Few policymakers ever claim credit for causing stagnation and recessions. Yet, they do so all the time, justifying their actions by some supposedly higher purpose.

Now, that higher purpose is checking inflation as if it is the worst option for people today. Many supposed economists make up tall tales that inflation causes economic contraction which ordinary mortals do not know or understand.

Jomo Kwame Sundaram

Recent trends since mid-2022 are clear. Inflation is no longer accelerating, but slowing. And for most economists, only accelerating inflation gives cause for concern.

Annualized inflation since has only been slightly above the official, but nonetheless arbitrary 2% inflation target of most Western central banks.

At its peak, the brief inflationary surge, in the second quarter of last year, undoubtedly reached the “highest (price) levels since the early 1980s” because of the way it is measured.

After decades of ‘financialization’, the public and politicians unwittingly support moneyed interests who want to minimize inflation to make the most of their financial assets.

War and price
Russia’s aggression against Ukraine began last February, with retaliatory sanctions following suit. Both have disrupted supplies, especially of fuel and food. The inflation spike in the four months after the Russian invasion was mainly due to ‘supply shocks’.

Price increases were triggered by the war and retaliatory sanctions, especially for fuel, food and fertilizer. Although no longer accelerating, prices remain higher than a year before.

To be sure, price pressures had been building up with other supply disruptions. Also, demand has been changing with the new Cold War against China, the Covid-19 pandemic and ‘recovery’, and credit tightening in the last year.

There is little evidence of any more major accelerating factors. There is no ‘wage-price spiral’ as prices have recently been rising more than wages despite government efforts ensuring full employment since the 2008 global financial crisis.

Despite difficulties due to inflation, tens of millions of Americans are better off than before, e.g., with the ten million jobs created in the last two years. Under Biden, wages for poorly paid workers have risen faster than consumer prices.

Higher borrowing costs have also weakened the lot of working people everywhere. Such adverse consequences would be much less likely if the public better understood recent price increases, available policy options and their consequences.

With the notable exception of the Bank of Japan, most other major central banks have been playing ‘catch-up’ with the US Federal Reserve interest rate hikes. To be sure, inflation has already been falling for many reasons, largely unrelated to them.

Making stagnation
But higher borrowing costs have reduced spending, for both consumption and investment. This has hastened economic slowdown worldwide following more than a decade of largely lackluster growth since the 2008 global financial crisis.

Ill-advised earlier policies now limit what governments can do in response. With the Fed sharply raising interest rates over the last year, developing country central banks have been trying, typically in vain, to stem capital outflows to the US and other ‘safe havens’ raising interest rates.

Having opened their capital accounts following foreign advice, developing country central banks always offer higher raise interest rates, hoping more capital will flow in rather than out.

Interestingly, conservative US economists Milton Friedman and Ben Bernanke have shown the Fed has worsened past US downturns by raising interest rates, instead of supporting enterprises in their time of need.

Four decades ago, increased servicing costs triggered government debt crises in Latin America and Africa, condemning them to ‘lost decades’. Policy conditions were then imposed by the International Monetary Fund and World Bank for access to emergency loans.

Globalization double-edged
Economic globalization policies at the turn of the century are being significantly reversed, with devastating consequences for developing countries after they opened their economies to foreign trade and investment.

Encouraging foreign portfolio investment has increasingly been at the expense of ‘greenfield’ foreign direct investment enhancing new economic capacities and capabilities.

The new Cold War has arguably involved more economic weapons, e.g., sanctions, than the earlier one. Trump’s and Japanese ‘reshoring’ and ‘friend-shoring’ discriminate among investors, remaking ‘value’ or ‘supply chains’.

Arguably, establishing the World Trade Organization in 1995 was the high water mark for multilateral trade liberalization, setting a ‘one size fits all’ approach for all, regardless of means. More recently, Biden has continued Trump’s reversal of earlier trade liberalization, even at the regional level.

1995 also saw strengthening intellectual property rights internationally, limiting technology transfers and progress. Recent ‘trade conflicts’ increasingly involve access to high technology, e.g., in the case of Huawei, TSMC and Samsung.

With declining direct tax rates almost worldwide, governments face more budget constraints. The last year has seen these diminished fiscal means massively diverted for military spending and strategic ends, cutting resources for development, sustainability, equity and humanitarian ends.

In this context, the new international antagonisms conspire to make this a ‘perfect storm’ of economic stagnation and regression. Hence, those striving for international peace and cooperation may well be our best hope against the ‘new barbarism’.

IPS UN Bureau

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Calls for more government regulation and intervention are common during crises. But once the crises subside, pressures to reform quickly evaporate and the government is told to withdraw. New financial fads and opportunities are then touted, instead of long needed reforms.

Global financial crisis
The 2007-2009 global financial crisis (GFC) began in the US housing market. Collateralized debt obligations (CDOs), credit default swaps (CDSs) and other related contracts, many quite ‘novel’, spread the risk worldwide, far beyond US mortgage markets.

Jomo Kwame Sundaram

The GFC also exposed massive resource misallocations due to financial liberalization with minimal regulation of supposedly efficient markets. With growing arbitrage of interest rate differentials, achieving balanced equilibria has become impossible except in mainstream economic models.

Financialization has meant much greater debt and risk exposure as well as vulnerability for many households and firms, e.g., due to ‘term’ (duration) and currency ‘mismatches’, resulting in greater overall financial system fragility.

This has worsened global imbalances, reflected in larger trade and current account deficits and surpluses. In unfavourable circumstances, exposure of firms and households to risky assets and liabilities has been enough to trigger defaults.

Bold fiscal efforts succeeded in inducing modest economic recoveries before they were nipped in the bud soon after the ‘green shoots of recovery’ appeared. Instead, the US Fed initiated ‘unconventional’ monetary policies, offering easy credit with ‘quantitative easing’.

Currencies in flux
The seemingly coordinated rise of various, apparently unconnected asset prices cannot be explained by conventional economics. Thus, speculation in commodity, currency and stock markets has been grudgingly acknowledged as worsening the GFC.

The exchange rates of many currencies have also come under greater pressure as residents borrowed in low interest rate currencies such as the Japanese yen. In turn, they have typically bought financial assets promising higher returns.

Thus, higher interest rates attract capital inflows, raising most domestic asset prices. Exchange rate movements are supposed to reflect comparative national economic strengths, but rarely do so. But conventional monetary responses worsen, rather than mitigate, contractionary tendencies.

Globalization of trade and finance has generated contradictory pressures. All countries are under pressure to generate trade or current account surpluses. But this, of course, is impossible as not all economies can run surpluses simultaneously.

Many try to do so by devaluing their currencies or cutting costs by other means. But only the US can use its ‘exorbitant privilege’ to maintain both budgetary and current account deficits by simply issuing Treasury bonds.

Currency markets can also undermine such efforts by enabling arbitrage on interest rate differentials. International imbalances have worsened, as seen in larger current account deficits and surpluses.

Contrary to mainstream economics, currency speculation does not equilibrate national, let alone international markets. It does not reflect economic fundamentals, ensuring exchange rate volatility, to damaging effect.

Commodity speculation
Thanks to currency mismatches, many companies and households face greater risk. Exchange rate fluctuations, in turn, exacerbate price volatility and its harmful consequences, which vary with circumstances.

Changes in ‘fundamentals’ no longer explain commodity price volatility. Meanwhile, more commodity speculation has resulted in greater price volatility and higher prices for food, oil, metals and other raw materials.

These prices have been driven by much more speculation, often involving indexed funds trading in real assets. The resulting price volatility especially affects everyone, as food consumers, and developing countries’ agricultural producers.

Sharp increases in commodity prices since mid-2007 were largely driven by speculation, mainly involving indexed funds. With the Great Recession following the GFC, most commodity producers in developing countries faced difficulties.

Since then, nearly all commodity prices fell from the mid-2010s as the world economic slowdown showed no sign of abating until economic sanctions in 2022 pushed up food, energy, fertilizer and other prices once again.

Besides hurting export revenues, lower commodity prices and even greater volatility have accelerated depreciation of earlier investments in equipment and infrastructure following the commodity price spikes.

Integrated solutions needed
The uneven financial system meltdown following the GFC raised expectations that ‘finance-as-usual’ would never return. But lasting solutions to threats, such as currency and commodity speculation, require international cooperation and regulation.

Meanwhile, goods and financial markets have become more interconnected. Thus, a truly multilateral and cooperative approach has to be found in the complex interconnections involving international trade and finance.

In this asymmetrically interdependent world, policy reforms are urgently needed. All countries need to be able to pursue appropriate countercyclical macroeconomic policies. Also, small economies should be able to achieve exchange rate stability at affordably low cost.

Although prompt actions were undertaken in response to the GFC, the world economy experienced a protracted slowdown, the ‘Great Recession’. Myopic policymakers in most developed economies focus on perceived national risks, ignoring international ones, especially those affecting developing countries.

Contrary to widespread popular presumption, the Bretton Woods multilateral monetary and financial arrangements did not include a regulatory regime. Nor has such a regime emerged since, even after US President Nixon unilaterally ended the Bretton Woods system in 1971.

With the gagged voice of developing countries in international financial institutions and markets, the United Nations must lead, as it did in the mid-1940s.

It is the only world institution which could legitimately develop a better alternative. Thankfully, the UN Charter assigns it responsibility to lead efforts to do so.

IPS UN Bureau

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Natural flows do not respect national boundaries. The atmosphere and oceans cross international borders with little difficulty, as greenhouse gases (GHGs) and other fluids, including pollutants, easily traverse frontiers.

Yet, in multilateral fora, strategies to address climate change and its effects remain largely national. GHG emissions – typically measured as carbon dioxide equivalents – are the main bases for assessing national climate action commitments.

Hezri A Adnan

This approach attributes GHG emissions to the country where goods are produced. Such carbon accounting focuses blame for global warming on newly industrializing economies. But it ignores who consumes the goods and where, besides diverting attention from those most responsible for historical emissions.

Thus, attention has focused on big national emitters. China, India, Brazil, Russia, South Africa and other large developing economies – especially the ‘late industrializers’ – have become the new climate villains.

China, the United States and India are now the world’s three largest GHG emitters in absolute terms, accounting for over half the total. With more rapid growth in recent decades, China and India have greatly increased emissions.

Undoubtedly, some developing countries have seen rapid GHG emission increases, especially during high growth episodes. In the first two decades of this century, such emissions rose over 3-fold in China, 2.7 times in India, and 4.7-fold in Indonesia.

Meanwhile, most rich economies have seen smaller increases, even declines in emissions, as they ‘outsource’ labour- and energy-intensive activities to the global South. Thus, over the same period, production emissions fell by 12% in the US and Japan, and by nearly 22% in Germany.

Jomo Kwame Sundaram

But determining responsibility for global warming fairly is necessary to ensure equitable burden sharing for adequate climate action. Most climate change negotiations and discussions typically refer to aggregate national emissions and income measures, rather than per capita levels.

But such framing obscures the underlying inequalities involved. A per capita view comparing average GHG emissions offers a more nuanced, albeit understated perspective on the global disparities involved.

Thus, in spite of recent reductions, rich economies are still the greatest GHG emitters per capita. The US and Australia spew eight times more per head than developing countries like India, Indonesia and Brazil.

Despite its recent emission increases, even China emits less than half US per capita levels. Meanwhile, its annual emissions growth fell from 9.3% in 2002 to 0.6% in 2012. Even The Economist acknowledged China’s per capita emissions in 2019 were comparable to industrializing Western nations in 1885!

Several developments have contributed to recent reductions in rich nations’ emissions. Richer countries can better afford ‘climate-friendly’ improvements, by switching energy sources away from the most harmful fossil fuels to less GHG-emitting options such as natural gas, nuclear and renewables.

Changes in international trade and investment with ‘globalization’ have seen many rich countries shift GHG-intensive production to developing countries.

Thus, rich economies have ‘exported’ production of – and responsibility for – GHG emissions for what they consume. Instead, developed countries make more from ‘high value’ services, many related to finance, requiring far less energy.

Export emissions, shift blame
Thus, rich countries have effectively adopted then World Bank chief economist Larry Summers’ proposal to export toxic waste to the poorest countries where the ‘opportunity cost’ of human life was presumed to be lowest!

His original proposal has since become a development strategy for the age of globalization! Thus, polluting industries – including GHG-emitting production processes – have been relocated – together with labour-intensive industries – to the global South.

Although kept out of the final published version of the Intergovernmental Panel on Climate Change (IPCC) report, over 40% of developing country GHG emissions were due to export production for developed countries.

Such ‘emission exports’ by rich OECD (Organization for Economic Co-operation and Development) countries increased rapidly from 2002, after China joined the World Trade Organization (WTO). These peaked at 2,278 million metric tonnes in 2006, i.e., 17% of emissions from production, before falling to 1,577 million metric tonnes.

For the OECD, the ‘carbon balance’ is determined by deducting the carbon dioxide equivalent of GHG emissions for imports from those for production, including exports. Annual growth of GHG discharges from making exports was 4.3% faster than for all production emissions.

Thus, the US had eight times more per capita GHG production emissions than India’s in 2019. US per capita emissions were more than thrice China’s, although the world’s most populous country still emits more than any other nation.

With high GHG-emitting products increasingly made in developing countries, rich countries have effectively ‘exported’ their emissions. Consuming such imports, rich economies are still responsible for related GHG emissions.

Change is in the air
Industries emitting carbon have been ‘exported’ – relocated abroad – for their products to be imported for consumption. But the UNFCCC approach to assigning GHG emissions responsibility focuses only on production, ignoring consumption of such imports.

Thus, if responsibility for GHG emissions is also due to consumption, per capita differences between the global North and South are even greater.

In contrast, the OECD wants to distribute international corporate income tax revenue according to consumption, not production. Thus, contradictory criteria are used, as convenient, to favour rich economies, shaping both tax and climate discourses and rules.

While domestic investments in China have become much ‘greener’, foreign direct investment by companies from there are developing coal mines and coal-fired powerplants abroad, e.g., in Indonesia and Vietnam.

If not checked, such FDI will put other developing countries on the worst fossil fuel energy pathway, historically emulating the rich economies of the global North. A Global Green New Deal would instead enable a ‘big push’ to ‘front-load’ investments in renewable energy.

This should enable adequate financing of much more equitable development while ensuring sustainability. Such an approach would not only address national-level inequalities, but also international disparities.

China now produces over 70% of photovoltaic solar panels annually, but is effectively blocked from exporting them abroad. In a more cooperative world, developing countries’ lower-cost – more affordable – production of the means to generate renewable energy would be encouraged.

Instead, higher energy costs now – due to supply disruptions following the Ukraine war and Western sanctions – are being used by rich countries to retreat further from their inadequate, modest commitments to decelerate global warming.

This retreat is putting the world at greater risk. Already, the international community is being urged to abandon the maximum allowable temperature increase above pre-industrial levels, thus further extending and deepening already unjust North-South relations.

But change is in the air. Investing in and subsidizing renewable energy technologies in developing countries wanting to electrify, can enable them to develop while mitigating global warming.

Hezri A Adnan is adjunct professor at the Faculty of Sciences, University of Malaya, Kuala Lumpur.

IPS UN Bureau

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Despite its dismal record, the Gates Foundation-sponsored Alliance for a Green Revolution in Africa (AGRA) announced a new five-year strategy in September after rebranding itself by dropping ‘Green Revolution’ from its name.

Rebranding, not reform
Instead of learning from experience and changing its approach accordingly, AGRA’s new strategy promises more of the same. Ignoring evidence, criticisms and civil society pleas and demands, the Gates Foundation has committed another $200 million to its new five-year plan, bringing its total contribution to around $900 million.

Timothy A. Wise

Stung by criticism of its poor results, AGRA delayed announcing its new strategy by a year, while its chief executive shepherded the controversial UN Food Systems Summit of 2021. Following this, AGRA has been using more UN Sustainable Development Goals rhetoric.

Hence, AGRA’s new slogan – ‘Sustainably Growing Africa’s Food Systems’. Likewise, the new plan claims to “lay the foundation for a sustainable food systems-led inclusive agricultural transformation”. But beyond such lip service, there is little evidence of any meaningful commitment to sustainable agriculture in the $550 million plan for 2023–27.

Despite heavy government subsidies, AGRA promotion of commercial seeds and fertilizers for just a few cereal crops failed to significantly increase productivity, incomes or even food security. But instead of addressing past shortcomings, the new plan still relies heavily on more of the same despite its failure to “catalyze” a productivity revolution among African farmers.

Jomo Kwame Sundaram

The name change suggests the 16-year-old AGRA wants to dissociate itself from past failures, but without acknowledging its own flawed approach. Recently, much higher fertilizer prices – following sanctions against Russia and Belarus after the Ukraine invasion – have worsened the lot of farmers relying on AGRA recommended inputs.

It is time to change course, with policies promoting ecological farming by reducing reliance on synthetic fertilizers as appropriate. But despite its new slogan, AGRA’s new strategy intends otherwise.

Last month, the Alliance for Food Sovereignty in Africa rejected the strategy and name change as “cosmetic”, “an admission of failure” of the Green Revolution project, and “a cynical distraction” from the urgent need to change course.

Productivity gains and losses
Despite spending well over a billion dollars, AGRA’s productivity gains have been modest, and only for a few more heavily subsidized crops such as maize and rice. And from 2015 to 2020, cereal yields have not risen at all.

Meanwhile, traditional food crop production has declined under AGRA, with millet falling over a fifth. Yields actually also fell for cassava, groundnuts and root crops such as sweet potato. Across a basket of staple crops, yields rose only 18% in 12 years.

Farmer incomes have not risen, especially after increased production costs are taken into account. As for halving hunger, which Gates and AGRA originally promised, the number of ‘severely undernourished’ people in AGRA’s 13 focus countries increased by 31%!

A donor-commissioned evaluation confirmed many adverse farmer outcomes. It found the minority of farmers who benefited were mainly better-off men, not smallholder women the programme was ostensibly meant for.

That did not deter the Gates Foundation from committing more to AGRA despite its dismal track record, failed strategy, and poor monitoring to track progress. Judging by the new five-year plan, we can expect even less accountability.

The new plan does not even set measurable goals for yields, incomes or food security. As the saying goes, what you don’t measure you don’t value. Apparently, AGRA does not value agricultural productivity, even though it is still at the core of the organization’s strategy.

Last month, the Rockefeller Foundation, AGRA’s other founding donor and a leader of the first Green Revolution from the 1950s, announced a reduction in its grant to AGRA and a decisive step back from the Green Revolution approach.

Its grant to AGRA supports school feeding initiatives and “alternatives to fossil-fuel derived fertilisers and pesticides through the promotion of regenerative agricultural practices such as cultivation of nitrogen-fixing beans”.

Business in charge
AGRA’s new strategy is built on a series of “business lines”, e.g., the “sustainable farming business line” will coordinate with the “Seed Systems business line” to sell inputs. Private Village Based Advisors are meant to provide training and planting advice in this privatized, commercial reincarnation of the government or quasi-government extension services of an earlier era.

The UN Food and Agriculture Organization successfully promoted peer-learning of agro-ecological practices via Farmer Field Schools after successfully field-testing them. This came about after research showed ‘brown hoppers’ thrived in Asian rice farms after Green Revolution pesticides eliminated the insect’s natural predators.

China lost a fifth of its 2007-08 paddy harvest to the pest, triggering a price spike in the thinly traded world rice market. Seeking help from the International Rice Research Institute, located in the Philippines, a Chinese delegation found its Entomology Department had lost most of its former capacity due to under-funding.

Earlier international agricultural research collaboration associated with the first Green Revolution – especially in wheat, maize and rice – seems to have collapsed, surrendering to corporate and philanthropic interests. This bitter experience encouraged China to step up its agronomic research efforts with a greater agro-ecological emphasis.

Empty promises?
The new strategy promises “AGRA will promote increased crop diversification at the farm level”. But its advisers cum salespeople have a vested interest in selling their wares, rather than good local seeds which do not require repeat purchases every planting season.

AGRA is not strengthening resilience by promoting agroecology or reducing farmer reliance on costly inputs such as fossil fuel fertilizers and other, often toxic, agrochemicals. Despite many proven African agroecological initiatives, support for them remains modest.

The new strategy stresses irrigation, key to most other Green Revolutions, but conspicuously absent from Africa’s Green Revolution. But the plan is deafeningly silent on how fiscally strapped governments are to provide such crucial infrastructure, especially in the face of growing water, fiscal and debt stress, worsened by global warming.

It is often said stupidity is doing the same thing over and over again, expecting different results. Perhaps this is due to the technophile conceit that some favoured innovation is superior to everything else, including scientific knowledge, processes and agro-ecological solutions.

IPS UN Bureau

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The ongoing plunder of Africa’s natural resources drained by capital flight is holding it back yet again. More African nations face protracted recessions amid mounting debt distress, rubbing salt into deep wounds from the past.

With much less foreign exchange, tax revenue, and policy space to face external shocks, many African governments believe they have little choice but to spend less, or borrow more in foreign currencies.

Ndongo Samba Sylla

Economic haemorrhage
After ‘lost decades’ from the late 1970s, Africa became one of the world’s fastest growing regions early in the 21st century. Debt relief, a commodity boom and other factors seemed to support the deceptive ‘Africa rising’ narrative.

But instead of long overdue economic transformation, Africa has seen jobless growth, rising economic inequalities and more resource transfers abroad. Capital flight – involving looted resources laundered via foreign banks – has been bleeding the continent.

According to the High Level Panel on Illicit Financial Flows from Africa, the continent was losing over $50 billion annually. This was mainly due to ‘trade mis-invoicing’ – under-invoicing exports and over-invoicing imports – and fraudulent commercial arrangements.

Transnational corporations (TNCs) and criminal networks account for much of this African economic surplus drain. Resource-rich countries are more vulnerable to plunder, especially where capital accounts have been liberalized.

Jomo Kwame Sundaram

Leonce Ndikumana and his colleagues estimate over 55% of capital flight – defined as illegally acquired or transferred assets – from Africa is from oil-rich nations, with Nigeria alone losing $467 billion during 1970-2018.

Over the same period, Angola lost $103 billion. Its poverty rate rose from 34% to 52% over the past decade, as the poor more than doubled from 7.5 to 16 million.

Oil proceeds have been embezzled by TNCs and Angola’s elite. Abusing her influence, the former president’s daughter, Isabel dos Santos acquired massive wealth. A report found over 400 companies in her business empire, including many in tax havens.

From 1970 to 2018, Côte d’Ivoire lost $55 billion to capital flight. Growing 40% of the world’s cocoa, it gets only 5–7% of global cocoa profits, with farmers getting little. Most cocoa income goes to TNCs, politicians and their collaborators.

Mining giant South Africa (SA) has lost $329 billion to capital flight over the last five decades. Mis-invoicing, other modes of embezzling public resources, and tax evasion augment private wealth hidden in offshore financial centres and tax havens.

Fiscal austerity has slowed job growth and poverty reduction in ‘the most unequal country in the world’. In SA, the richest 10% own over half the nation’s wealth, while the poorest 10% have under 1%!

Resource theft and debt
With this pattern of plunder, resource-rich African countries – that could have accelerated development during the commodity boom – now face debt distress, depreciating currencies and imported inflation, as interest rates are pushed up.

Zambia’s default on its foreign debt obligations in late 2020 has made headlines. But foreign capture of most Zambian copper export proceeds is not acknowledged.

During 2000-2020, total foreign direct investment income from Zambia was twice total debt servicing for external government and government-guaranteed loans. In 2021, the deficit in the ‘primary income’ account (mainly returns to capital) of Zambia’s balance of payments was 12.5% of GDP.

As interest payments on public external debt came to ‘only’ 3.5% of GDP, most of this deficit (9% of GDP) was due to profit and dividend remittances, as well as interest payments on private external debt.

For the IMF, World Bank and ‘creditor nations’, debt ‘restructuring’ is conditional on continuing such plunder! African countries’ worsening foreign indebtedness is partly due to lack of control over export earnings controlled by TNCs, with African elite support.

Resource pillage, involving capital flight, inevitably leads to external debt distress. Invariably, the IMF demands government austerity and opening African economies to TNC interests. Thus, we come full circle, and indeed, it is vicious!

Africa’s wealth plunder dates back to colonial times, and even before, with the Atlantic trade of enslaved Africans. Now, this is enabled by transnational interests crafting international rules, loopholes and all.

Such enablers include various bankers, accountants, lawyers, investment managers, auditors and other wheeler dealers. Thus, the origins of the wealth of ‘high net-worth individuals’, corporations and politicians are disguised, and its transfer abroad ‘laundered’.

What can be done?
Capital flight is not mainly due to ‘normal’ portfolio choices by African investors. Hence, raising returns to investment, e.g., with higher interest rates, is unlikely to stem it. Worse, such policy measures discourage needed domestic investments.

Besides enforcing efficient capital controls, strengthening the capabilities of specialized national agencies – such as customs, financial supervision and anti-corruption bodies – is important.

African governments need stronger rules, legal frameworks and institutions to curb corruption and ensure more effective natural resource management, e.g., by revising bilateral investment treaties and investment codes, besides renegotiating oil, gas, mining and infrastructure contracts.

Records of all investments in extractive industries, tax payments by all involved, and public prosecution should be open, transparent and accountable. Punishment of economic crimes should be strictly enforced with deterrent penalties.

The broader public – especially civil society organizations, local authorities and impacted communities – must also know who and what are involved in extractive industries.

Only an informed public who knows how much is extracted and exported, by whom, what revenue governments get, and their social and environmental effects, can keep corporations and governments in check.

Improving international trade and finance transparency is essential. This requires ending banking secrecy and better regulation of TNCs to curb trade mis-invoicing and transfer pricing, still enabling resource theft and pillage.

OECD rhetoric has long blamed capital flight on offshore tax havens on remote tropical islands. But those in rich countries – such as the UK, US, Switzerland, Netherlands, Singapore and others – are the biggest culprits.

Stopping haemorrhage of African resource plunder by denying refuge for illicit transfers should be a rich country obligation. Automatic exchange of tax-related information should become truly universal to stop trade mis-invoicing, transfer pricing abuses and hiding stolen wealth abroad.

Unitary taxation of transnational corporations can help end tax abuses, including evasion and avoidance. But the OECD’s Inclusive Framework proposals favour their own governments and corporate interests.

Africa is not inherently ‘poor’. Rather, it has been impoverished by fraud and pillage leading to resource transfers abroad. An earnest effort to end this requires recognizing all responsibilities and culpabilities, national and international.

Africa’s veins have been slit open. The centuries-long bleeding must stop.

Dr Ndongo Samba Sylla is a Senegalese development economist working at the Rosa Luxemburg Foundation in Dakar. He authored The Fair Trade Scandal. Marketing Poverty to Benefit the Rich and co-authored Africa’s Last Colonial Currency: The CFA Franc Story. He also edited Economic and Monetary Sovereignty for 21st century Africa, Revolutionary Movements in Africa and Imperialism and the Political Economy of Global South’s Debt. He tweets at @nssylla

IPS UN Bureau

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The latest annual climate conference has begun in the face of a worsening climate crisis and further retreats by rich nations following the energy crisis induced by NATO sanctions after the Russian invasion of Ukraine.

Copping out again
The 27th Conference of the Parties (COP 27) to the United Nations Framework Convention on Climate Change (UNFCCC) is now meeting in Sharm-el-Sheikh, Egypt, from 6 to 18 November 2022.

Hezri A Adnan

The looming world economic recession is likely to be deeper than in 2008. The likely spiral into stagflation will make addressing the climate crisis even more difficult.

Invoking the Ukraine war as pretext, governments and corporations are rushing to increase fossil fuel production to offset the deepening energy crisis.

Resources which should be deployed for climate adaptation and mitigation have been diverted for war, fossil fuel extraction and use, including resumption of shale gas ‘fracking’ as well as coal mining and burning.

War causes huge social and economic damage to people, society and the environment. The wars in Ukraine, Yemen and elsewhere impose high costs on all, disrupting energy and food supplies, and raising prices sharply.

Russia’s Ukraine incursion has provided a convenient smokescreen for a hasty return to fossil fuels, as military-industrial processes alone account for 6% of all greenhouse gases.

The future is already here
All these have worsened crises facing the world’s environment and economy. The most optimistic Intergovernmental Panel on Climate Change (IPCC) scenario expects the 1.5°C rise above pre-industrial levels threshold for climate catastrophe to be breached by 2040.

Jomo Kwame Sundaram

But the future is already upon us. Accelerating warming is already causing worse extreme weather events, ravaging economies, communities and ecosystems.

Recent floods in Pakistan displaced 33 million people. Wildfires, extreme heat, ice melt, drought, and extreme weather phenomena are already evident on many continents, causing disasters worldwide.

In 2021, the sea level rose to a record high, and is expected to continue rising. UN reports estimate women and children are 14 times more likely than adult men to die during climate disasters.

Popular sentiment is shifting, even in the US, where ‘climate scepticism’ is strongest. Devastation threatened by Hurricane Ida in 2021 not only revived painful memories of Katrina in 2005, but also heightened awareness of warming-related extreme weather events.

Stronger climate action needed
In international negotiations, rich nations have evaded historical responsibility for ‘climate debt’ by only focusing on current emissions. Hence, there is no recognition of a duty to compensate those most adversely impacted in the global South.

Last year’s COP26 Glasgow Climate Pact was hailed for its call to ‘phase-out’ coal. This has now been quickly abandoned by Europe with the war. And for developing countries, Glasgow failed to deliver any significant progress on climate finance.

At COP27, the Egyptian presidency has proposed an additional ‘loss and damage’ finance facility to compensate for irreparable damage due to climate impacts.

After failing to even meet its modest climate finance promises of 2009, the rich North is dithering, pleading for further talks until 2024 to work out financing details.

Meanwhile, the G7 has muddied the waters by counter-offering its Global Shield Against Climate Risks – a disaster insurance scheme.

Get priorities right
What the world needs, instead, are rapidly promoted and implemented measures as part of a more rapid, just, internationally funded transition for the global South. This should:

• replace fossil fuels with renewable energy, including by subsidizing renewable energy generation for energy-deficient poor populations.
• promote energy-saving and efficiency measures to reduce its use and greenhouse gas emissions by at least 70% (from 1990) by 2030.
• implement a massive global public works programme, creating ‘green jobs’ to replace employment in ‘unsustainable’ industries.
• develop needed sustainable technologies, e.g., to replace corporate agricultural practices with ‘agroecological’ farming methods, investment and technology.

Another world is possible
Another world is possible. A massive social and political transformation is needed. But the relentless pursuit of private profit has always been at the expense of people and nature.

Greed cannot be expected to become the basis for a just solution to climate change, let alone environmental degradation, world poverty, hunger and gross inequalities.

The COP27 conference is now taking place in Sharm-al-Sheikh, an isolated, heavily policed tourist resort. Only one major road goes in and out, as if designed to keep out civil society and drown out voices from the global South.

The luxury hotels there are charging rates that have put COP27 beyond the means of many, especially climate justice activists from poorer countries. The rich and powerful arrived in over 400 private jets, making a mockery of decarbonization rhetoric.

Thus, the COP process is increasingly seen as exclusive. Without making real progress on the most important issues, it is increasingly seen as slow, irrelevant and ineffective.

Generating inadequate agreements at best, the illusion of progress thus created is dangerously misleading at worst.

By generating great expectations and false hopes, but actually delivering little, it is failing the world, even when it painstakingly achieves difficult compromises which fall short of what is needed.

Multilateralism at risk
Multilateral platforms, such as the UNFCCC, have long been expected to engage governments to cooperate in developing, implementing and enforcing solutions. With the erosion of multilateralism since the end of the Cold War, these are increasingly being bypassed.

Instead, self-appointed private interests, with means, pretend to speak for world civil society. Strapped for resources, multilateral platforms and other organizations are under pressure to forge partnerships and other forms of collaboration with them.

Thus, inadequate ostensible private solutions increasingly dominate policy discourses. Widespread fiscal deficits have generated interest in them due to the illusory prospect of private funding.

Private interests have thus gained considerable influence. Thus, the new spinmeisters of Davos and others have gained influence, offering seductively attractive, but ultimately false, often misleading and typically biased solutions.

Meanwhile, global warming has gone from bad to worse. UN Member States must stiffen the backs of multilateral organizations to do what is right and urgently needed, rather than simply going with the flow, typically of cash.

Hezri A Adnan is an environmental policy analyst and Fellow of the Academy of Sciences, Malaysia. He is author of The Sustainability Shift: Reshaping Malaysia’s Future.

IPS UN Bureau

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Ahead of the first United Nations environmental summit in Stockholm in 1972, a group of scientists prepared The Limits to Growth report for the Club of Rome. It showed planet Earth’s finite natural resources cannot support ever-growing human consumption.

Limits used integrated computer modelling to investigate twelve planetary scenarios of economic growth and their long-term consequences for the environment and natural resources.

Hezri A Adnan

Within limits
Limits considered population, food production, industrialization, pollution and non-renewable resource use trends from 1900 to 2100.

It conceded, “Any human activity that does not require a large flow of irreplaceable resources or produce severe environmental degradation might continue to grow indefinitely”.

Most projected scenarios saw growth ending this century. Ominously, Limits warned of likely ecological and societal collapses if anthropocene challenges are not adequately addressed soon enough.

Failure would mean less food and energy supplies, more pollution, and lower living standards, even triggering population collapses.

But Limits was never meant to be a definitive forecast, and should not be judged as such. Instead, it sought to highlight major resource threats due to growing human consumption.

Off-limits?
Gaya Herrington showed three of Limits’ four major scenarios anticipated subsequent trends. Two lead to major collapses by mid-century. She concluded, “humanity is on a path to having limits to growth imposed on itself rather than consciously choosing its own.”

Limits stressed the urgent need for radical transformation to achieve ‘sustainable development’. The ‘international community’ embraced this, in principle, at the 1992 Earth Summit in Rio de Janeiro, two decades after Stockholm.

With accelerating resource depletion – as current demographic, industrial, pollution and food trends continue – the planet’s growth limits will be reached within the next half-century. The Earth’s ‘carrying capacity’ is unavoidably shrinking.

Jomo Kwame Sundaram

The report maintained it was still possible to create conditions for a much more sustainable future while meeting everyone’s basic material needs. As Gandhi said, “The world has enough for everyone’s need, but not enough for everyone’s greed.”

No other environmental work then, or since, has so directly challenged mainstream growth beliefs. Unsurprisingly, it attracted strong opposition.

The 1972 study was long dismissed by many as neo-Malthusian prophecy of doom, underestimating the potential for human adaptation through technological progress.

Many other criticisms have been made. Limits was faulted for focusing too much on resource limits, but not enough on environmental damage. Economists have criticized it for not explicitly incorporating either prices or socioeconomic dynamics.

Beyond limits
In Beyond the Limits (1993), the two Meadows and Randers argued that resource use had exceeded the world environment’s carrying capacity.

Using climate change data, they highlighted the likelihood of collapse, going well beyond the earlier focus on the rapid carbon dioxide build-up in the atmosphere.

In another sequel, Limits to Growth: The 30-Year Update (2004), they elaborated their original argument with new data, calling for stronger actions to avoid unsustainable excess.

Dennis Meadows stresses other studies confirm and elaborate Limits’ concerns. Various growth trends peak around 2020, suggesting likely slowdowns thereafter, culminating in environmental and economic collapse by mid-century.

Limits’ early 1970s’ computer modelling has been overtaken by enhanced simulation capabilities. Many earlier recommendations need revision, but the main fears have been reaffirmed.

Limitless?
Two key Limits’ arguments deserve reiteration. First, its critique of technological hubris, which has deterred more serious concern about the threats, thus undermining environmental, economic and other mitigation efforts.

As Limits argued, environmental crisis and collapse are due to socioeconomic, technological and environmental transformations for wealth accumulation, now threatening Earth’s resources and ecology.

Conventional profit-prioritizing systems and technologies have changed, e.g., with resource efficiency innovation. Such efforts help postpone the inevitable, but cannot extend the planet’s natural limits.

Of course, innovative new technologies are needed to address old and new problems. But these have to be deployed to enhance sustainability, rather than profit.

The Limits’ critique is ultimately of ‘growth’ in contemporary society. It goes much further than recent debates over measuring growth, recognizing greater output typically involves more resource use.

While not necessarily increasing exponentially, growth cannot be unlimited, due to its inherent resource and ecological requirements, even with materials-saving innovations.

This Earth for all
Thankfully, Limits’ fourth scenario – involving significant, but realistic transformations – allows widespread increases in human wellbeing within the planet’s resource boundaries.

This scenario has inspired Earth for All – the Club of Rome’s Transformational Economics Commission’s 2022 report – which more than updates Limits after half a century. Its subtitle – A Survival Guide for Humanity – emphasizes the threat’s urgency, scale and scope.

It argues that ensuring the wellbeing of all is still possible, but requires urgent fundamental changes. Major efforts are needed to eradicate poverty, reduce inequality, empower women, and transform food and energy systems.

The comprehensive report proposes specific strategies. All five need significant investments, including much public spending. This requires more progressive taxation, especially of wealth. Curbing wasteful consumption is also necessary.

More liquidity – e.g., via ‘monetary financing’ and International Monetary Fund issue of more special drawing rights – and addressing government debt burdens can ensure more policy and fiscal space for developing country governments.

Many food systems are broken. They currently involve unhealthy and unsustainable production and consumption, generating much waste. All this must be reformed accordingly.

Market regulation for the public good is crucial. Better regulation – of markets for goods (especially food) and services, even technology, finance, labour and land – is necessary to better conserve the environment.

Limited choice
The report includes a modeling exercise for two scenarios. ‘Too Little Too Late’ is the current trajectory, offering too few needed changes.

With growing inequalities, social trust erodes, as people and countries compete more intensely for resources. Without sufficient ‘collective action’, planetary boundaries will be crossed. For the most vulnerable, prospects are grim.

In the second ‘Giant Leap’ scenario, the five needed shifts are achieved, improving wellbeing all around. Everybody can live with dignity, health and security. Ecological deterioration is sufficiently reversed, as institutions serve the common good and ensure justice for all.

Broad-based sustainable gains in wellbeing need pro-active governance reshaping societies and markets. This needs sufficient political will and popular pressure for needed reforms.

But as the world moves ever closer to many limits, the scenario looming is terrifying: ecosystem destruction, gross inequalities and vulnerabilities, social and political tensions.

While regimes tend to bend to public pressure, if only to survive, existing discourses and mobilization are not conducive to generating the popular political demands needed for the changes.

Adnan A Hezri is an environmental policy analyst and Fellow of the Academy of Sciences, Malaysia. He is author of The Sustainability Shift: Reshaping Malaysia’s Future.

IPS UN Bureau

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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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Central banks (CBs) around the world – led by the US Fed, European Central Bank and Bank of England – are raising interest rates, ostensibly to check inflation. The ensuing race to the bottom is hastening world economic recession.

Going for broke
New UK Prime Minister Liz Truss has already revived ‘supply side economics’, long thought to have been fatally discredited. Her huge tax cuts are supposed to kick-start Britain’s stagnant economy in time for the next general election.

Anis Chowdhury

Reagan’s Council of Economic Advisers chairman, Harvard professor Martin Feldstein found most Reagan era growth due to expansionary monetary policy. Volcker’s interest rate hikes to fight inflation were reversed. This enabled the US economy to bounce back from its severe 1982 monetary policy inflicted recession.

George W Bush’s 2001 and 2003 tax cuts also failed to spur growth. Instead, deficits and debt ballooned. “The largest benefits from the Bush tax cuts flowed to high-income taxpayers”. Likewise, Trump tax cuts failed to lift the US economy, with billionaires now paying much less than workers.

After Boris Johnson stepped down, UK Conservative Party leadership contenders started by promising more tax cuts. But The Economist was “sceptical that such cuts will lift Britain’s growth rate”. Instead, it worried tax cuts would compound inflationary pressures, triggering ever tighter monetary policy.

The Economist concluded, “It is hard to spot a connection between the overall level of taxation and long-term prosperity”. Unsurprisingly, The Economist sees Truss’ “largest tax cuts in half a century” as “a reckless budget, fiscally and politically”.

Jomo Kwame Sundaram

Tax cuts usually make things worse. Typically, these require cutting social protection and essential public services, ostensibly to balance the budget. So, already greater wealth and income inequalities will worsen.

Governments have to cut public investments due to ballooning budget deficits. Higher interest rates and public spending cuts will also derail efforts needed to transition to more sustainable, greener futures.

Class war
Policy fights over inflation have many dimensions, including class. Instead of helping people cope with rising living costs, increasing interest rates only makes things worse, hastening economic slowdowns. Thus, workers not only lose jobs and incomes, but also are forced to pay more for mortgages and other debts.

Unemployment, lower incomes, deteriorating health and other pains hurt workers. As workers want higher incomes to cope with rising living expenses, such austere policies are deemed necessary to prevent ‘wage-price spirals’.

As usual, workers are being blamed for the resurgence of inflation. But research by the International Monetary Fund (IMF) and others has found no evidence of such wage-price spirals in recent decades.

Experience and evidence suggest very low likelihood of such dialectics in current circumstances, although some nominal wages have risen. Since the 1980s, labour bargaining power and collective wage determination have declined.

Policymakers should address stagnant, even declining real wages in most economies in recent decades. These have hurt “low-paid workers much more than those at the top”. Even the Organization for Economic Cooperation and Development club of rich countries has “worryingly” noted these trends.

The IMF Deputy Managing Director has explained why wages do not have to be suppressed to avoid inflation. Letting nominal wages rise will mitigate rising inequality, plus declining labour income shares (Figure 1) and real wages.

Source: IMF, World Economic Outlook, April 2017

Profit margins had already risen, even before the Ukraine war and sanctions. US trends prompted the Bloomberg headline, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”. Aggregate profits of the largest UK non-financial companies in 2021 rose 34% over pre-pandemic levels.

Policymakers should therefore restrain profits, not wages. Recent price increases have been due to rising profits from mark-ups. Recent trends have made it “easier for firms to put their prices up” notes the Reserve Bank of Australia Governor.

Addressing inequality
The IMF Managing Director (MD) recently warned, “People will be on the streets if we don’t fight inflation”. But people are even more likely to protest if they lose jobs and incomes. Worse, the burden of fighting inflation has been put on them while the elite continues to enrich itself.

Raising interest rates is a blunt means to fight inflation. It worsens living costs and job losses, while tax cuts mainly benefit the rich. Instead, the rich should be taxed more to enhance revenue to increase public provisioning of essential services, such as transport, health and education.

The IMF MD noted raising taxes on the wealthy will help close the yawning gap between rich and poor without harming growth. Public provision of childcare and labour market programmes (e.g., retraining) will improve labour supply. Easing worker shortages can thus dampen price pressures.

The current situation requires addressing growing inequality. Redistributive fiscal measures – taxing high earners to fund expanded social protection and public provisioning – are time-tested means to address disparities.

Increasing top tax rates and tax system progressivity are also socially progressive, checking growing inequality. Meanwhile, as consumer prices spiral, rising profits and high executive remuneration have to be checked.

Supply-side policies
The World Bank and Bank of International Settlements heads have urged reducing the current focus on demand management to counter inflation. They both insist on addressing long-term supply bottlenecks, but do not offer much practical guidance.

Poorly coordinated ‘unconventional’ monetary policies since the 2008-09 global financial crisis have created property and stock market bubbles. These damage the real economy, worsen inequality and slow labour productivity growth, with the worst spill over effects in developing counties.

Addressing supply bottlenecks can involve tax incentives and credit policies. But discredited supply-side mantras – e.g., labour market deregulation – must be discarded. Related fiscal and monetary policies – e.g., tax cuts for the rich and inappropriate interest rate hikes – should also be abandoned.

Governments are losing chances to boost productivity, achieve low carbon transformation and cut inequalities. Instead, policymakers should pro-actively push desired economic changes by favouring less carbon-intensive and more dynamic investments.

This may also require checking CBs’ monetary policy independence to more effectively coordinate fiscal with monetary policies. But this should not undermine CBs’ ‘operational independence’ to foster “orderly economic growth with reasonable price stability”.

Governments must rise to the extraordinary challenges of our times with pragmatic, appropriate and progressive policy initiatives. To do this well, they must boldly reject the ideologies and dogmas responsible for our current predicament.

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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The world economy is on the brink of outright recession, according to the International Monetary Fund (IMF). The Ukraine war and sanctions have scuttled recovery from the COVID-19 pandemic.

Over 80 central banks have already raised interest rates so far this year. Except for the Bank of Japan governor, major central bankers have reacted to recent inflation by raising interest rates. Hence, stagflation is increasingly likely as rising interest rates slow the economy, but do not quell supply-side cost-push inflation.

Anis Chowdhury

While acknowledging the short-term costs of raising interest rates, he has never bothered to explain why inflation targets should be considered sacrosanct regardless of circumstances. Simply asserting inflation will be more costly if not checked now makes for poor evidence-based policy making.

After all, only a month earlier, on 7 June, the IMF advised, “Countries should allow international prices to pass through to domestic prices while protecting households that are most in need”.

The Fund recognized the major sources of current inflation are supply disruptions – first due to pandemic lockdowns disrupting supply chains, and then, delivery blockages of food, fuel and fertilizer due to war and sanctions.

US Fed infallible?
Without explaining why, US Federal Reserve Bank Chair Jerome Powell insists on emulating his hero, Paul Volcker, Fed chair during 1979-87. Volcker famously almost doubled the federal funds target rate to nearly 20%.

Thus, Volcker caused the longest US recession since the 1930s’ Great Depression, raising unemployment to nearly 11%, while “the effects of unemployment, on health and earnings of sacked workers, persisted for years”.

Asked at a US Senate hearing if the Fed was prepared to do whatever it takes to control inflation – even if it harms growth – Powell replied, “the answer to your question is yes”.

Jomo Kwame Sundaram

Similarly, later Fed chair Ben Bernanke and his co-authors showed overzealous monetary tightening was mainly responsible for the 1970s’ stagflation. With prices still rising despite higher interest rates, stagflation now looms large.

North Atlantic trio
Most central bankers have long been obsessed with fighting inflation, insisting on bringing it down to 2%, despite harming economic progress. This formulaic response is prescribed, even when inflation is not mainly due to surging demand.

Powell recently observed, “supply is a big part of the story”, acknowledging the Ukraine war and China’s pandemic restrictions have pushed prices up.

While admitting higher interest rates may increase unemployment, Powell insists meeting the 2% target is “unconditional”. He asserted, “we have the tools and the resolve to get it down to 2%”, insisting “we’re going to do that”.

While recognizing “very big supply shocks” as the primary cause of inflation, Bank of England (BOE) Governor Andrew Bailey also vows to meet the 2% inflation target, allowing “no ifs or buts”.

While European Central Bank President Christine Lagarde does not expect to return “to that environment of low inflation”, admitting “inflation in the euro area today is being driven by a complex mix of factors”, she insists on raising “interest rates for as long as it takes to bring inflation back to our [2%] target”.

April Fools?
Much of the problem is due to the 2% inflation targeting dogma. As the then Governor of the Reserve Bank of New Zealand – the first central bank to adopt a 2% inflation target – later admitted, “The figure was plucked out of the air”.

Thus, a “chance remark” by the NZ Finance Minister – during “a television interview on April 1, 1988 that he was thinking of genuine price stability, ‘around 0, or 0 to 1 percent’” – has become monetary policy worldwide!

Powell also acknowledged, “Since the pandemic, we’ve been living in a world where the economy has been driven by very different forces”. He confessed, “I think we understand better how little we understand about inflation.”

Meanwhile, Powell acknowledges how changed globalization, demographics, productivity and technical progress no longer check price increases – as during the ‘Great Moderation’.

Bailey’s resolve to get inflation to 2% is even more shocking as he admits the BOE cannot stop inflation hitting 10%, as “there isn’t a lot we can do”.

Although it has no theoretical, analytical or empirical basis, many central bankers treat inflation targeting as universal best practice – in all circumstances! Thus, despite acknowledging supply-side disruptions and changed conditions, they still insist on the 2% inflation target!

Interest rate, blunt tool
Central bankers’ inflation targeting dogma will cause much damage. Even when inflation is rising, raising interest rates may not be the right policy tool for several reasons.

First, the interest rate only addresses the symptoms, not the causes of inflation – which can be many. Second, raising interest rates too often and too much can kill productive and efficient businesses along with those less so.

Third, by slowing the economy, higher interest rates discourage investment in new technology, skill-upgrading, plant and equipment, adversely affecting the economy’s long-term potential.

Fourth, higher interest rates will raise debt burdens for governments, businesses and households. Borrowings accelerated after the 2008-09 global financial crisis, and even more during the pandemic.

Monetary tightening also constrains fiscal policy. A slower economy implies less tax revenue and more social provisioning spending. Higher interest rates also raise living costs as households’ debt-servicing costs rise, especially for mortgages. Living costs also rise as businesses pass on higher interest rates to consumers.

Policy innovation
The recent inflationary surge is broadly acknowledged as due to supply shortages, mainly due to the new Cold War, pandemic, Ukraine war and sanctions.

Increasing interest rates may slow price increases by reducing demand, but does not address supply constraints, the main cause of inflation now. Anti-inflationary policy in the current circumstances should therefore change from suppressing domestic demand, with higher interest rates, to enhancing supplies.

Raising interest rates increases credit costs for all. Instead, financial constraints on desired industries to be promoted (e.g., renewable energy) should be eased. Meanwhile, credit for undesirable, inefficient, speculative and unproductive activities (e.g., real estate and share purchases) should be tightened.

This requires macroeconomic policies to support economic diversification, by promoting industrial investments and technological innovation. Each goal needs customized policy tools.

Instead of reacting to inflation by raising the interest rate – a blunt one-size-fits-all instrument indeed – policymakers should consider various causes of inflation and how they interact.

Each source of inflation needs appropriate policy tools, not one blunt instrument for all. But central bankers still consider raising interest rates the main, if not only policy against inflation – a universal hammer for every cause of inflation, all seen as nails.

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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Long seen as means to seek advantage on the pretext of providing mutual benefit, free trade agreements (FTAs) may increasingly be used as economic weapons in the emerging new Cold War.

Pivot to Asia, containing China
In November 2009, President Obama observed, “in an inter-connected world, power does not need to be a zero-sum game… the United States does not seek to contain China”.

Anis Chowdhury

His US Trade Representative (USTR) claimed the TPP was based on principles the US champions, such as protecting intellectual property (IP) and human rights. While claiming all who accept its principles would be welcome to join, China was conspicuously not among countries negotiating the TPP.

For Washington, this new rivalry with China involves strengthened US alliances with Japan, South Korea and Australia. In October 2011, the US Congress ratified the Korea-US (KORUS) FTA.

With the military and economic containment of China central to US security strategy, the TPP was concluded in 2015. Obama emphasized, “TPP allows America – and not countries like China – to write the rules of the road in the 21st century.”

Creating an “anyone but China club” was the US motive for establishing the TPP. But with changed public sentiment since Trump’s presidency, once Obama’s loyal Vice-President, now President Biden did not attempt to revive the TPP during his presidential campaign, or since.

Security alliances
“American prosperity and security are challenged by an economic competition playing out in a broader strategic context… We must work with like-minded allies and partners to ensure our principles prevail and the rules are enforced so that our economies prosper”, noted President Trump’s national security strategy.

Jomo Kwame Sundaram

By 2020, leaders of all four countries were more aligned in their concerns about China’s rise. In November 2020, navies of all four countries participated in their first joint military exercise in over a decade.

Meanwhile, under Shinzo Abe, Japan radically transformed its security policy. Abe has greatly expanded the Japan Self-Defence Forces’ role, mission and capabilities within and beyond the US-Japan alliance, especially in East Asia.

‘Defence cooperation’ has also been enhanced through country-to-country arrangements, such as the recent Japan-Australia Reciprocal Access Agreement as well as the earlier Japan-India Acquisition and Cross Servicing Agreement.

The US security profile in the region has been boosted by the AUKUS (Australia-UK-USA) alliance. Its clear intention is to enhance the US and its allies military presence in the Indo-Pacific, with the greatest ‘China focus’ of all regional security arrangements.

World hegemony
The US is also linking trade to its national security strategy, especially to contain China, in Africa and Latin America. As the USTR notes, “The Biden Administration is conducting a comprehensive review of U.S. trade policy toward China as part of its development of its overall China strategy”.

Her office also emphasizes, “Addressing the China challenge will require a comprehensive strategy and more systematic approach than the piecemeal approach of the recent past.”

Reflecting his Interim National Security Strategic Guidance, Biden emphasizes, “The United States must renew its enduring advantages…; modernize our military capabilities…; and revitalize America’s unmatched network of alliances and partnerships”. He notes “growing rivalry with China, Russia… reshaping every aspect of our lives”.

Biden insists his administration “will make sure that the rules of the international economy are not tilted against the United States. We will enforce existing trade rules and create new ones… This agenda will strengthen our enduring advantages, and allow us to prevail in strategic competition with China or any other nation”.

His administration announced a review of all Trump-era trade negotiations. Due to expire in 2025, President Clinton’s African Growth and Opportunity Act has offered enhanced US market access to qualifying African countries since 2000.

In April 2021, Secretary of State Antony Blinken confirmed US-Kenya FTA talks would resume. Observers believe the US-Kenya FTA, initiated by Trump in 2020, would help expand US ‘carrot and stick’ trade and security policies on the continent to counter China.

In the US ‘Monroe doctrine backyard’, six US FTAs already involve 12 Latin American and Caribbean countries. On 8 June, Biden announced a new regional economic partnership to counter China. His speech inaugurated a Summit of the Americas, criticized for omitting countries seen as friendly to China.

But Biden’s Americas Partnership for Economic Prosperity is still seen as a work in progress. Not even offering FTAs’ standard tariff relief, the US anticipates initially focusing on “like-minded partners”. Although Biden hailed his “ground-breaking, integrated new approach”, responses suggest “waning” US influence.

Now, five years after Trump withdrew from the TPP, Biden has revived Obama’s China strategy with his own Indo-Pacific Economic Framework. Smug, he could not help but echo Obama’s TPP brag, “We’re writing the new rules”.

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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The world is being pressed by financial interests to raise interest rates, ostensibly to check inflation. After the US Federal Reserve started raising interest rates, more central banks have been doing likewise.

Considering inflation’s contemporary causes, such ‘follow the leader’ central bank mimicry cannot check it except by slowing economies. Worse, this has meant taking on huge new risks, seriously damaging world economic prospects in the medium and long-term.

Anis Chowdhury

Nonetheless, “The ratio of fervent beliefs to tangible evidence seems unusually high on this topic”. Unsurprisingly, central banks are still trying to keep inflation below 2% – an arbitrary target “plucked out of the air”, due to a “chance remark” by New Zealand’s finance minister then.

Raising interest rates will derail recovery and worsen supply disruptions and shortages due to the pandemic, war and sanctions. European Central Bank (ECB) Executive Board member Fabio Panetta has noted the euro zone is “de facto stagnating” as economic growth has almost stopped.

As policymakers struggle with inflation, growth and wellbeing are being subjected to huge risks. As Panetta warns, “monetary tightening aimed at containing inflation would end up hampering growth that is already weakening”.

Interest rates rising globally
Among emerging markets and developing economies, South Africa’s central bank raised interest rates for the first time in three years in November 2021.

On 24 March 2022, the Bank of Mexico raised interest rates for the seventh consecutive time. On the same day, Brazil’s central bank raised interest rates to its highest level since 2017.

Jomo Kwame Sundaram

Without evidence or reasoning, they insist higher interest rates will check inflation. Their recognized adverse effects for recovery and growth are dismissed as unavoidably necessary short-term costs for some unspecified long-term gains.

But despite facing higher inflationary expectations, tightening international monetary conditions, and Ukraine war uncertainties, the ECB and Bank of Japan have not joined the bandwagon, refusing to raise policy interest rates so far.

Interest rate – blunt tool
But central bankers’ dogmatic stances, knee-jerk responses and ‘follow the leader’ behaviour are not helpful. Even when inflation reaches dangerous levels, raising interest rates may still not be the right policy response for several reasons.

First, raising interest rates only addresses the symptoms – not the causes – of inflation. Inflation is often said to be a consequence of an economy ‘overheating’. But overheating can be due to many factors.

Higher interest rates may relieve overheating, by slowing economic activity. But a good doctor should first investigate and diagnose an ailment’s causes before prescribing appropriate treatment – which may or may not require medication.

It is widely accepted that the current inflationary surge is due to supply chain disruptions – exacerbated by war and sanctions – especially of essential goods such as food and fuel. If so, long-term solutions require increasing supplies, including by removing bottlenecks.

Higher interest rates reduce aggregate demand. But simply raising interest rates does not even address the specific causes of inflation, let alone rising prices due to supply disruptions of essential goods, such as food and fuel.

Interest rate – indiscriminate
Second, the interest rate affects all sectors, everyone. It does not even distinguish between sectors or industries needing to expand or be encouraged, and those that should be phased out, for being less productive or inefficient.

Also, raising interest rates too often, and to excessively high levels, can squeeze, or even kill productive and efficient businesses along with inefficient or less productive ones.

US bankruptcies had soared in the early 1980s after US Fed chair Volcker’s legendary interest rate spike. “Thousands of businesses that took out bank loans could fail”, warned a leading UK tax advisory firm recently.

Third, interest rates do not distinguish among households and businesses. Higher interest rates may discourage household expenditure, but also dampen all kinds of spending – for both consumption and investment.

Hence, overall demand may shrink – discouraging investment in new technology, plant, equipment and skills. Thus, higher interest rates adversely affect long-term productive capacities and technological progress of economies.

Debt, recessions and financial crises
Fourth, higher interest rates raise debt servicing costs for governments, businesses and households. With the exceptionally low interest rates previously available after the 2008-09 global financial crisis (GFC), debt burdens rose in most countries.

These undoubtedly encouraged risky, speculative behaviour as well as unproductive share buybacks, increased dividends, and mergers & acquisitions. Interest rate hikes have triggered many recessions and financial crises. Thus, raising interest rates now will likely trigger a new, albeit different era of stagflation.

The pandemic has pushed public debt to historic new highs. Forty-four per cent of low-income and least developed countries were at high risk of, or already in external debt distress in 2020.

Before the COVID-19 crisis, half the small island developing states surveyed already had solvency problems, i.e., were at high risk of, or already in debt distress. Thus, raising interest rates can trigger a global debt crisis.

Fifth, paradoxically, higher interest rates raise debt-servicing expenses, especially mortgage payments, for indebted households. Costs of living also rise if businesses pass higher interest costs on to consumers by raising prices.

Hence, the main beneficiaries of low inflation and higher interest rates are the holders of financial assets who fear the relative diminution of their value.

Developing countries vulnerable
Developing countries are particularly vulnerable. Higher interest rates in developed countries – particularly the US – trigger capital outflows from developing countries – causing exchange rate depreciations and inflationary pressures.

Higher interest rates and weaker exchange rates will aggravate already high debt service burdens – as happened in Latin America in the early 1980s after US Fed chair Volcker greatly increased US interest rates.

To discourage sudden capital outflows and prevent large currency depreciations, developing countries raise interest rates sharply. This may lead to economic collapse – as in Indonesia during the 1997-98 Asian financial crisis.

Although pandemic response measures – such as debt moratoria – provided some relief, business failures rose nearly 60% in 2020 from 2019. Middle- and low-income countries saw more business failures.

The World Bank’s Pulse Enterprise Survey – of 24 middle- and low-income countries – found 40% of businesses surveyed in January 2021 expected to be in arrears within six months.

This included more than 70% of firms in Nepal and the Philippines, and over 60% in Turkey and South Africa. Business failures of such scale can trigger banking crises as non-performing loans suddenly soar.

Instead of checking contemporary inflation, raising interest rates is likely to greatly damage recovery and medium-term growth prospects. Hence, it is imperative for developing countries to innovatively develop appropriate means to better address the economic dilemmas they face.

IPS UN Bureau

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By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, May 3 2022 (IPS)

Capital flight from the global South is immense, with widespread adverse effects. A new book proposes measures to curb, even reverse capital flight from Africa. It also offers pragmatic lessons for many developing countries.

Out of Africa
On the trail of capital flight from Africa extends pioneering work begun much earlier. The editors – Leonce Ndikumana and James Boyce – estimate Sub-Saharan Africa (SSA) has lost more than US$2 trillion to capital flight in the last half century!

Leonce Ndikumana

Such forensic country analyses are crucial to more effectively check capital flight. Outflows since the 1980s from the three countries have been massive: US$103 billion from Angola, US$55 billion from Cote d’Ivoire, and US$329 billion from South Africa in 2018 dollars.

Capital flight has been much more than cumulative external debt. Annual outflows were between 3.3% and 5.3% of national income. Nigeria, South Africa and Angola account for the most capital outflows from SSA, with Cote d’Ivoire seventh.

Resource booms
As governments get more revenue from natural resources, the fiscal ‘social contract’ is eroded. When people pay taxes, they expect state spending to benefit the public. But with more revenue from resources – via state monopolies, royalties and taxes – governments become less accountable to their own citizens.

Gaining and maintaining access to foreign credit has similar effects. Developing country governments then focus on ingratiating themselves with friendly foreign donor governments to get ODA, and on enhancing their credit ratings.

Hence, such regimes have less political need to provide ‘public goods’, including services, let alone accelerate social progress. Thus, erosion of the fiscal ‘social contract’ undermines not only public wellbeing, but also state legitimacy.

James K. Boyce

Unsurprisingly, such regimes believe their choices are limited. Another option is repression – which typically rises as the status quo is threatened. The resulting sense of insecurity spreads from the public to the elite, worsening capital flight.

Exploiting valuable natural resources not only generates export earnings, but also attracts foreign investments. One result is ‘Dutch disease’ as the national currency rises in value – reducing other exports and jobs, inevitably hurting development prospects.

Thus, vast private fortunes have been made and illicitly transferred abroad. Ruling elites and their allies rarely only rely on either state or market to become richer. The book shows how both state and market strengthen private and personal power and influence.

Plundering Africa
The book’s case studies show how resource extraction has been central to capital flight. In all three countries, the efficacy of fiscal policy tools – especially to foster investments for development – has been undermined.

Outflows have increased with economic liberalization, as unrecorded financial outflows – via the current account – grow with freer trade. Thus, trade-related financial transactions enable corruption and capital flight.

In Côte d’Ivoire – the world’s top cocoa producer – rents initially came from supply chains connecting farmers to consumers. Corrupt partnerships – connecting domestic elites to foreign businesses – have been crucial to such arrangements.

Thus, natural resource primary commodity exports have enabled illicit capital flows. Ivorian cocoa exports have been consistently under-reported – with trade statistics of major importers showing massive under-invoicing by exporters.

Post-colonial political settlements have given a few privileged access to resource rents. With capital flight thus enabled, successive Ivorian regimes have been less obliged to spend more on development or public wellbeing.

Due to the cocoa boom, the post-colonial ‘Ivorian miracle’ ended when prices fell. The bust triggered a political crisis, culminating in civil war. But the crunch also meant the country could no longer service its foreign debt.

In Angola too, natural resources worsened its protracted civil wars. After these ruinous conflicts, oil rents enriched the triumphant nepotistic regime. This enabled the control to gain control of more, even as most Angolans continued to live in destitution.

Angola’s massive oil exports mainly benefited the small elite of cronies around the president. They failed to develop the economy or improve most lives. All this has been enabled by ‘helpful’ professionals who have enriched themselves doing so.

While benefiting its elite and foreign transnationals, Angola’s ‘oil curse’ has blocked balanced and sustainable development of its economy. Despite rapidly depleting its oil reserves, Angola and most Angolans have benefited little.

South Africa – SSA’s second largest economy after Nigeria – seems less reliant on natural resources. Post-apartheid economic liberalization has enabled capital flight as private corporate interests – especially the influential minerals-energy complex – quickly took advantage of the new dispensation.

By under-invoicing their exports, mineral interests have been engaged in massive capital flight and tax evasion. Meanwhile, business cronies have enriched themselves in new ways, e.g., in the state’s electric power sector. Such abuses were exposed by the Gupta family scandal, leading to then President Jacob Zuma’s downfall.

Stemming capital flight
‘State capture’ by politically influential nationals have undermined government regulatory capacities with help from transnational enablers. Ostensible ‘good governance’ reforms have enabled capital flight and tax evasion – by undermining ‘developmental governance’, including prudential regulation.

Institutional environments, mechanisms and enablers facilitate capital flight, tax evasion and wealth accumulation offshore. With often complex, varied and changing facilitation, capital flight has shifted massive wealth abroad for elites.

Transnational financial networks have eased capital outflows – at the expense of productive investments, good jobs and social wellbeing. Capital flight has worsened financing, including budgetary gaps – aggravating related social deprivations.

Wealth creation enhances the economic pie, but distribution depends on who appropriates it. Improved understanding of such varied and ever-changing relations of appropriation is crucial to effectively curb this haemorrhage.

Greater awareness should inspire and inform better measures to check capital flight from the global South. Instead of the Washington Consensus ‘good governance’ mantra, a developmental governance agenda is needed.

Hence, curbing capital flight is crucial for financing sustainable development. Checking capital flight and related abuses – such as trade mis-invoicing, money laundering, tax evasion and public asset acquisition by elites – requires well-coordinated efforts at both national and international levels.

All researchers, policymakers and regulators will gain from the book’s forensic analyses of financial, fiscal and other such abuses. International financial institutions now have little excuse for continuing to enable the capital flight and tax evasion still bleeding the global South.

IPS UN Bureau

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Curbing capital flight from developing countries is long overdue. New sanctions against Russian oligarchs show this can be done with the requisite political will. Recent research also shows how to more effectively stop capital flight.

Capital flight
Capital flight is widespread, with resource-rich countries more vulnerable. ‘Mis-invoicing’ exports and embezzling export earnings of state-owned mineral companies have been central to such wealth appropriation.

Capital flight is enabled, not only by national conditions, but also by transnational facilitators. Internationally, capital flight is aided by institutions and professional enablers such as bankers, lawyers, accountants and consultants.

Capital should flow to investments yielding the most returns. But economic theory suggests making more depends on appropriating what economists call ‘rents’. These rents may be secured by many means, legal or otherwise.

Developing countries – especially resource-rich economies – are generally more susceptible to abuse. Wealth buys power and influence, enabling further accumulation. Thus, in the real world, natural resource endowments become a curse – not a blessing.

Since the 1990s, the IMF’s sixth Article of Association – authorizing national capital controls – has been ‘flexibly reinterpreted’ by management and staff. Instead of protecting national economies, they have eased transborder capital flows – and flight.

To add insult to injury, advocates falsely claim that more capital will thus flow into, rather than out of developing countries. After all, conventional economic theory insists capital flows from ‘capital-rich’ to ‘capital-poor’ countries.

The reality of capital flowing ‘upstream’ – to rich countries – underscores how mainstream economic textbooks mislead. Clearly, the real world is very different from the one that such economists believe should exist.

Enabling illicit outflows
Unsurprisingly, the wealthy – especially the ‘crooked’ – want to keep their assets abroad – beyond the reach of national authorities, and rivals. As such wealth has often been acquired illicitly, owners want to protect themselves from investigation, prosecution and expropriation.

Capital flight is enabled by transnational financial networks with considerable influence. These involve global banks and financial institutions, auditors and accounting firms, tax lawyers and consulting firms for hire. Along with corporate executives and government officials, they facilitate capital flight, sharing in the spoils.

With both states and markets at their disposal, transnational financial networks successfully overcome national constraints. Prerogatives of national sovereignty are also abused to obscure their transactions and operations from surveillance.

Capital flight is enabled, even incentivized by national environments allowing the wealthy to surreptitiously sneak financial assets offshore. Instead of helping developing countries protect their meagre assets, international financial institutions have facilitated, even worsened the haemorrhage.

Elites influence the law and its enforcement, typically by employing enabling professionals and friendly legislators. After all, laws and governments are neither impartial nor efficient, constantly reshaped by influence, often connected to wealth. Hence, some illicit activities and wealth may be unlawful while others may not be.

National legal jurisdictions have been changed to ease cross-border flows. Rules, norms and practices have been changed to hide wealth transfers from national and international authorities, rules and regulations. Hence, natural resource endowments especially enable capital flight.

Such outflows may even be triply illicit – in terms of mode of acquisition, concealment from tax authorities, and transfer across borders. But not all illicitly transferred flight capital is illicitly acquired. Conversely, illicitly obtained wealth – ‘laundered’ before being transferred abroad legally – is not deemed capital flight.

Some capital flight involves legally acquired wealth illicitly transferred abroad. This may be reported as trade-related payments on the current account – not involving capital account transfers. They may thus bypass, or even contravene capital controls and foreign exchange regulations.

They strive to evade detection, prosecution, litigation, fines, charges and taxes by various revenue authorities. Illicit foreign exchange outflows secretly transferred abroad and not recorded in official national accounts may not be deemed illegal.

Hence, the volume and significance of capital flight estimates tend to be understated. Capital flight is easier from most developing economies – which have become more open in the last four decades with economic liberalization, often demanded by structural adjustment programmes.

Why stop capital flight?
Transnational corruption – across national borders – undermines governance and national resource mobilization needed to enhance productive investments. But many advocates of opening capital accounts justify capital flight by blaming it on allegedly predatory or incompetent governments.

The international financial system features enabling capital flight often also facilitate tax avoidance and evasion by the wealthy. Thus, capital flight doubly undermines domestic resource mobilization by leaching both investible and government resources.

Transborder capital flows avoid or minimize taxes paid, while hiding beneficiaries’ identities and wealth in secretive offshore tax havens. Government finances are also directly hit when externally borrowed funds, or state-owned enterprises and natural resources are embezzled.

Worse, government or public foreign debt has often been abused to directly finance capital flight. Meanwhile, illicit offshore flight capital goes untaxed. This shifts the tax burden to the middle class and domestic businesses unable to sneak their assets abroad, or to otherwise avoid revenue authorities.

Many developing countries continue to suffer significant resource outflows, largely due to illicit capital flight. On the trail of capital flight from Africa: The Takers and the Enablers – edited by Leonce Ndikumana and James Boyce – studies this blight in sub-Saharan Africa. The world has much to learn from their forensic analysis.

The volume estimates haemorrhage from African countries since 1970 at US$2 trillion! Of this, almost 30% has been lost in the 21st century. Adding interest, cumulative offshore assets were US$2.4 trillion by 2018 – more than thrice Africa’s external debt!

The West’s piecemeal approach to sanctions targeting individuals is recognized as costly, time-consuming and ineffectual. Instead, the editors recommend a pre-emptive, across-the-board effort to undermine transnational networks enabling illicit financial flows. This should begin with closing financial system loopholes.

IPS UN Bureau

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