is not only inappropriate, but also damaging. It can increase unemployment significantly without dampening inflation, warned the UN’s World Economic Survey 1955 as Friedman’s anti-Keynesian arguments were emerging.

Interest rates do not discriminate between credit for consumer and investment spending. In efforts to dampen demand sufficiently, interest rates are raised sharply. Such monetary tightening can do much lasting economic damage.

Declining or lower investment is harmful for the progress needed for sustainable development, requiring innovation and productivity growth. After all, improved technologies typically require new machines and tools.

No one ‘one size fits all’
Dealing with ‘stagflation’ – economic stagnation with inflation – caused by multiple factors requires both fiscal and monetary policies working together complementarily. They also need particular tools and regulatory measures for specific purposes.

Monetary authorities should also create government fiscal space by financing unanticipated urgent needs and long-term sustainable development projects, e.g., for renewable energy.

Governments need to first provide some immediate cost of living relief to defuse unrest as food and fuel prices surge. This can be done with measures that may include food vouchers, suspending some taxes on key consumer products.

In the medium- to long-term, governments can expand subsidized public provisioning of healthcare, transport, housing, education and childcare to offset rising living costs. Such public provisioning – increasing the “social wage” – diffuses wage demands, preventing wage-price spirals.

Such policy initiatives brought down inflation in Australia during the 1980s without causing large-scale unemployment. This contrasted with the deep recessions in the UK and USA then due to high interest rates.

Get correct medicine
But to do so, governments need more fiscal space. Hence, tax reforms are critical. Progressive tax reforms – such as introducing wealth taxes and raising marginal tax rates for high income earners – also mitigate inequality. Governments also need to align their short- and long-term fiscal policy frameworks.

Monetary authorities need to apply a combination of tools, such as reserve requirements for commercial bank deposits, more credit, including differential interest rate facilities, and more inclusive financing.

For example, central banks should restrict credit growth in ‘overheated’ sectors, while expanding affordable credit for those facing supply bottlenecks. Central banks also need to curb credit growth likely to be used for speculation.

Governments also need regulatory measures to prevent unscrupulous monopolies or cartels trying to manipulate markets and create artificial shortages. Regulatory measures are also needed to check commodity futures and other speculation. These increase food and fuel price rises and other problems.

Relying exclusively on the interest rate hammer is an article of monetarist faith, not macroeconomic wisdom. Pragmatic policymakers have demonstrated much ingenuity in designing more appropriate macroeconomic policy responses – not only against inflation, but worse, the stagflation now threatening the world.

IPS UN Bureau

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Finger pointing in the blame game over Russia’s Ukraine incursion obscures the damage it is doing on many fronts. Meanwhile, billions struggle to cope with worsening living standards, exacerbated by the pandemic and more.

Losing sight in the fog of war
US Secretary of State Anthony Blinken insists, “the Russian people will suffer the consequences of their leaders’ choices”. Western leaders and media seem to believe their unprecedented “crushing sanctions” will have a “chilling effect” on Russia.

Anis Chowdhury

Already, the rouble has been hammered by preventing Russia’s central bank from accessing its US$643bn in foreign currency reserves, and barring Russian banks from using the US-run global payments transfer system, SWIFT.

Withdrawal of major Western transnational companies – such as Shell, McDonald’s and Apple – will undoubtedly hurt many Russians – not only oligarchs, their ostensible target.

Thus, Blinken’s claim that “The economic costs that we’ve been forced to impose on Russia are not aimed at you [ordinary Russians]” may well ring hollow to them. They will get little comfort from knowing, “They are aimed at compelling your government to stop its actions, to stop its aggression”.

As The New York Times notes, “sanctions have a poor record of persuading governments to change their behavior”. US sanctions against Cuba over six decades have undoubtedly hurt its economy and people.

But – as in Iran, North Korea, Syria and Venezuela – it has failed to achieve its supposed objectives. Clearly, “If the goal of sanctions is to compel Mr. Putin to halt his war, then the end point seems far-off.”

Jomo Kwame Sundaram

Russia has become a major primary commodity producer – not unlike many developing countries and the former settler colonies of North America and Australasia. It is now a major exporter of crude oil and natural gas.

It is also the largest exporter of palladium and wheat, and among the world’s biggest suppliers of fertilizers using potash and nitrogen. On 4 March, Moscow suspended fertilizer exports, citing “sabotage” by “foreign logistics companies”.

Farmers and consumers will suffer as yields drop by up to half. Sudden massive supply disruptions will thus have serious ramifications for the world economy – now more interdependent than ever, due to earlier globalization.

Sanctions’ inflation boomerang
International Monetary Fund Managing Director Kristalina Georgieva has ominously warned of the Ukraine crisis’ economic fallouts. She cautions wide-ranging sanctions on Russia will worsen inflation and further slow growth.

No country is immune, including those imposing sanctions. But the worst hit are poor countries, particularly in Africa, already struggling with rising fuel and food prices.

For Georgieva, more inflation – due to Russian sanctions – is the greatest threat to the world economy. “The surging prices for energy and other commodities – corn, metals, inputs for fertilizers, semiconductors – coming on top of already high inflation” are of grave concern to the world.

Russia and Ukraine export more than a quarter of the world’s wheat while Ukraine is also a major corn exporter. Supply chain shocks and disruptions could add between 0.2% to 0.4% to ‘headline inflation’ – which includes both food and fuel prices – in developed economies over the coming months.

US petrol prices jumped to a 17-year high in the first week of March. The costs of other necessities, especially food, are rising as well. US Treasury Secretary Janet Yellen has acknowledged that the sanctions are worsening US inflation.

The European Union (EU) gets 40% of its natural gas from Russia. Finding alternative supplies will be neither easy nor cheap. The EU is Russia’s largest trading partner, accounting for 37% of global trade in 2020. Thus, sanctions may well hurt Europe more than Russia – like cutting one’s nose to spite one’s face.

The European Central Bank now expects stagflation – economic stagnation with inflation, and presumably, rising unemployment. It has already slashed its growth forecast for 2022 from 4.2% to 3.7%. Inflation is expected to hit a record 5.1% – way above its previous 3.2% forecast!

Developing countries worse victims
Global food prices are already at record highs, with the Food Price Index (FPI) of the Food and Agricultural Organization up more than 40% over the past two years.

The FPI hit an all-time high in February – largely due to bad weather and rising energy and fertilizer costs. By February 2022, the Agricultural Commodity Price Index was 35% higher, while maize and wheat prices were 26% and 23% more than in January 2021.

Besides shortages and rising production costs – due to surging fuel and fertilizer prices – speculation may also push food prices up – as in 2007-2008.

Signs of such speculation are already visible. Chicago Board of Trade wheat future prices rose 40% in early March – its largest weekly increase since 1959!

Rising food prices impact people in low- and middle-income countries more as they spend much larger shares of their incomes on food than in high-income countries. The main food insecurity measure has doubled in the past two years, with 45 million people close to starvation, even before the Ukraine crisis.

Countries in Africa and Asia rely much more on Russian and Ukrainian grain. The World Bank has warned, “There will be important ramifications for the Middle East, for Africa, North Africa and sub-Saharan Africa, in particular”, where many were already food insecure before the incursion.

The Ukraine crisis will be devastating for countries struggling to cope with the pandemic. Unable to access enough vaccines or mount adequate responses, they already lag behind rich countries. The latest food and fuel price hikes will also worsen balance-of-payments problems and domestic inflationary pressures.

No to war!
The African proverb, “When two elephants fight, all grass gets trampled”, sums up the world situation well. The US and its allies seem intent to ‘strangle Russia’ at all costs, regardless of the massive collateral damage to others.

This international crisis comes after multilateralism has been undermined for decades. Hopes for reduced international hostilities, after President Biden’s election, have evaporated as US foreign policy double standards become more apparent.

Russia has little support for its aggressive violation of international law and norms. Despite decades of deliberate NATO provocations, even after the Soviet Union ended, Putin has lost international sympathy with his aggression in Ukraine.

But there is no widespread support for NATO or the West. Following the vaccine apartheid and climate finance fiascos, the poorer, ‘darker nations’ have become more cynical of Western hypocrisy as its racism becomes more brazen.

IPS UN Bureau

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All too many developing countries have been persuaded or required to prioritize inflation targeting (IT) in their monetary policy. By doing so, they have tied their own hands instead of adopting bolder economic policies for growth, jobs and sustainable development.

Anis Chowdhury

Initially, developing economies adopted IT after crises to get financial support from the International Monetary Fund (IMF), e.g., after the 1997-98 Asian financial crisis. From the mid-1970s, many had borrowed heavily to accelerate growth. After the US Fed raised interest rates sharply from 1980, many succumbed to debt crises.

The IMF insisted on severe short-term stabilization policies to keep inflation and debt low. The World Bank complemented it with medium-term structural adjustment policies demanding market liberalization and other reforms.

Price stabilization policies to keep inflation low have been an IMF priority since. But instead of accelerating growth, as promised, IT has actually slowed it. Yet, developing countries have jumped on the IT bandwagon – 25 had formally adopted IT by 2020, while most others strive to keep inflation very low.

How bad is inflation?
Most believe that inflation is the greatest threat to the economy and growth. Many presume inflation creates uncertainty, causing resource misallocation. All this is said to retard growth – meaning fewer jobs, less tax revenue and lasting poverty.

Higher prices hurt by reducing purchasing power, especially harming wage-earners. On the contrary, price stability – implying low and steady inflation – is believed to be more conducive to ensuring growth and prosperity.

Jomo Kwame Sundaram

Many central bankers and economists dogmatically believe – without evidence – that tightly reining in inflation actually spurs growth. Acknowledging developing countries are more prone to external and supply shocks, the IMF recommended targets of up to 5% – higher than developed countries’ 2%.

Most developing countries aspiring to become emerging market economies have formally adopted IT – e.g., South Africa’s 3–6% or India’s 2–6%. By setting successively lower short-term inflation targets, they believe financial markets are impressed.

But by doing so, they prevent themselves from realizing their full economic potential. Striving to emulate the developed countries’ 2% target constrains both growth and structural transformation. After all, it was quite arbitrarily set for no economic reason, except the NZ finance minister liking the ‘0 to 2 by ’92’ slogan!

Arbitrary targets
While there is little disagreement about likely problems associated with ‘hyper-’ or very high inflation, the threshold beyond which inflation becomes harmful is a moot issue on which there is no consensus.

Inflation targets are arbitrarily set, as acknowledged in an IMF paper. Hence, “any choice of a medium-term inflation target for these [developing] countries is bound to be arbitrary”. Harry Johnson had found early IMF empirical studies of the inflation-growth relationship to be inconclusive.

Later studies did not settle the matter. For example, Michael Bruno and William Easterly at the World Bank concluded that inflation under 40% did not tend to accelerate or worsen, and “countries can manage to live with moderate – around 15–30 percent – inflation for long periods”.

MIT’s Rudiger Dornbusch and Stanley Fischer, later IMF Deputy Managing Director, came to similar conclusions. They found moderate inflation of 15–30% did not harm growth, noting “such inflations can be reduced only at a substantial short-term cost to growth”.

A 2000 IMF paper suggested 11% inflation was optimal for developing countries; 7% inflation would have “an insignificant negative effect” on growth, while 18% inflation remained positive for growth. Yet, it recommended an IT target of 7–11% and “bringing inflation down to single digits and keeping it there”.

The IMF Independent Evaluation Office’s 2007 report on Sub-Saharan Africa found “mission chiefs are evenly divided on whether (or not) the Fund should tolerate higher [than 5%] inflation rates…IMF policy staff acknowledge that the empirical literature on the inflation-growth relationship is inconclusive”.

Hence, very low inflation targets are quite arbitrary without any sound theoretical and empirical bases. But the IMF and its chorus of economists have not hesitated to insist on keeping inflation very low by promoting IT for all, especially to susceptible developing country policymakers.

Constraining development
Very low inflation targets particularly constrain low-income countries (LICs). LIC governments face modest revenue bases and limited domestic savings. Hence, they should borrow more from central banks to finance their development spending.

But such borrowings are prohibited by law in many developing countries – especially those which have formally embraced IT – to prove their anti-inflationary commitment. Thus, a potentially major means for central banks to be more developmental is denied by statute.

By raising interest rates to keep inflation very low, central banks reduce not only consumer spending, but also business investments. Such policies also increase both public and private debt burdens, in turn constraining spending.

Thus, overall aggregate demand remains depressed, limiting growth unless compensated by greater export demand. But higher interest rates attract capital inflows, causing exchange rates to appreciate, undermining export competitiveness.

Means deny ends
IT policy is problematic for two major reasons. First, it demands debilitatingly low targets. Second, it denies central banks’ potential developmental role by insisting on price stability – read ‘containing inflation’ – as its principal goal.

IMF researchers have acknowledged, “identifying the growth effects of moving from, say, 20 percent inflation to 5 percent has been challenging”.

They concluded, “pushing inflation too low – say, below 5 percent – may entail a loss of output …, suggesting a need for caution in setting very low inflation targets in low-income countries… In particular, inflation targets should be set so as to help avoid risks of an unintended contractionary policy stance.”

Also, San Francisco US Federal Reserve Bank research has concluded, “developing economies that adopted an inflation target did not show any substantial gains in growth in the medium term compared with those that did not adopt a target”.

Thus, developing countries prioritizing IT have, often unwittingly, curtailed their own economic prospects. Falsely promoted as means to enhance growth, jobs and development, IT, in fact, constrains them – the ultimate con!

Rejecting the IT fetish does not mean doing nothing about inflation. Instead, developing countries need to better know the economic challenges they face and the efficacy of their policy tools. National economic priorities should be comprehensively addressed without subordinating all policy goals to the god of IT.

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Inflation hawks are winning the day. The latest ‘beggar thyself’ race to raise interest rates has begun. This ostensibly responds to the spectre of runaway inflation, supposedly retarding economic growth and progress, and thus threatening central bank ‘credibility’.

Anis Chowdhury

Central banks in many emerging market and developing economies (EMDEs) – such as Brazil, Russia and Mexico – began raising policy interest rates right after inflation warning bells were set off after mid-2021. Indonesia and South Africa have since joined the bandwagon.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva has warned that US interest rate rises would “throw cold water” on global recovery, especially hurting struggling emerging markets.

An earlier IMF blog had urged EMDEs to prepare for earlier than expected US interest rate hikes. The Fund has lowered its growth projections as the inflation bogey induces monetary and fiscal tightening.

Inflation paranoia
Inflation hawks denounce price increases, claiming – without evidence – that it impedes growth. Former World Bank chief economist Michael Bruno and William Easterly refuted these popular, but false prejudices.

Using 1962-1992 data for 127 countries, they found, “The ratio of fervent beliefs to tangible evidence seems unusually high”. They also found extremely high inflation – over 40% yearly – mainly due to very exceptional circumstances, e.g., Nicaragua after the Sandinista takeover.

Jomo Kwame Sundaram

Bank economists Ross Levine, Sara Zervos and David Renelt confirmed a negative inflation-growth relationship to be exceptional, and due to a few extreme cases.

Rudiger Dornbusch and former IMF Deputy Managing Director Stanley Fischer came to similar conclusions. They too found moderate inflation of 15–30% did not harm growth, emphasizing “such inflations can be reduced only at a substantial short-term cost to growth”.

Citing IMF research, Harry Johnson also argued that while very high inflation could be harmful, there was no conclusive empirical evidence of the alleged inflation-stagnation causal nexus.

Even monetarist guru Milton Friedman acknowledged, “Historically, all possible combinations have occurred: inflation with and without development, no inflation with and without development”.

Thus, the Fund and the Bank have no sound bases for promoting draconian policies to eliminate inflation above, say 5%, by citing a few exceptional cases of very high, runaway inflation and low growth.

Inflation misdiagnosed
Friedman’s sweeping generalization that “inflation is always and everywhere a monetary phenomenon” ignored other factors possibly contributing to inflation.

Without careful consideration of inflation’s causes, the same old policy prescriptions are likely to fail, but not without causing much harm. Prices tend to rise as demand outstrips supply. This can also happen when demand rises faster than supply, or if demand does not decline when supply falls.

The IMF attributes the current inflationary surge to supply chain woes, higher energy prices and local wage pressures. While demand has been boosted by pandemic relief and recovery measures, where existent, supply shortages remain vulnerable to disruptions.

Rising food costs are also pushing up consumer prices. Extreme weather events – droughts, fires, floods, etc. – have affected food output. More commodity price speculation – e.g., via indexed futures – has also raised food prices.

Although wages have risen in some sectors in some countries, economy-wide wage-price spirals are unlikely. Employment suffered during the pandemic while unionization is at historically low levels.

Labour’s collective bargaining powers have declined for decades, especially with technological change, casualization and globalization lowering the labour income share of GDP.

As the profit share of income continues to rise, rising mark-ups and executive remuneration also push up prices. With more market monopoly powers, price gouging has become more widespread with the pandemic.

Understanding what causes particular prices to rise is critical for planning appropriate policy responses. Although devoid of actual diagnoses, inflation hawks have no hesitation prescribing their standard inflation elixir – raising interest rates.

Raising interest rates may help if inflation is mainly due to easier credit fuelling demand. But tighter credit is unlikely to effectively address ‘supply-side’ inflation, which typically requires targeted measures to overcome bottlenecks.

Interest rates harm
Higher interest rates increase borrowing costs, squeezing investment and household spending. This hits businesses, hurting employment, incomes and spending, and can result in a vicious downward spiral.

Higher interest rates also increase governments’ debt burdens, forcing them to cut spending on public services including healthcare and education. Incredibly, elevated interest rates – harming investments, jobs, earnings and social protection – supposedly benefits the public!

The adverse spill-over impacts of rising interest rates are also considerable. Raising rates in major advanced economies weaken EMDE capital inflows, currencies, fiscal positions and financial stability, especially as sovereign debt has ballooned over the last two years.

Indeed, the interest rate is a blunt weapon against inflation. How can raising interest rates curb food or oil price increases? While supply blockages persist, essential consumer prices will rise, even with high interest rates.

Higher interest rates may even aggravate inflation as businesses cut investment spending. Thus, supply bottlenecks, especially of essential goods, are likely to be more severe, pushing up their prices.

Most people are indebted, with the poor often borrowing to smoothen consumption. Thus, the poor are hurt in many ways: losing jobs and earnings, coping with less social protection, and having to borrow at higher interest rates.

Hence, the standard medicine of higher interest rates has massive social costs. Meanwhile, the principal beneficiaries of using higher interest rates to lower inflation are rich net creditors and financial asset owners.

Toxic prescription
Premature reversal of expansionary fiscal policy has been largely due to debt hawks’ successful fear mongering. Thus, debt paranoia nipped in the bud the ‘green shoots’ of robust recovery following the 2008-2009 global financial crisis.

In the early 1980s, inflation paranoia led to interest rate spikes, triggering debt crises, stagnation and lost decades in much of the world, especially developing countries. Now, inflation hawks are poised to derail global recovery, stop adequate climate action and otherwise undermine sustainable development.

Policymakers the world over, but especially in developing countries, must reject the inflation hawks’ paranoid screeches. Instead, they must identify and address the sources, causes and nature of the inflation actually faced. And then, take appropriate measures to prevent inflation accelerating to harmful levels.

There are a host of alternative policy measures available to policymakers. They must reject the lie that they have no choice but to raise interest rates – widely recognized as a blunt weapon, with deadly ‘externalities’.

While all available policy options may involve trade-offs, policymakers must seek and achieve socially optimal results. This requires robust, resilient, green and inclusive recoveries – not fighting quixotic windmills of the paranoid mind.

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Funding for developing countries to address global warming is grossly inadequate. Very little finance is for adaptation to climate change, the urgent need of countries most adversely affected. Also, adaptation needs to be forward-looking rather than only addressing accumulated problems.

Anis Chowdhury

The COP26 deal was undoubtedly a “historically shameful dereliction of duty” and “nowhere near enough to avoid climate disaster”. Glasgow’s failure shows up lack of real progress and inadequate policy responses. Worse, no significant new resources came with the “Glasgow Suicide Pact”.

The United Nations Conference on Trade and Development (UNCTAD)’s Trade and Development Report 2021 laments rich countries’ unwillingness to address grave challenges facing developing countries. After all, Agenda 2030 for Sustainable Development was in trouble even before COVID-19.

Climate policy responses involve both mitigation and adaptation. Mitigation seeks to reduce greenhouse gas (GHG) emissions through more efficient energy use, and by using renewable energy instead of fossil fuels. Adaptation involves strengthening resilience and protection to minimize adverse effects on human lives.

National adaptation needs get far less international funding than mitigation for the world. Thus, poor countries struggle alone addressing global warming mainly caused by others. Adaptation challenges are also wide-ranging, due to varying country vulnerabilities.

Risky approach to risk
Governments have been advised to reduce vulnerability to shocks by improving data and risk assessment. Most measures to strengthen resilience use conventional financial risk management methods. These seek to better protect existing assets, and to provide temporary financial support when shocks happen.

Jomo Kwame Sundaram

Relying on past experience, the conventional approach is hardly forward-looking in addressing new challenges. Recommended measures tend to deploy scarce resources to address past and current effects of climate change.

Focussing on current vulnerabilities enables adapting to extant climate threats. This may provide some temporary resilience and relief. But it does not prepare for new threats. Thus, the approach ignores future problems, not providing much protection from or reducing vulnerability to emerging threats.

Counting on pricing and other market techniques for climate adaptation risk assessment is also limiting. The approach tends to focus on what is predictable and incremental, rather than on what is more uncertain and systemic.

With its roots in financial risk management, the approach favours returning to some assumed norms of normality and stability. It thus rejects considering new possibilities, including a more dynamic approach to sustainable transformation.

Furthermore, returning to ‘normal’ for many communities implies exploitation and precarity. Preservation and coping are also favoured by the approach. Typically, these are hardly enough to address the complex challenges faced. Worse, they may inadvertently cause maladaptation.

Avoid maladaptation
A transformative approach to climate risk is needed instead. The only lasting solution may be to reduce developing countries’ reliance on climate sensitive activities, such as cattle breeding, through far reaching changes to create more resilient economies.

This requires moving away from de-risking in favour of a more integrated and systemic approach to diversify economies for greater resilience. More diversified economies are more supportive of sustainable development, and much less vulnerable or likely to be disrupted by external shocks.

In recent years, this has been clear from the greater vulnerability of primary export-dependent economies to economic shocks originating elsewhere. But it is also true of climate shocks. Thus, climate adaptation requires a new vision of common goals, instead of merely avoiding risks and worst-case scenarios.

Diversification crucial
Thus, climate adaptation in the global South needs to be addressed through development. Moving from de-risking to diversification requires a developmental state committed to ‘green’ industrial policy – involving investment and technology – to do so.

Diversification involves two cumulative processes working in tandem. First, shifting from primary production to manufacturing and higher value services. Second, moving resources from less to more capital-intensive activities.

Developing countries have to pursue sustainable development, keeping emissions and resource consumption within ecological limits. This requires economic diversification, raising productivity and improving social conditions.

Such new transformation strategies must recognize ecological and climate constraints. Developing country policymakers have limited means to address such challenges. With uneven ‘neo-liberal’ globalization, they are also handicapped by institutional weaknesses, e.g., even in mobilizing domestic resources.

Multilateralism key
Some rich countries – e.g., the UK and Australia – have cut their aid budgets and not deployed their unused Special Drawing Rights to help developing countries. They have done little to encourage private creditors to enable developing countries to invest to develop out of the multiple crises they face.

Thus far, measures for debt relief are very modest and grossly inadequate, “kicking the can down the road”. Deferring debt simply means borrowings are due to be paid later, as compound interest accumulates. Meanwhile, debt burdens continue to grow.

The UNCTAD report warns that measly climate funding is accelerating global warming, undermining prospects for decarbonizing the world. It highlights the need for pro-active multilateralism and support for developing countries to address the climate and pandemic induced crises.

“Global challenges clearly require multilateral responses”. But so far, only the IMF has provided some real relief by cancelling debt service obligations for 28 countries – worth US$727 million – between April 2020 and October 2021.

The end of the first Cold War undermined the felt need for UN-led multilateralism. If US President Biden really seeks to emulate President Roosevelt, he can begin by reviving the UN-led multilateralism FDR envisaged, instead of recklessly pursuing the new Cold War favoured by neo-conservatives in his team.

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Carbon offset markets allow the rich to emit as financial intermediaries profit. By fostering the fiction that others can be paid to cut greenhouse gases (GHGs) instead, it undermines efforts to do so.

Anis Chowdhury

Breakthrough?
On 28 January 2021, two High-Level Climate Action Champions, the COP25 and COP26 Presidents, and the United Nations Framework Convention on Climate Change (UNFCCC) Executive Secretary launched the Davos’ World Economic Forum’s ‘Race to Zero Breakthroughs’ initiative.

More than 130 countries pledged in Glasgow to reach net-zero carbon emissions by 2050. Despite well-known setbacks, the COP26 Glasgow Climate Pact has been hailed as a breakthrough on the “path to a safer future”.

Before COP26, many cities, regions, businesses, investors and higher education institutions joined the 120 countries already committed then. Achieving net-zero via offset trading has thus become the main climate action distraction.

Following difficult, protracted negotiations after the 2015 Paris Agreement (PA), Article 6 was the last of its 29 Articles agreed to. Article 6 unifies carbon offset trading standards in order to minimize ‘double counting’.

Offsetting allows countries and companies to continue emitting GHGs instead of cutting them. Buying offsets lets them claim their emissions have been ‘cancelled’. Thus, offset markets have slowed climate action in the rich North, responsible for two-thirds of cumulative emissions.

Jomo Kwame Sundaram

But why pay for emission cuts which would have happened anyway, even without being paid for via offset sales? At best, net-zero is a zero-sum game maintaining atmospheric GHG levels. But progress requires CO2 reduction, i.e., being net-negative, not just net-zero.

Many carbon credits sold as offsets do not additionally remove carbon as claimed. For example, J.P. Morgan, Disney and BlackRock have all paid millions to protect forests not even under threat. A CEO agreed its offset – buying into a Tanzania forestry programme – “is cheating”.

The Economist sees carbon offsets as “cheap cheats”. By ramping up the supply of offsets, prices were kept low. Much scope to game the system remains. Energy-intensive companies collude and lobby against high carbon prices, insisting they damage competitiveness.

Often buying in bulk, they pay too little for carbon credits to incentivize switching to renewable energy. Averaging only US$3 per tonne of CO2 in 2018 cannot accelerate desirable energy transitions.

Less than 5% of all offsets actually reduce CO2 in the atmosphere. A 2016 European Commission study of CDM offset projects found 85% provided no environmental benefits.

Making money instead
The Glasgow Financial Alliance for Net Zero (GFANZ) – a US$130 trillion investor club of over 450 financial firms in 45 countries – was launched at COP26 in Glasgow. It is chaired by former Bank of England Governor Mark Carney, now UN Special Envoy for Climate Action and Finance.

The GFANZ claims to be leveraging the power of big finance to innovatively achieve the PA goal of keeping the temperature rise over pre-industrial levels under 1.5 degrees Celsius.

Advocates claim this will unlock trillions of dollars to protect forests, increase renewable energy generation and otherwise mitigate global warming. But GFANZ does not even seek to cut finance for GHG-intensive industries.

GFANZ members pay ‘experts’, non-governmental organizations (NGOs) and governments to achieve net-zero ‘pathways’. Offset markets have enabled environmental NGOs to make money from supposed climate mitigating projects or by certifying other schemes.

Meanwhile, big businesses burnish their green credentials with offset purchases. After all, there are no agreed metrics to ensure portfolio alignment with the PA. Unsurprisingly, the Marshall Islands’ climate envoy urges remaining “vigilant against greenwashing”.

Touting market solutions, the World Bank has noted a recent surge in demand from major financial investors, including Goldman Sachs, Morgan Stanley and Lansdowne Partners. But much goes to profits from arbitrage, speculation or trading for third parties – not decarbonization or net-zero.

Even Larry Fink – CEO of Blackrock, the world’s largest asset manager – is sceptical, “We are lying to ourselves if we think we can do it just by conveniently asking banks and financial service companies, public companies, to conform to TCFD reporting. We are creating the biggest capital arbitrage of our lifetimes.”

Selling the sky
Offset markets have meant new opportunities to create new tradable assets. By aggregating all GHG emissions – from fossil fuels, deforestation, landfills, agriculture, etc. – profitable new financial products have been engineered for emissions trading and carbon credits.

The implicit premise is that market-based approaches always work best to address problems, in this case, to reduce GHG emissions. They do not distinguish between ‘luxury emissions’ and those due to the poor’s livelihoods.

Meanwhile, the world’s wealthiest 1% produces twice the total carbon emissions of the poorest 50%! Worse, emissions from private jets, mega-yachts and space travel of the super-rich greatly exacerbate global warming.

As with CDM and voluntary offset markets, the burden of emissions reduction has been shifted from North to South. While rich countries continue emitting GHGs, developing countries are now expected to ‘come clean’!

But no money for poor
At the GFANZ launch, Mark Carney claimed, “Make no mistake, the money is here, if the world wants to use it”. But developing countries are still waiting to see the promised US$100bn yearly to help finance their mitigation and adaptation efforts.

Following strong US opposition at the Article 6 negotiations, developing countries failed to secure ‘international transfers of mitigation outcomes’, i.e., mandatory contributions to the Adaptation Fund from the proceeds of international emissions trading among parties to the PA.

The US and European Union also successfully blocked a ‘loss and damage’ fund to finance recovery and reconstruction after climate disasters. Thus, Glasgow failed to deliver any significant additional climate finance for poor countries – for climate change adaptation as well as losses and damages.

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The planet is already 1.1°C warmer than in pre-industrial times. July 2021 was the hottest month ever recorded in 142 years. Despite the pandemic slowdown, 2020 was the hottest year so far, ending the warmest decade (2011-2020) ever.

Betrayal in Glasgow
Summing up widespread views of the recently concluded Glasgow climate summit, former Irish President Mary Robinson observed, “People will see this as a historically shameful dereliction of duty,… nowhere near enough to avoid climate disaster”.

Anis Chowdhury

Even if countries fulfil their Paris Agreement pledges, global warming is now expected to rise by 2.7°C from pre-industrial levels by century’s end. Authoritative projections suggest that if all COP26 long-term pledges and targets are met, the planet will still warm by 2.1℃ by 2100.

The United Nations Environment Programme suggests a strong chance of global warming disastrously rising over 1.5°C in the next two decades. Earlier policy targets – to halve global carbon emissions by 2030, and reach ‘net-zero’ emissions by 2050 – are now recognized as inadequate.

The Glasgow UN Framework Convention on Climate Change 26th Conference of Parties (COP26) was touted as the world’s ‘last best hope’ to save the planet. Many speeches cited disturbing trends, but national leaders most responsible for greenhouse gas (GHG) emissions offered little.

Thus, developing countries were betrayed yet again. Despite contributing less to accelerating global warming, they are suffering its worst consequences. They have been left to pay most bills for ‘losses and damages’, adaptation and mitigation.

Glasgow setbacks
Glasgow’s two biggest hopes were not realized: renewing targets for 2030 aligned with limiting warming to 1.5℃, and a clear strategy to mobilize the grossly inadequate US$100bn yearly – promised by rich country leaders before the Copenhagen COP in 2009 – to help finance developing countries’ efforts.

Jomo Kwame Sundaram

Meanwhile, far too many loopholes open to abuse remain, undermining efforts to reduce emissions. Further, no commitment to end fossil fuel subsidies globally – at US$11 million every minute, i.e., around US$6 trillion annually – was forthcoming.

No new oil and gas fields should be developed for the world to have a chance of getting to net-zero by 2050. Nevertheless, governments are still approving such projects, typically involving transnational corporate giants.

Various measures – e.g., ‘carbon capture and storage’ and ‘offsetting’ – have been touted as solutions. But carbon capture and storage technologies remain controversial, unproven at scale, expensive and rarely cost-competitive.

The Glasgow outcome did not include any commitment to fully phase out oil and gas. Meanwhile, the language on coal has been diluted to become virtually toothless: coal-powered plants will now be ‘phased down’, instead of ‘phased out’.

Offsets off track
Offset market advocates claim to reduce emissions or remove GHGs from the atmosphere by some to ‘off-set’ emissions by others. Thus, offsetting often means paying someone poor to cut GHG emissions or forcing them to pay someone else to do so. With more means, big business can more easily afford to ‘greenwash’.

Carbon offset markets have long overpromised, but underdelivered. As they typically exaggerate GHG emission reduction claims, offsetting is a poor substitute for actually cutting fossil fuel use. Meanwhile, disagreements over offset rules have long stalled international climate change negotiations.

Buying offsets allows GHG emitters “to keep polluting”, albeit for a fee. Highly GHG emitting activities by wealthier individuals, companies and nations can thus continue, after “transferring the burden of action and sacrifice to others” – typically to those in poorer nations – via the market.

For Tariq Fancy – who managed ‘sustainable investing’ at BlackRock, the world’s largest fund manager – the market for offsets is a “deadly distraction”, “leading the world into a dangerous mirage, … burning valuable time”.

Meanwhile, most established offset programmes – e.g., the United Nations’ REDD+ programme or the Kyoto Protocol’s Clean Development Mechanism – have clearly failed to meaningfully reduce GHG emissions.

More than 130 countries have committed to achieve net-zero by 2050. But net-zero targeting has actually allowed the world to continue kicking the can down the road, instead of acting decisively and urgently to verifiably cut GHG emissions.

Hence, it is seen as a cynical “scam”, “nothing more than an expensive cover-up for continued toxic emissions”. Trading non-verifiable offsets – supposedly to achieve net-zero – allows continuing GHG emissions with business almost as usual.

Loss and damage?
Vulnerable and poor nations have argued for decades that rich countries owe them compensation for irreversible damage from global warming. In fact, no UN climate conference has delivered any funding for losses and damages to countries affected.

Rich countries agreed to begin a ‘dialogue’ to discuss “arrangements for the funding of activities to avert, minimize and address loss and damage”. Representing developing nations, Guinea expressed “extreme disappointment” at this ruse to delay progress on financing recovery from and rebuilding after climate disasters.

Developed nations account for two-thirds of cumulative emissions compared to only 3% from Africa. Carbon emissions by the wealthiest 1% of the world’s population were more than twice those of the bottom half between 1990 and 2015!

Low-lying small island nations – from the Marshall Islands to Fiji and Antigua – fear losing much of their land to rising sea levels. But their longstanding call to create a ‘loss and damage’ fund was rejected yet again.

South Pacific island representatives have expressed disappointment at lack of funding for losses and damages, and the watered down language on coal. For them, COP26 was a ‘monumental failure’, leaving them in existential peril.

Although historical responsibility for GHG emissions lies primarily with the wealthy countries, especially the US and the European Union, once again, they have successfully evaded serious commitments to address such longstanding problems due to global warming.

Climate injustice
For the UN Secretary-General, “[o]ver the past 25 years, the richest 10% of the global population has been responsible for more than half of all carbon emissions, and the poorest 50% were responsible for just 7% of emissions”.

The World Bank estimates that, if left unchecked, climate change will condemn 132 million more people into poverty over the next decade, while displacing more than 216 million from their homes and land by 2050.

Meanwhile, poorer countries – who have contributed least to cumulative GHG emissions – continue to suffer most. To address climate injustice, rich countries – most responsible for GHG emissions and global warming – must do much more.

Their finance for developing countries ought to be much more ambitious than US$100bn yearly. Financing terms should be far more generous than currently. Also, funding should prioritize adaptation, especially for the poorest countries most at risk.

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Quickly enabling greater and more affordable production of and access to COVID-19 medical needs is urgently needed in the South. Such progress will also foster much needed goodwill for international cooperation, multilateralism and sustainable development.

Jomo Kwame Sundaram

But sustained European efforts – of Switzerland, the UK and the EU, led by Germany – have blocked progress ahead of the WTO ministerial starting 30 November. Meanwhile, ongoing text-based discussions seem to be leading nowhere.

IP not needed for innovation
Affordable vaccines and drugs have been crucial for eliminating infectious diseases such as tuberculosis, HIV-AIDS, polio and smallpox. But despite strong evidence to the contrary, advocates insist intellectual property rights (IPRs) are needed to incentivize innovation.

Development of COVID-19 vaccines and other therapeutics have been accelerated by considerable government financing. Only six major vaccine developers received over US$12 billion in public funding. Projected revenue from their IP monopolies will exceed tens of billions.

Supply shortages have disrupted vaccine supplies. IP monopolies block competition, making it hard to quickly increase supplies. Thanks to patent protection, for example, only four companies produce plastic bioreactor bags needed to make vaccines.

Cross-border IP enforcement has been enhanced by TRIPS in 1995. The African walkout from the 1999 Seattle ministerial highlighted the WTO’s rich country bias. As part of the compromise to revive WTO talks, TRIPS has included a ‘public health exception’ since 2001.

Anis Chowdhury

All licensing requires case-by-case, patentholder-by-patentholder, country-by-country negotiations. But licensing is only limited to patents, without requiring sharing ‘industrial secrets’ needed to make complex biochemical compounds.

Time consuming, onerous and costly, such negotiations are beyond the means of most poor countries. Worse, some high-income country (HIC) governments have blocked such licensing, even when agreed to by companies.

IP deepens inequalities
The World Health Organization Director-General has noted four-fifths of vaccine doses went to HICs or upper middle-income countries (MICs). Rich countries – with a seventh of the world’s population – had bought over half the first 7.5 billion vaccine doses by November 2020.

Meanwhile, only 1.5% in low-income countries (LICs) were vaccinated by August 2021. Much of the variation in infection and death rates is due to unequal access, not only to vaccines, but also diagnostic tests, medical therapies, protective equipment, devices, equipment and other needs.

The private-public COVAX facility had promised to deliver two billion vaccine doses by end-2021, and to reach a fifth of the people in 92 LICs. But less than half a billion doses have been delivered so far.

Australian academic Deborah Gleeson warns that even as promising new treatments become available, they will be too costly for most in LICs and many MICs. Diagnostic tests are unequally distributed, with HICs averaging over a hundred times more than LICs.

And even when governments and companies are willing to license others to supply small LICs with low-cost generics, most MICs are excluded. Worse, some high-income country (HIC) governments have blocked such licensing, even when agreed to by companies.

Some HICs have been embarrassed into sharing millions of their unused excess vaccine doses. But of the 1.8 billion doses promised so far, only 14% has gone to LICs. Such donations of funds and other needs undoubtedly help.

But such unpredictable acts of charity – e.g., by HICs who bought far more than they needed – are hardly enough. Manufacturing capacity in the developing world must still be enhanced to meet overall needs. This requires the waiver.

Contrary to the claim that the South lacks manufacturing capacity, vaccines have long been made in over eighty developing countries. Although novel, mRNA vaccine manufacture involves less steps, ingredients and physical capacity than traditional vaccines. MSF has identified many capable producers in the South.

TRIPS waiver urgently needed
TRIPS provides 20-year monopolies for patents. These have often been ‘evergreened’, i.e., extended, sometimes indefinitely, ostensibly to reward additional innovation. Thus, most developing countries have been prevented from meeting their health needs more affordably.

The temporary waiver would allow companies everywhere to produce the required items and use patented technologies without infringing IP. Supplies would increase and prices fall. Currently, access to COVID-19 needs is very inequitable, deepening the yawning gap between HICs and LICs.

The revised 21 May text clarifies the proposed waiver is for at least three years from the decision date, subject to annual review. It would cover products and technologies – including vaccines, therapeutics, diagnostics, devices, protective equipment, materials, components, methods and means of manufacture.

The proposal also covers the application, implementation and enforcement of TRIPS provisions on patents, copyrights, designs and other protected information, e.g., undisclosed manufacturing blueprints and industrial secrets.

Thus, the waiver has long been urgently needed to contain the pandemic worldwide. But rich countries have successfully blocked progress thus far despite the heavy human and economic toll it has taken.

Game changer
Unlike the more flexible arrangements of the General Agreement on Tariffs and Trade, the WTO framework and negotiating priorities have undermined developmental aspirations.

The South has been undermined by rich countries’ betrayal of the 2001 Doha compromise. After ‘softly’ killing the ‘Development Round’ promised then, rich countries can now redeem themselves by supporting the waiver.

Almost two years after COVID-19 was first recognized, the pandemic continues to threaten the world, with poor countries and people now worse affected. The devastation could be partly mitigated if developing countries could meet their pandemic needs without fear of litigation for IP infringement.

A TRIPS Council meeting is scheduled for 16 November, before the four-day WTO Ministerial Council meeting from 30 November. The waiver would also encourage renewed international cooperation, long undermined by destructive rivalry and competition.

By refusing to make concessions, rich countries would not only jeopardize the WTO, but also the world’s ability to urgently contain the pandemic. With complementary financial resource transfers, they can restore the goodwill urgently needed for international cooperation and to revive multilateralism.

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Addressing global warming requires cutting carbon emissions by almost half by 2030! For the Intergovernmental Panel on Climate Change, emissions must fall by 45% below 2010 levels by 2030 to limit warming to 1.5°C, instead of the 2.7°C now expected.

Instead, countries are mainly under pressure to commit to ‘net-zero’ carbon (dioxide, CO2) emissions by 2050 under that deal. Meanwhile, global carbon emissions – now already close to pre-pandemic levels – are rising rapidly despite higher fossil fuel prices.

Anis Chowdhury

False promise
At the annual climate meetings in Glasgow, carbon pricing is being touted as the main means to cut CO2 and other greenhouse gas (GHG) emissions. The European Union President urged, “Put a price on carbon”, while Canadian Prime Minister Justin Trudeau advocates a global minimum carbon tax.

Businesses are also rallying behind one-size-fits-all CO2 pricing, claiming it is “effective and fair”. But there is little discussion of how revenues thus raised should be distributed among countries, let alone to support poorer countries’ adaptation and mitigation efforts.

Carbon pricing supposedly penalizes CO2 emitters for economic losses due to global warming. The public bears the costs of global warming, e.g., damage due to rising sea levels, extreme weather events, changing rainfall, droughts or higher health care and other expenses.

But there is little effort at or evidence of compensation to those adversely affected. Therefore, poorer countries are understandably sceptical, especially as rich countries have failed to fulfil their promise of US$100bn yearly climate finance support.

The CO2 price market solution is said to be “the most powerful tool” in the climate policy arsenal. It claims to deter and thus reduce GHG emissions, while incentivizing investment shifts from fossil-fuel burning to cleaner energy generating technologies.

Jomo Kwame Sundaram

Only 22% of GHGs produced globally are subject to carbon pricing, averaging only US$3/ton! Hence, such price incentives alone cannot significantly discourage high GHG emissions, or greatly accelerate widespread use of low-carbon technologies.

Powerful fossil-fuel corporate interests have made sure that carbon prices are not high enough to force users to switch energy sources. Thus, existing CO2 pricing policies are “modest and less ambitious” than they could and should be. Meanwhile, several factors have undermined carbon taxation’s ability to speed up ‘decarbonization’.

First, carbon taxes have never actually provided much climate finance. Second, CO2 taxes misrepresent climate change as due to ‘market failure’, not as a fundamental systemic problem. Third, it seeks efficiency, not efficacy! Thus, it does not treat global warming as an urgent threat.

Fourth, market signals from carbon taxation seek to ‘optimize’ the status quo, rather than to transform systems responsible for global warming. Fifth, it offers a deceptively simplistic ‘universal’ solution, rather than a policy approach sensitive to circumstances. Sixth, it ignores political realities, especially differences in key stakeholders’ power and influence.

Unfair to poor
Even if introduced gradually, the flat carbon tax will burden poorer countries more. Worse, carbon pricing is regressive, hurting the poor more. Thus, the burden of CO2 taxes is heavier on average consumers in poor countries than on poor consumers in ‘average’ countries.

A UN survey showed a seemingly fair, uniform global carbon tax would burden – as a share of GDP – developing countries much more than developed countries. Thus, although per capita emissions in poorer countries are far less than in rich ones, a flat CO2 tax burdens developing countries much more.

Also, a standard carbon tax burdens low-income groups more, by raising not only energy costs directly, but also those of all goods and services requiring energy use. With this seemingly fair, one-size-fits-all tax, low income households and countries pay much more relatively.

Analytically, such distributional effects can be avoided by differentiated pricing, e.g., by increasing prices to reflect the amount of energy used. Also, compensatory mechanisms – such as subsidies or cash transfers to low-income groups – can help.

But these are administratively difficult, particularly for poor countries, with limited taxation and social assistance systems. Furthermore, effectively targeting vulnerable populations is hugely problematic in practice.

Mission impossible?
Selective investment and technology promotion policies are much more effective in encouraging clean energy and reducing GHG emissions. Huge investments in solar, hydro and wind energy as well as public transport are required, typically involving high initial costs and low returns. Hence, public investment often has to lead.

But most developing countries lack the fiscal capacity for such large public investment programmes. Large increases in compensatory financing, official development assistance and concessional lending are urgently needed, but have not been forthcoming despite much talk.

Climate finance initiatives generally need to improve incentives for mitigation, while funding much more climate adaptation in developing countries. Potentially, a CO2 tax could yield significantly more resources to cover such international funding requirements, but this requires appropriate redistributive measures which have never been seriously negotiated.

Carbon taxes can help
Even without an ostensibly market-determined CO2 price, taxing GHG emissions would make renewable energy more price competitive. The UN advocated a ‘global green new deal’ in response to the 2008-2009 global financial crisis. It noted a US$50/ton tax would make more renewables commercially competitive, besides mobilizing US$500bn annually for climate finance.

A mid-2021 International Monetary Fund (IMF) staff note has proposed an international carbon price floor. This would “jump-start” emissions reductions by requiring G20 governments to enforce minimum carbon prices. Involving the largest emitting countries would be very consequential while bypassing collective action difficulties among the 195 UN Member States.

The scheme could be pragmatically designed to be more equitable, and for all types of GHGs, not just CO2 emissions. But even a global carbon price of US$75/ton would only cut enough emissions to keep global warming below 2°C – not the needed 1.5°C, the Paris Agreement goal!

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Current climate mitigation plans will result in a catastrophic 2.7°C world temperature rise. US$1.6–3.8 trillion is needed annually to avoid global warming exceeding 1.5°C.

Creative accounting
Rich countries have long broken their 2009 Copenhagen COP16 pledge to mobilize “US$100 billion per year by 2020 to address the needs of developing countries”. The pandemic has worsened the situation, reducing available finance. Poor countries – many already caught in debt traps – struggle to cope.

Anis Chowdhury

Such ambiguity has enabled double-counting, poor transparency and creative accounting, noted the UN Independent Expert Group on Climate Finance. Thus, the rich countries’ Organisation for Economic Co-operation and Development (OECD) reported US$80bn in climate finance for developing countries in 2019.

Fudging numbers
But OECD climate finance numbers include non-concessional commercial loans, ‘rolled-over’ loans and private finance. Some donor governments count most development aid, even when not primarily for ‘climate action’.

Also, the dispute over which funds are to be considered ‘new and additional’ has not been resolved since the 1992 adoption of the UN Framework Convention on Climate Change (UNFCCC) at the Rio Earth Summit.

Official development assistance redesignated as climate finance should be categorized as ‘reallocated’, rather than ‘additional’ funding. Consequently, poor countries are losing aid for education, health and other public goods.

Jomo Kwame Sundaram

Climate finance anarchy
Developing countries expected the promised US$100bn yearly to be largely public grants disbursed via the then new UNFCCC Green Climate Fund. Oxfam estimates public climate financing at only US$19–22.5bn in 2017-18, with little effective coordination of public finance.

Developing countries believed their representatives would help decide disbursement, ensuring equity, efficacy and efficiency. But little is actually managed by developing countries themselves. Instead, climate finance is disbursed via many channels, including rich countries’ aid and export promotion agencies, private banks, equity funds and multilateral institutions’ loans and grants.

Several UN programmes also support climate action, including the UN Environment Programme, UN Development Programme and Global Environment Facility. But all are underfunded, requiring frequent replenishment. Uncertain financing and developing countries’ lack of meaningful involvement in disbursements make planning all the more difficult.

Financialization has meant that climate funding increasingly involves private financial interests. Claims of private climate finance from rich to poor countries are much contested. Even the OECD estimate has not been rising steadily, instead fluctuating directionless from US$16.7bn in 2014 to US$10.1bn in 2016 and US$14.6bn in 2018.

The actual role and impact of private finance are also much disputed. Unsurprisingly, private funding is unlikely to help countries most in need, address policy priorities, or compensate for damages beyond repair. Instead, ‘blended finance’ often uses public finance to ‘de-risk’ private investments.

Putting profits first
The poorest countries desperately need to rebuild resilience and adapt human environments and livelihoods. Adaptation funds are required to better cope with the new circumstances created by global warming.

Needed ‘adaptation’ – such as improving drainage, water catchment and infrastructure – is costly, but nonetheless desperately necessary.

But ‘donors’ prefer publicizable ‘easy wins’ from climate mitigation, especially as they increasingly gave loans, rather than grants. Thus, although the Paris COP21 Agreement sought to balance mitigation with adaptation, most climate finance still seeks to cut greenhouse gas (GHG) emissions.

As climate adaptation is rarely lucrative, it is of less interest to private investors. Rather, private finance favours mitigation investments generating higher returns. Thus, only US$20bn was for adaptation in 2019 – less than half the sum for mitigation. Unsurprisingly, the OECD report acknowledges only 3% of private climate finance has been for adaptation.

Chasing profits, most climate finance goes to middle-income countries, not the poorest or most vulnerable. Only US$5.9bn – less than a fifth of total adaptation finance – has gone to the UN’s 46 ‘least developed countries’ (LDCs) during 2014-18! This is “less than 3% of [poorly] estimated LDCs annual adaptation finance needs between 2020-2030”.

Cruel ironies
The International Monetary Fund recognizes the “unequal burden of rising temperatures”. It is indeed a “cruel irony” that those far less responsible for global warming bear the brunt of its costs. Meanwhile, providing climate finance via loans is pushing poor countries deeper into debt.

Increasingly frequent extreme weather disasters are often followed by much more borrowing due to poor countries’ limited fiscal space. But loans for low-income countries (LICs) cost much more than for high-income ones. Hence, LICs spend five times more on debt than on coping with climate change and cutting GHG emissions.

Four-fifths of the most damaging disasters since 2000 have been due to tropical storms. The worst disasters have raised government debt in 90% of cases within two years – with no prospect of debt relief.

As many LICs are already heavily indebted, climate disasters have been truly catastrophic – as in Belize, Grenada and Mozambique. Little has trickled down to the worst affected, and other vulnerable, needy and poor communities.

Funding gap
Based on countries’ own long-term goals for mitigation and adaptation, the UNFCCC’s Standing Committee on Finance estimated that developing countries need US$5.8-5.9 trillion in all until 2030. The UN estimates developing countries currently need US$70bn yearly for adaptation, rising to US$140–300bn by 2030.

In July, the ‘V20’ of finance ministers from 48 climate-vulnerable countries urged delivery of the 2009 US$100bn vow to affirm a commitment to improve climate finance. This should include increased funds, more in grants, and with at least half for adaptation – but the UNFCCC chief has noted lack of progress since.

Only strong enforcement of rigorous climate finance criteria can stop rich countries abusing currently ambiguous reporting requirements. Currently fragmented climate financing urgently needs more coherence and strategic prioritization of support to those most distressed and vulnerable.

This month’s UNFCCC COP26 in Glasgow, Scotland, can and must set things right before it is too late. Will the new Cold War drive the North to do the unexpected to win the rest of the world to its side instead of further militarizing tensions?

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“The outlook for LDCs is grim”. The latest United Nations (UN) assessment of prospects for the least developed countries (LDCs) notes recent setbacks without finding any silver lining on the horizon.

Promises unkept
Half a century ago, LDCs were first officially recognised by a UN General Assembly resolution. It built on research, analysis and advocacy by the UN Conference on Trade and Development (UNCTAD).

Anis Chowdhury

But actual progress has been disappointing, with only seven countries ‘graduating’. The list of LDCs has grown to 46 as more ‘qualify’ to ‘join’. With the fifth conference due in Doha in January 2022, some critical soul-searching is urgently needed for efforts not to disappoint yet again.

The failure of development partners to meet their commitments has been a major long-standing problem. Only 6 of 29 Organization for Economic Cooperation and Development (OECD) partners have kept their promise to give at least 0.15% of their national incomes as aid to LDCs.

As the 1969 UN definition of official development assistance (ODA) has been compromised, the UN report unsurprisingly laments declining aid ‘concessionality’. New OECD aid reporting rules mean its numbers do not reliably measure additional sustainable development finance.

Systemic incoherence
The UN uses three criteria – income, human assets and vulnerability – to classify LDCs. Although nominally part of the UN system, the World Bank and International Monetary Fund do not recognise LDCs.

Instead, the Bank only uses income to classify countries, with only low-income countries eligible for concessional loans from both Bank and Fund. Thus, ‘middle-income’ LDCs – so classified due to poor human assets and/or high vulnerability – are left out.

When the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was adopted in 1995, LDCs were given more time to comply: first, until November 2005, extended to July 2013, then July 2021, and most recently, July 2034. But such ad-hoc postponements undermine LDCs’ long-term planning.

Jomo Kwame Sundaram

Limited market access
LDCs account for only 0.13% of global trade. But despite touting trade liberalisation as necessary for development, OECD countries have not given LDCs much access to their own markets. Allowing more meaningful ‘duty-free, quota-free’ (DFQF) access is thus crucial to LDCs.

Helpful 97% DFQF access for LDCs to developed country markets was agreed to at the 2005 World Trade Organization (WTO) ministerial in Hong Kong. But most LDC exports are concentrated in a few tariff lines, such as agricultural products and textiles, still subject to constant re-negotiation.

Tariff reduction alone is no panacea, as non-tariff measures have posed barriers to LDC exports. Regulatory standards – e.g., ‘sanitary and phyto-sanitary’ requirements – and ‘Rules of Origin’ clauses limit LDC eligibility for preferences. Even when requirements are met, onerous procedures can still frustrate access.

Also, preferential arrangements – like the European Union’s ‘Everything But Arms’ initiative and the US ‘Generalised System of Preferences’ (GSP) – have often been arbitrarily implemented.

Needing frequent Congressional approval makes GSP unpredictable, ever subject to capricious new conditions. Thus, some US lawmakers are demanding that GSP renewal – which expired on 31 December 2020 – should be subject to conditions such as particular human rights, rule of law, labour or environmental regulation priorities.

Trade concessions?
Despite the lofty 2000 Millennium Declaration, OECD countries have conceded little since. After the African walkout at the 1999 Seattle WTO ministerial, the promise of a ‘Development Round’ brought developing countries back to the negotiating table. Launched in Doha after 9/11, “with much rhetoric about… global unity”, there was little enthusiasm among rich countries.

Still pushing developing countries to open their markets more, rich countries demanded they lower tariffs to nearly zero in sectors never previously covered by multilateral trade agreements, including agriculture and services.

Refusing to recognise tariffs as poor countries’ means to protect their farmers and ensure food security, OECD demands ignore their own heavy subsidisation of food agriculture. Also, LDC protection of their modern services – still in ‘infancy’ – is deemed necessary to withstand transnational competition.

OECD countries became more protectionist after the 2008-2009 global financial crisis, later pursuing bilateral, regional and plurilateral ‘free trade’ agreements. In December 2015, the Financial Times gleefully proclaimed “the Doha Round had finally died a merciful death” after long being comatose.

Preferential trade?
Despite DFQF market access, ‘margins of preference’ (MoP) for LDC products have been squeezed by other developing countries’ exports. MoP refer to the difference between preferential rates for LDCs and other rates. These may refer to ‘Most Favoured Nation’ (MFN) rates available to all countries, or preferential rates available to some.

Meanwhile, tariffs have fallen with MFN liberalisation, in some cases to zero. Tariff cuts have deprived LDCs of important revenue. ‘Aid for Trade’ (A4T) – purportedly to promote exports – has never tried to compensate developing countries for lost tariff revenue.

Moreover, A4T conditionalities make them less developmental. A4T is often used for trade policy capacity building – typically focused on encouraging LDCs to open their markets more, as desired by rich countries – rather than enhancing LDCs’ productive capacities and capabilities.

Even if market barriers are reduced, most LDCs still lack the infrastructure and support services to export much more. OECD countries demand LDC trade liberalisation even before they have developed sufficient productive capacities. Hence, even ‘graduate’ LDCs fail to become internationally competitive.

International solidarity critical
While LDCs’ lot remains dismal, new challenges have emerged. For many LDCs, global warming poses an existential threat. The pandemic has also worsened their lot. Inadequate international fiscal support and the high costs of containing the pandemic meant 2020 saw LDCs’ worst growth since the 1980s’ lost decade.

The UN report acknowledges even the meagre progress “painstakingly achieved on several dimensions of development, notably on the fronts of poverty, hunger, education and health” has been reversed. Besides emerging challenges, the LDCs conference must also address the roots of their condition.

LDCs’ development trajectories and options are shaped by the global environment. Besides foreign trade, concessional international financing is key to LDC progress. The latest UN LDCs report proposes new “international support measures”, but recent trends suggest they are unlikely to materialise.

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The bogey of inflation has been revived. Dubious pre-pandemic economic progress, fiscal constraints and vaccine apartheid were bad enough. Now, ostensibly anti-inflationary measures also threaten recovery and sustainable development.

The International Monetary Fund (IMF) has revised downwards its latest global growth forecast. Its latest World Economic Outlook (WEO) warns of a “dangerous divergence” between richer and poorer countries. This has been exacerbated by, but has also worsened national fiscal disparities and the ‘great vaccine divide’.

Anis Chowdhury

But over 70%, or 152 of 209 economists polled believe rising inflation worldwide is due to temporary supply chain disruptions. Heads of major central banks – such as the US Federal Reserve, Bank of England and European Central Bank – concur.

Although the IMF agrees, it also urges policymakers to “be on the lookout and be prepared to act, especially if…prolonged supply disruptions, rising commodity and housing prices, permanent and unfunded fiscal commitments, a de-anchoring of expectations, combined with mismeasurement of output gaps [materialise]”.

The IMF’s October 2021 Fiscal Monitor urges governments to take all steps necessary to regain capital markets’ and lenders’ confidence, including by reducing budget deficits. But it also warns against ‘self-defeating’, premature phasing-out of needed recovery measures. Thus, the ‘two-handed’ IMF economists offer contradictory policy guidance.

Wrong diagnosis
But inflation is unlikely to persist. First, labour market deregulation since the 1980s has long eroded workers’ bargaining power. Hence, workers are now more worried about job security, badly eroded in recent decades.

Second, ‘decent’ job creation remains weak in most rich countries after decades of ‘off-shoring’ and labour-saving innovation. Unsurprisingly then, labour shares of national income have been falling since the mid-1970s.

Jomo Kwame Sundaram

The WEO notes private investment fell in 2021’s second quarter, with several new uncertainties responsible. Slower investment and growth also mean less tax revenue and higher debt-GDP ratios. Cutting spending will only make things worse.

Correct diagnosis should be the basis for choice of medication. Contrary to monetarist faith, inflation is not only due to excess money supply. But if supplies are blocked – e.g., due to disasters, conflicts, curfews or transport restrictions – demand easily becomes ‘excessive’.

Inflation is often also due to big suppliers abusing their market power, with powerful firms raising prices with higher ‘mark-ups’. Privatization and deregulation over the last four decades have strengthened these monopolies or oligopolies.

Blunt instrument
The WEO seems more concerned with inflation than employment as financial markets demand monetary tightening, interest rate hikes and fiscal austerity. Bloomberg has urged emerging economies to “brace for rate hikes”, with Mexico, Brazil, Peru, Russia and others obliging, as The Economist anticipated.

The interest rate is a blunt tool. Inflation is reduced by raising interest rates, cutting growth and increasing unemployment – “tough medicine” indeed. Hawks emphasize how inflation erodes the poor’s purchasing power, but deny their prescriptions do worse.

One must also wonder how interest rate hikes are supposed to address actual problems. For example, in September 2021, global food prices shot up nearly 33% year-on-year, due to extreme weather and pandemic restrictions. Higher rates also certainly could not help when a severe drought hit hydroelectric power generation in Brazil.

Higher interest rates squeeze both private and government spending. Thus, rate hikes will likely trigger a vicious circle of further rate increases and general austerity, slowing recovery and raising debt-GDP ratios.

Raising interest rates in rich countries will also see more capital flight from developing countries and exchange rate depreciations. Already handicapped by vaccine inequity and constrained fiscal space, worsened by modest debt relief and pandemic support from rich countries, raising interest rates will set them further back.

Debt misconstrued
Rising debt levels have understandably been an on-going concern. In 2019, the World Bank warned that post-2008 global financial crisis (GFC) indebtedness was dangerous, noting all previous debt waves had ended in crises.

With the pandemic, fears have been “looming” again of “catastrophic” debt crises in developing countries. As if governments had much choice, the Wall Street Journal warned, “Governments world-wide gorge on record debt, testing new limits”.

The IMF’s October Fiscal Monitor acknowledges, “there is no magic number for the debt target. Macroeconomic theory does not prescribe a specific debt target; nor is there a clear threshold above which debt might become particularly harmful to economic growth”. This confirms earlier IMF and World Bank findings suggesting exaggeration of debt constraints.

Rather, the focus should be on “the likely growth effects of the level, composition and efficiency of public spending and taxation”. Instead of fixating on overall debt levels, its composition – domestic vs external, public vs publicly guaranteed – deserves more attention.

In fact, debt-financed infrastructure, education, skill development and retraining programmes all enhance growth. IMF research found such infrastructure investment had large growth effects without even raising the debt-GDP ratio.

Deep-seated challenges
The predictable recommendation is ‘belt-tightening’ – via ‘austerity’ and ‘higher interest rates’ – bringing even more economic contraction. Typical structural reform prescriptions – e.g., more labour market liberalization, deregulation, privatization and tax cuts – only make things worse, while regressive tax cuts rarely generate promised growth.

Financialization in recent decades has encouraged more speculation, share buybacks, real property, mergers and acquisitions. Consequently, the real economy has suffered, with inflation rising as productivity growth falters.

But inflation was kept in check by cheap imports and cheaper labour, even as profit margins and executive salaries rose. But neoliberals have not hesitated to claim credit for taming inflation during the Great Moderation via fiscal austerity, debt ceilings and inflation targeting.

Despite fiscal austerity, debt has risen, especially since the GFC. Slower growth has also meant less revenue, further reducing fiscal space. Public investment cuts – particularly for services, infrastructure, research and development – have also hurt productivity growth.

Build forward, not backwards
Every economic crisis is different in its own way. The COVID-19 recession involves both supply and demand shocks. Output has fallen due to lockdowns and value chain disruptions. Demand has also declined with lower incomes, less spending, more jobs lost and greater uncertainty.

When provided, relief measures have sustained some demand. Pandemic restrictions have accelerated digitalization, but other changes are also needed. Reforms must build on COVID-19 transformations for a better future , e.g., by promoting job-intensive green investments, worker reskilling and retraining.

The COVID recession thus offers an unexpected opportunity to ‘build forward better’ to address deep-seated problems to build a better world. This must necessarily involve shedding biased and dysfunctional arrangements, managing markets, guiding private investments, workforce retraining and investing in education, health and social protection.

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