Long wait at the border between Sudan and Egypt. Credit: Hisham Allam/IPS

By Hisham Allam
CAIRO, May 25 2023 (IPS)

The conflict in Sudan is impacting the economy in Egypt, and those who make their living moving goods across the borders have spent weeks hoping the situation will normalize.

Muhammad Saqr, a truck driver, left Cairo with a load of thinners on April 13, heading to Khartoum. By the time he had arrived at the border, the battle had flared up. Saqr remained, like dozens of trucks, waiting for the borders to be reopened.

On April 15, 2023, clashes erupted in Sudan between the army led by Lieutenant General Abdel Fattah al-Burhan and the Rapid Support Forces led by Lieutenant General Muhammad Hamdan Dagalo, known as “Hamidti.” According to the UN, the clashes have resulted in hundreds of deaths and displaced more than a million people, with 840,000 internally displaced while another 250,000 have crossed the borders.

Saqr was stuck at the border for 28 days.

“We began to run out of supplies, and we reassured ourselves that the situation would improve tomorrow. Twenty-eight days passed while we slept in the open. The information we received from the bus drivers transporting the displaced from Sudan to Egypt convinced us that there would be no immediate relief. We knew that if we entered Khartoum alive, we would leave in shrouds,” Saqr told IPS.

“The merchant to whom we were transferring the goods asked us to wait and not return (home), particularly because he could not pay the customs duties due to the banks’ closure.”

Muhammad Saqr at the border of Sudan and Egypt.

Eventually, they returned with the goods to Cairo, Saqr said.

Mahmoud Asaad, a driver, was stuck on the Sudanese side of the border. Due to customs papers and permits, the livestock he was transporting had already been stuck in the customs barn in Wadi Halfa, Sudan, for thirty days. Then when the conflict broke out, the cows were trapped for another thirty days.

“We used to transport shipments of animals from Sudan to Egypt regularly,” Asaad explains. The average daily transport of animals to Egypt was roughly 60 trucks laden with cows and camels. This trade has stopped, and many Sudanese importers have fled to Egypt while waiting for the conflict to end.

“Sudan is regarded as a gateway for Egyptian exports to enter the markets of the Nile Basin countries and East Africa, and the continuation of war and insecurity will reduce the volume of trade exchange between the two countries, negatively impacting the Egyptian economy, which is currently experiencing some crises,” Matta Bishai, head of the Internal Trade and Supply Committee of the Importer’s Division of the General Federation of Chambers of Commerce, told IPS.

According to Bishai, commodity prices have risen significantly in recent months as the Egyptian pound has fallen against the US dollar. He also stated that the current situation in Sudan would result in additional price increases in the coming months, particularly for commodities imported from Sudan, such as meat.

Bishai explained that while Egypt had an ample domestic meat supply, it was nevertheless reliant on imports. Importing it from other countries such as Colombia, Brazil, and Chad would take longer and be more expensive than importing it from Sudan, as land transport is more convenient and cheaper than transporting the goods by sea.

According to Bishai, Sudan is a major supplier of livestock and live meat to Egypt, supplying about 10 percent of Egypt’s requirements. Higher meat prices will put additional pressure on Egypt’s inflation rates.

“Rising commodity prices, combined with the current situation in Sudan, are expected to result in higher inflation rates in Egypt in the coming months,” said Bishai.

According to data from the General Authority for Export and Import Control on trade exchange between Egypt and the African continent during the first quarter of this year, Sudan ranked second among the top five markets receiving Egyptian exports, valued at USD 226 million.

According to Ahmed Samir, the Egyptian Minister of Trade and Industry, the volume of trade exchange between Egypt and African markets amounted to about USD 2,12 billion in the first quarter of this year, with the value of Egyptian commodity exports to the continent totaling USD 1,61 billion and Egyptian imports from the continent totaling UD 506 million.

Mohamed Al-Kilani, an economics professor and member of the Egyptian Society of Political Economy, said: “The negative consequences will be felt in the trade exchange, which has recently increased and reached USD2 billion. Egypt has attempted to expedite the import process from Sudan by expanding the road network and building a railway.”

Credit rating agency Moody’s warned that should the conflict in Sudan continue for an extended period, it would have an adverse credit impact on neighboring countries and impact multilateral development banks. Moody’s added that if the clashes in Sudan turn into a long civil war, destroying infrastructure and worsening social conditions, there will be long-term economic consequences and a decline in the quality of Sudan’s multilateral banks’ assets, as well as an increase in non-performing loans and liquidity.

As the conflict entered its sixth week, attempts at a ceasefire have failed – with both sides accusing each other of violating agreements.

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The Reserve Bank of Australia (RBA)’s latest interest rate hike comes before the ink of the much-awaited review of the RBA, released on 20 April, has dried. The threat of more increases to come is a clear sign of an emboldened RBA as the government accepts all of the panel’s utterly disappointing 51 recommendations.

Anis Chowdhury

The recommendations of the three-person panel, charged with reviewing the structure, governance, and effectiveness of the RBA, range from creating a separate board to make decisions on interest rates, to giving the Bank a simpler dual mandate to pursue both price stability and full employment.

Utter disappointment
The Review report fails to question the long-held taboos about inflation and Central Bank’s role in a social democracy. While the Review panel leaves the RBA’s 2-3% inflation target unchanged, it outrageously recommends dropping from the RBA’s mandate “economic prosperity and welfare of the people of Australia” and the removal of government’s power to intervene in the RBA’s decisions.

This will make the RBA more inflation hawkish, and more aggressive in its use of the blunt interest rate tool without much regard for the consequences on jobs, especially when the RBA’s full employment mandate is left vague.

Without the power to intervene in the RBA’s decisions, such hawkish interest rate hikes will force the government to cut its expenditure as it has to pay more on interest for its debts while its tax revenue shrinks when the economy slows.

Thus, the well-being of ordinary citizens, especially those who will lose jobs, will worsen as the government struggles to find money for targeted budget support. No wonder the Treasurer termed the latest RBA interest rate decision as “Pretty brutal”.

Voodoo of 2-3% inflation target
In accepting the RBA’s current 2-3% inflation target, the Review panel ignores the fact that the 2-3% inflation target has become a “global economic gospel” without any empirical or theoretical basis.

The 2-3% target was plucked out of the air and it became a universal mantra after a chance remark by the then Finance Minister of New Zealand in a television interview followed by relentless preaching.

The recommendation ignores the changed circumstance since the 2-3% inflation target was first adopted. In the wake of the 2008-2009 Global Financial Crisis, many, including the then IMF’s Chief Economist, Olivier Blanchard suggested a 4% inflation target would be more appropriate.

The inflation-unemployment trade-off relationship (i.e., the Phillips curve) has become flatter over the years due to labour market deregulations, off-shoring and other developments. This means trying to dogmatically achieve such a low inflation target would require a much higher unemployment rate as recognised by the former Fed Chair and current US Treasury Secretary Janet Yellen. That is, the interest rate must rise more steeply inflicting serious damages to the business finances, household spending and government budget.

Full employment, a poor cousin
The Review panel recommends “full employment” mandate along with inflation target. However, while the inflation target has a numerical figure (2-3%), there is no such specific target mentioned for unemployment that may be consistent with the concept of full employment. When asked during a press conference, the Treasurer said, “It’s a contested concept”.

The report mentions full employment 100 times! But does not say what it means; instead, the panel accepts the current RBA’s definition and measure of full employment based on a contestable concept of a “non-accelerating inflation rate of unemployment” (NAIRU). That is, full employment is consistent with an unemployment rate below which inflation will accelerate.

There is general consensus that models based on NAIRU are basically wrong. An article in the RBA Bulletin acknowledged, “Model estimates of the NAIRU are highly uncertain and can change quite a bit as new data become available”. Thus, James Galbraith argued for ditching the NAIRU. And an op-ed in The Financial Times concluded, “The sooner NAIRU is buried and forgotten, the better”.

Social democracy sacrificed
The panel thinks, there are too many factors that affect prosperity and welfare. So, it recommends removal of the RBA’s third mandate “economic prosperity and welfare of the people of Australia”, enshrined in the 1959 RBA Act.

Furthermore, the panel seeks to remove the government’s ability to overrule an RBA decision because it “undermines the independent operation of monetary policy”.

With these recommendations implemented, the RBA will not be bound to the commitment to build a fairer society, although economic prosperity and people’s welfare can remain as an “overarching purpose”.

The Winner
A super independent RBA will have all the power it needs to use its sole weapon, interest rate rises, to keep inflation at 2-3%. The emboldened RBA will declare the consequences to its actions on the job markets as consistent with a vaguely defined full employment, and economic prosperity and welfare of the people.

It can simply assert that job and income losses are short-term pains for long-term gains, without having to provide any evidence. There are no such things as short-term pains.

For many, job loss may cause permanent damages to their mental health, self-esteem and social life often leading to suicides. IMF research shows that the scarring effects of recessions can be permanent.

Thus, the clear winner of the recommended reforms, is the RBA, not the ordinary people struggling to find decent jobs to enable them to put a roof over their heads and two square meals on their tables.

Meanwhile, the RBA’s ideological anti-inflationary fight with a blunt interest rate tool benefits the big four banks. They are “tipped to rake in record $33 billion” in profits from rising interest rates when everyday Aussies and small businesses battle rising bankruptcies and job losses.

Anis Chowdhury is Adjunct Professor, School of Business, Western Sydney University. He held senior United Nations positions in the area of Economic and Social Affairs in New York and Bangkok.

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Soledad Arnedo is head of the La Negra del Norte cooperative textile workshop, which works together with other productive enterprises of the popular economy in the Argentine municipality of San Isidro, on the outskirts of Buenos Aires. CREDIT: Daniel Gutman/IPS

By Daniel Gutman
BUENOS AIRES, May 5 2023 (IPS)

Nearby is an agroecological garden and a plant nursery, further on there are pens for raising pigs and chickens, and close by, in an old one-story house with a tiled roof, twelve women sew pants and blouses. All of this is happening in a portion of a public park near Buenos Aires, where popular cooperatives are fighting the impact of Argentina’s long-drawn-out socioeconomic crisis.

“We sell our clothes at markets and offer them to merchants. Our big dream is to set up our own business to sell to the public, but it’s difficult, especially since we can’t get a loan,” Soledad Arnedo, a mother of three who works every day in the textile workshop, told IPS.

The garments made by the designers and seamstresses carry the brand “la Negra del Norte”, because the workshop is in the municipality of San Isidro, in the north of Greater Buenos Aires.“In Argentina in the last few years, having a job does not lift people out of poverty. This is true even for many who have formal sector jobs.” -- Nuria Susmel

In Greater Buenos Aires, home to 11 million people, the poverty rate is 45 percent, compared to a national average of 39.2 percent.

La Negra del Norte is just one of the several self-managed enterprises that have come to life on the five hectares that, within the Carlos Arenaza municipal park, are used by the Union of Popular Economy Workers (UTEP).

It is a union without bosses, which brings together people who are excluded from the labor market and who try to survive day-to-day with precarious, informal work due to the brutal inflation that hits the poor especially hard.

“These are ventures that are born out of sheer willpower and effort and the goal is to become part of a value chain, in which textile cooperatives are seen as an economic agent and their product is valued by the market,” Emmanuel Fronteras, who visits different workshops every day to provide support on behalf of the government’s National Institute of Associativism and Social Economy (INAES), told IPS.

Today there are 20,520 popular cooperatives registered with INAES. The agency promotes cooperatives in the midst of a delicate social situation, but in which, paradoxically, unemployment is at its lowest level in the last 30 years in this South American country of 46 million inhabitants: 6.3 percent, according to the latest official figure, from the last quarter of 2022.

Women work in a textile cooperative that operates in Navarro, a town of 20,000 people located about 125 kilometers southwest of Buenos Aires. Many of the workers supplement their income with a payment from the Argentine government aimed at bolstering productive enterprises in the popular economy. CREDIT: Evita Movement

The working poor

The plight facing millions of Argentines is not the lack of work, but that they don’t earn a living wage: the purchasing power of wages has been vastly undermined in recent years by runaway inflation, which this year accelerated to unimaginable levels.

In March, prices rose 7.7 percent and year-on-year inflation (between April 2022 and March 2023) climbed to 104.3 percent. Economists project that this year could end with an index of between 130 and 140 percent.

Although in some segments of the economy wage hikes partly or fully compensate for the high inflation, in most cases wage increases lag behind. And informal sector workers bear the brunt of the rise in prices.

“In Argentina in the last few years, having a job does not lift people out of poverty,” economist Nuria Susmel, an expert on labor issues at the Foundation for Latin American Economic Research (FIEL), told IPS.

“This is true even for many who have formal sector jobs,” she added.

On five hectares of a public park in the Argentine municipality of San Isidro, in Greater Buenos Aires, there is a production center with several cooperatives from the Union of Workers of the Popular Economy (UTEP), which defends the rights of people excluded from the formal labor market. CREDIT: Daniel Gutman/IPS

The National Institute of Statistics and Censuses (INDEC) estimates that the poverty line for a typical family (made up of two adults and two minors) was 191,000 pesos (834 dollars) a month in March.

However, the average monthly salary in Argentina is 86,000 pesos (386 dollars), including both formal and informal sector employment.

“The average salary has grown well below the inflation rate,” said Susmel. “Consequently, for companies labor costs have fallen. This real drop in wages is what helps keep the employment rate at low levels.”

“And it is also the reason why there are many homes where people have a job and they are still poor,” she said.

Social value of production

La Negra del Norte is one of 35 textile cooperatives that operate in the province of Buenos Aires, where a total of 160 women work.

They receive support not only from the government through INAES, but also from the Evita Movement, a left-wing social and political group named in honor of Eva Perón, the legendary Argentine popular leader who died in 1952, at the age of just 33.

The Evita Movement formed a group of textile cooperatives which it supports in different ways, such as the reconditioning of machines and the training of seamstresses.

“The group was formed with the aim of uniting these workshops, which in many cases were small isolated enterprises, to try to formalize them and insert them into the productive and economic circuit,” said Emmanuel Fronteras, who is part of the Evita Movement, which has strong links to INAES.

“In addition to the economic value of the garments, we want the production process to have social value, which allows us to think not only about the profit of the owners but also about the improvement of the income of each cooperative and, consequently, the valorization of the work of the seamstresses,” he added in an interview with IPS.

The 12 women who work in the Argentine cooperative La Negra del Norte sell the clothes they make at markets and dream of being able to open their own store, but one of the obstacles they face is the impossibility of getting a loan. CREDIT: Daniel Gutman/IPS

The high level of informal employment in Argentina’s textile industry has been well-documented, and has been facilitated by a marked segmentation of production, since many brands outsource the manufacture of their clothing to small workshops.

Many of the workers in the cooperatives supplement their textile income with a stipend from the Potenciar Trabajo government social programme that pays half of the minimum monthly wage in exchange for their work.

“Economically we are in the same situation as the country itself. The instability is enormous,” said Celene Cárcamo, a designer who works in another cooperative, called Subleva Textil, which operates in a factory that makes crusts for the traditional Argentine “empanadas” or pasties in the municipality of San Martín, that was abandoned by its owners and reopened by its workers.

Other cooperatives operating in the pasty crust factory are involved in the areas of graphic design and food production, making it a small hub of the popular economy.

The six women working at Subleva Textil face obstacles every day. One of them is the constant rise in the prices of inputs, like most prices in the Argentine economy.

Subleva started operating shortly before the COVID-19 pandemic, so it had to adapt to the complex new situation. “They say that crisis is opportunity, so we decided to make masks,” said Cárcamo, who stressed the difficulties of running a cooperative in these hard times in Argentina and acknowledged that “We need to catch a break.”

Egypt plans to sell shares in 32 state-owned businesses, including three banks. Credit: Hisham Allam/IPS

By Hisham Allam
Cairo, Apr 6 2023 (IPS)

Egypt intends to sell shares in 32 state-owned businesses within a year, including three banks, two military-owned businesses, and numerous businesses in the energy and transportation sectors. This is part of the administration’s efforts to reduce the role of the state in the economy and attract foreign capital.

That also follows the government’s December USD 3 billion deal with the IMF to resume privatization initiatives.

The IMF approved the USD 3 billion loan to strengthen the private sector and reduce the state’s footprint in the economy.

Egypt planned to sell 23 state-owned enterprises in 2018, but the plan was postponed due to the worldwide crisis.

The Russia-Ukraine conflict has put pressure on the Egyptian economy and currency, making the proposal more urgent.

According to Rashad Abdo, head of the Egyptian Forum for Economic Studies, Egypt had already received sovereign loans from many donors, including international institutions, such as the International Monetary Fund and Gulf countries, and these parties either set harsh lending conditions or would be reluctant to lend due to increased risks.

The State Ownership Policy Plan, adopted by President Abdel-Fattah El-Sisi in December, outlines how the government would participate in the economy and how it would increase private sector involvement in public investments. Egypt wants to increase the contribution of the private sector to the nation’s economic activity from 30 percent to 65 percent within the next three years. One-quarter of these enterprises will be listed by the government within six months.

Egypt announced the offering of these companies, intending to sell them to strategic investors, specifically Gulf sovereign funds. Egypt is expected to sell enterprises worth USD 40 billion within three years, including those held by the army.

Attracting foreign investment requires strengthening the investment climate, lowering inflation rates, and expanding anti-corruption efforts, Abdo told IPS.

The State Ownership document states that 32 Egyptian state companies will be listed on the Egypt Exchange (EGX) or sold to strategic investors within a year, beginning with the current quarter and ending in the first quarter of 2024. Stakes in three significant banks, Banco du Caire, United Bank of Egypt, and Arab African International Bank, are among the scheduled transactions. Insurance, electricity, and energy companies, as well as hotels and industrial and agricultural concerns, will also be on the market. Prime Minister Moustafa Madbouly announced that the first stakes would be offered in March and a quarter by June, and more businesses could be added over the next year.

Abdo pointed out that the Monetary Fund affirmed the Egyptian government’s commitment to implementing the State Ownership Document when it agreed to grant it this loan and the Egyptian government saw it as a favorable opportunity to implement the terms of the document set by the Organization for Economic Cooperation and Development.

Mohamed Al-Kilani, professor of economics and member of the Egyptian Society for Political Economy, said the privatization effort seeks to eliminate the dollar gap in Egypt and thus provide indirect compensation in the form of services and benefits from the International Monetary Fund’s debt.

The state would also send a message to foreign investors that it responds to the private sector and is willing to withdraw from certain sectors to benefit the private sector.

“The state is attempting to exploit this proposal to stimulate and revitalize the Egyptian Stock Exchange while taking into account the fair valuation of these companies in comparison to the global market. However, the state was unclear about the details of this offering and whether it is a long-term or short-term investment, and it has not clarified the size of employment or the percentages offered in terms of ownership and management,” Al-Kilani told IPS.

“The state is trying to create new types of foreign investment to attract foreign currency due to the fluctuation in exchange rates and high-interest rates,” Al-Kilani added.

According to external debt data published on the central bank’s website in mid-February, Egypt’s external debt fell by USD 728 million to USD 154.9 billion at the end of last September, but its foreign exchange reserves remain low, prompting renewed demand for state assets. The Russia-Ukraine conflict has further pressured the economy and local currency, prompting the proposal for new urgency.

Despite its relatively modest improvement in the latest data from the central bank at the beginning of February (USD 34.2 billion), it lost about 20 percent of the level of USD 41 billion at the end of February last year.

Last January, the IMF suggested that the volume of the financing gap in Egypt would reach about USD 17 billion over the next 46 months in light of its decline in foreign exchange resources and the high cost of its imports as one of the largest countries in the world to import its food and the first importer of wheat in the world.

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The carts of “cartoneros” or garbage pickers stand in front of a merchandise purchase warehouse in the La Paternal neighborhood in the city of Buenos Aires. CREDIT: Daniel Gutman/IPS

By Daniel Gutman
BUENOS AIRES, Apr 6 2023 (IPS)

It’s a Monday morning in April on Florida, a pedestrian street in the heart of the Argentine capital, and a small crowd gathers outside the window of an electronic appliance store to watch a violent scene on a TV screen. But it is not part of any movie or series.

The scene, broadcast live, is happening a few kilometers away, in a poor suburb of Buenos Aires: colleagues of a city bus driver who was murdered during a robbery throw stones and fists at the Minister of Security of the province of Buenos Aires, Sergio Berni, who had come to talk and offer the government’s condolences in front of the cameras.

No one seems surprised among the office employees watching the scene on TV, and several make no effort to hide a certain sense of satisfaction that other ordinary people have decided to take action against a representative of the political leadership, the target of widespread discontent, as reflected by the opinion polls.“There is growing social polarization in Argentina, with an increasingly weak middle class. Each crisis leaves another part of society outside the system.” -- Agustín Salvia

“This was bound to happen sometime, if the politicians earn a fortune for doing nothing and we work all day to earn a pittance… And on top of that you go out on the street and they kill you just to rob you,” comments one of the viewers, as the rest listen approvingly.

The scene reflects the climate of tension and the sense of being fed-up that is felt in large swathes of Argentine society, in the midst of a long, deep economic crisis, which in the last five years has constantly chipped away at the purchasing power of wages, due to inflation that occasionally stops growing for a couple of months, only to surge again with greater force.

If there was room for modest optimism in 2022, as the result of a recovery in economic activity after the peak of the COVID-19 pandemic, it seems distant today, since the beginning of this year brought news that reflects the magnitude of the breakdown of the social fabric in this Southern Cone country.

On Mar. 31, the official poverty rate for the second half of 2022 was announced: 39.2 percent of the population, or 18.1 million people in this South American country of 46 million, according to the most up-to-date figures.

Since 2021 ended with a poverty rate of 37.3 percent, this means that in one year a million people were thrown into poverty, despite the fact that the economy, thanks to the rebound in post-pandemic activity, grew 4.9 percent, above the average for the region, according to the Economic Commission for Latin America and the Caribbean (ECLAC).

But these data are already old and the figures for 2023 will be worse due to the acceleration of inflation, which is surprising even by the standards of Argentina, a country all too accustomed to this problem.

The price rise in February reached 6.6 percent, exceeding the 100 percent year-on-year rate (from March 2022 to February 2023) for the first time since 1991.

When you look a little closer, perhaps the worst aspect is that prices grew much more than the average, 9.8 percent, for food, the biggest expense for the lowest-income segments of society.

To this picture must be added an extreme drought that has affected the harvest of soybeans and other grains, which are the largest generator of foreign exchange in Argentina. The estimates of different public and private organizations on how much money the country will lose this year in exports range between 10 and 20 billion dollars.

This is one of the reasons why the World Bank, which had forecast two percent growth for the Argentine economy this year, revised its estimates at the beginning of April and concluded that there will be no economic growth in 2023.

Luis Ángel Gómez sits in the soup kitchen that he runs in the municipality of San Martín, one of the most densely populated areas in Greater Buenos Aires. For the past 10 years, he has been serving lunch and afternoon snacks to about 70 children, but lately he has also been helping their parents and grandparents. CREDIT: Daniel Gutman/IPS

Soup kitchens

About 15 kilometers from the center of Buenos Aires, in the Loyola neighborhood, the cold statistics on the economy translate into ramshackle homes separated by narrow alleyways, with piles of garbage at the corners and skinny dogs wandering among the children playing in the street.

In a truck trailer that carries advertising for a campaigning politician, a dentist extracts teeth free of charge for local residents, who have increasing problems accessing health services.

The neighborhood is in San Martín, one of the municipalities on the outskirts of Buenos Aires. Eleven million people live in these working-class suburbs (almost a quarter of the country’s total population), where the poverty rate is 45 percent, higher than the national average.

“I have never before seen what is happening today. Before, only men went out to pick through the garbage (for recyclable materials to sell), because the idea was that the streets weren’t for women. But today the women also go out,” Luis Ángel Gómez, 58, born and raised in the neighborhood, who does building work and other odd jobs, told IPS.

Indeed, the carts of the “cartoneros” or garbage pickers, which used to be seen only in the most densely populated working-class neighborhoods of Buenos Aires after sunset, when the building managers take out the garbage, are now seen throughout the city and at all hours.

A market selling clothes at low prices in Parque Centenario, one of the best-known markets in Buenos Aires, located in Caballito, a traditional upper middle-class neighborhood of Buenos Aires. This type of street fair has mushroomed in Argentina in the face of persistent inflation that is destroying the purchasing power of wages. CREDIT: Daniel Gutman/IPS

Gómez has been running a soup kitchen in Loyola for 10 years, where he provides lunch three times a week and afternoon snacks twice a week to more than 70 children and adolescents. It is in a room with a tin roof, a couple of gas stoves and photos of smiling boys and girls as decoration.

“The municipality gives me some merchandise: 20 kilos of ground meat and two boxes of chicken per month. Besides that, I cook with donations,” said Gómez. “This box was given to me by the company that collects garbage in the municipality,” he added, pointing to cartons of long-life milk.

But the soup kitchen cannot meet all the needs of the local residents, said Gómez. “My concern was to give the kids a better future and I fed them until they were 14 or 15 years old. Today I also have to help their parents and grandparents.”

The carts of “cartoneros” or garbage pickers, which until a few years ago were only seen after sunset in the most densely populated low-income neighborhoods, today have become a common image in every part of Buenos Aires at all times of the day. One is seen here in the neighborhood of Flores. CREDIT: Daniel Gutman/IPS

The middle class on the slide

The crisis has picked up speed since 2018 and deepened with the pandemic, but Argentina is going through a period of stagnation, with low economic growth and very little formal private sector job creation for more than a decade.

A study recently presented by the Pontifical Catholic University of Argentina (UCA) shows that since 2010 access to food, healthcare, employment and social security have steadily worsened, despite social assistance, affecting five million households out of a total of 12 million.

“There is growing social polarization in Argentina, with an increasingly weak middle class. Each crisis leaves another part of society outside the system,” sociologist Agustín Salvia, director of the UCA’s Social Observatory on Argentine Social Debt, which is considered a chief reference point in the country, told IPS.

Salvia explained that the improvement in economic activity after the peak of the COVID-19 pandemic drove the creation of new jobs until the third quarter of last year, although poverty grew just the same because they were almost all precarious low-wage jobs.

“The post-pandemic recovery cycle is over. Since the last quarter of 2022 there has been no more job creation, which added to inflation will cause poverty to grow in 2023,” added Salvia.

The expert said structural or chronic poverty used to be 25 or 30 percent in Argentina, but has now held steady at 40 or 45 percent, with a deterioration marked by the stagnation of quality employment, which has pushed many formerly middle-class families into poverty.

Queues and frustration met the changes to the currency and withdrawal limits in Abuja. Credit: Abdullahi Jimoh/IPS

By Abdullahi Jimoh
ABUJA, Mar 6 2023 (IPS)

Nigerians confronted by hardships over the scarcity of the newly redesigned naira notes in conjunction with the country’s cashless policy introduced by the apex bank have had a last-minute reprieve from a policy that had disrupted their lives and exacerbated hunger.

On Friday, March 3, 2023, the country’s Supreme Court temporarily suspended the March 10, 2023, deadline for use of the redesigned naira and said the imposition of such a tight deadline was an affront to the 1999 constitution.

Trying to get money from the ATMs of accredited commercial banks had created so many difficulties that people had put their lives on hold. Artisans, teachers, and other professionals could not go to work, many school children were loitering at home, itinerant traders were stranded, and families were now hungry and, on occasion, resorted to violent protests because they had not been able to access their money.

Experts had warned that the situation could trigger a cash-induced recession because the country’s economy is chiefly cash-based.

In October last year, the Central Bank of Nigeria Governor, Godwin Emefiele, announced that three major denominations would be redesigned on the Federal government’s orders.

Emefiele announced that Nigeria’s last redesign was in 2014 when the N100 note was redesigned to mark the country’s centenary.

“In line with sections 19, subsection a and b of the CBN Act 2007, the management of the CBN sought and obtained the approval of President Muhammad Buhari to redesign, produce and circulate new series of banknotes at N200, N500 and N1000 levels,” he said.

In November last year, Buhari launched the new naira notes and said they would be in circulation from December 15, and the deadline for swapping old notes for new ones in the Deposit Money Banks (DMBs) was slated for this year on January 31. But the mass objection and the banks’ inability to swap the money forced it to be extended to February 10, 2023. On February 17, the old notes ceased to be recognized as legal tender.

To add to the woes on December 6, the apex bank, in an attempt to push a cashless economy, introduced a cash withdrawal limit and directed the lower banks to limit over-the-counter amounts to be withdrawn by individuals and corporate entities to N100,000 and N500,000 (about USD 207 and USD 1085. 5) per week. This order was expected to take effect on January 9, 2023, and ATMs and point of sale (PoS) terminals would dispense a maximum of (N20,000) (USD 43.4) at a time.

The cashless policy’s first phase was introduced in April 2012 in Lagos to encourage electronic transactions and enhance the efficiency of Nigeria’s payment system. It was successful there, and the policy was then extended to five other states in July 2013. For the expansion of financial access points and financial inclusion and proliferation of electronic transactions, the CBN gave full implementation in September 2019 before the nationwide implementation was recently announced to commence on January 9 this year.

Like many other developing African countries, Nigeria’s economy was greatly affected by the Russian/Ukraine war. In 2016 the country hit a recession, which caused her economy to contract by 1.6 percent due to a fall in the price of oil in the international market.

Also, in the third quarter of 2020, its economy plunged into recession over the negative impact of COVID-19 on travel and the supply chain of goods worldwide.

Moreover, the growth of her inflation rate climbed to 21.82 percent in January 2023.

The CBN justifies the cashless policy in the banking system, saying it could defuse kidnapping for ransom, armed robbery, graft terrorism financing, extortion, advance fee fraud, and other crimes, while the compulsory withdrawal limit will cause deflation to the country’s economy.

Inflation occurs when there is too much money in circulation. The central bank’s findings showed that as of October last year, currency in circulation was N3.23 trillion naira, but there was only 500 billion naira in various banks’ custody, and 2.7 trillion naira was permanently undeposited. Observers have projected that with the decision to take the money out of circulation, inflation would decrease.

Not Enough Money in Circulation

News analysts questioned whether the Nigerian Security Printing and Minting (NSPM) could print the money. It was created in 1963 with authority to produce currencies and security documents for ministries, agencies of government, and companies.

In addition, a World Bank survey revealed that there were 16.15 ATMs per 100,000 adults in Nigeria in 2021 – which means that for a population of over 200 million people in Nigeria, there are only 32,000 ATMs across the federation. Each ATM would need to dispense a minimum of 1 million naira daily.

But the problem was exacerbated because the commercial banks were short of cash and unable to get the newly printed naira from the central bank because the NSPM could only print 4 billion banknotes per year.

The central bank’s deputy governor, Aisha Ahmad, said in December that 500 million new notes had been ordered, which a financial analyst describes as insufficient.

“The intention for the naira redesign and adoption of cashless transactions is to reduce vote buying and terrorism in the country, but the CBN needs to release more cash into circulation,” a Lagos-based analyst from KPMG Babatunde Babajide told IPS in an interview.

The Vote Buying

As enticing voters with cash was a phenomenon in previous Nigerian elections, the CBN insisted on retaining the notes in the banks and kicking against any further extension of the swapping of the old currency to check vote buying during the February election.

However, many members of the All Progressive Congress (APC), the ruling party, said the cash crunch is a plot against their candidate Bola Ahmed Tinubu. Last week Tinubu was declared the winner of the election – despite allegations that the poll was flawed, and is now contested by both the main opposition leaders Peoples Democratic Party (PDP), Atiku Abubakar and Labour Party’s Peter Obi.

A political scientist from the University of Nigeria, Adilieje Chukwuma, also affirmed that the naira redesign was principally for economic gain but may also have had political undertones.

“Looking at the timing, it could have a political undertone. But I prefer to view the situation mainly as an economic recovery,” he told IPS.

While some believe the programme to replace the naira was designed to impact the poor, Babajide, the financial analyst, views it as beneficial to the majority.

“Nigerians just need to adopt electronic transactions. The CBN action is intentional, mainly to reduce the supply of cash and curb inflation,” Babajide says.

The analyst, however, added that hopefully, after the country’s general election, things would start to return to normal.

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In July 2021, widespread civil unrest spread across KwaZulu Natal and other South African provinces. While it followed the incarceration of former President Jacob Zuma, analysts also attributed it to widespread unemployment and inequality. Credit: Lyse Comins/IPS

By Lyse Comins
DURBAN, Mar 1 2023 (IPS)

South Africa’s almost record level food price inflation, load shedding, rising energy costs, and further fuel and interest rate hike forecast have eroded workers’ disposable incomes and further disadvantaging the poor – leaving analysts predicting that the country was at heightened risk, including civil unrest.

Head of Policy Analysis at the Centre for Risk Analysis, Chris Hattingh, cautioned that the lower fuel price, which the latest Statistics SA data showed last week, had largely contributed to driving annual consumer inflation down from 7,2 percent in December 2022 to 6,9 percent in January, could prove to be only a temporary reprieve. The fuel price index declined by 10.5 percent between December 2022 and January, the data showed.

United Trade Union of SA (UASA) spokesperson Abigail Moyo said the state’s failure to supply food producers and retailers with sufficient water and electricity to run businesses efficiently had fuelled inflation that eroded workers’ disposable income.

“Economically driven financial stress through no fault of their own has been a factor in workers’ lives for years. With items such as maize meal going up 36,5 percent since January last year, onions up 48.7 percent, samp up 29.6 percent, and instant coffee up 26.4 percent, it is clear that difficult times are not nearly over for households,” she said.

Hattingh added: “This inflation relief afforded by the lower fuel price could prove to be temporary. The reopening of the Chinese economy will likely drive international oil prices higher, impacting down the line in the form of higher fuel prices. South Africa is also more exposed to imported inflation. Should the costs and prices of manufactured and consumer goods and inputs increase, this will then drive inflation higher locally.”

“Of great concern regarding pressure on consumers is that the food and non-alcoholic beverages inflation rate was recorded at 13.4 percent (annually) in January. The previous time this reading was so high was April 2009, at 13.6 percent,” he said.

Additionally, the category of bread and cereals recorded the biggest increase of any product group at 21.8 percent, while meat inflation rose from 9.7 percent in December 2022 to 11.2 percent in January.

“A fundamental weakness in the economy – unreliable electricity supply – could likely push prices and inflation higher throughout the year. This will result in more pressure on consumers and businesses and add to the potential for civil unrest,” he said.

He said load shedding was now a priced-in “feature of South African life,” as shown by the Rand weakening to R19 against the US Dollar.

Annual inflation, at 6.9 percent, was also outside the South African Reserve Bank’s (SARB) target range of 3 – 6 percent.

“With the latest data for January now in, the SARB could continue its rate hiking cycle with another 25 basis points increase at the next meeting of the Monetary Policy Committee,” Hattingh said.

Independent crime and policing expert and a former senior researcher at the Institute for Security Studies, Dr Johan Burger, warned that signs of potential unrest due to the rising cost of living and disillusionment were visible across the country.

He said most households in the middle and higher income brackets had been forced to cut back on spending due to higher interest rates and the rising prices of basic foods.

“Those of us with a relatively stable income are already finding it increasingly difficult and have to think twice before we buy something, so one can only imagine the pressure people in lower income groups must be feeling,” he said.

“For many, this has been the situation for many years, and it has become worse. Unemployment is at 32,9 percent, and the unofficial unemployment rate is even higher. High levels of unemployment lead to high levels of poverty, creating all sorts of social problems,” he said.

Burger said during the looting in July 2021, much of what was stolen was foodstuffs and goods that could be sold for cash.

“In some cases, people who went out to shop for food were attacked and robbed of their food. Other instances that we see now are when a truck breaks down on the road near a community, and all of a sudden, a flood of people come in and strip it of whatever it’s carrying – whether food or something they can exchange for food,” he said.

Burger said these incidents showed a “general instability” against the backdrop of a weakened criminal justice system that cannot deal effectively with criminals.

“The potential for large-scale disruptions and looting and for large groups of people to come together and engage in popular uprisings could happen. When large groups of people are exposed to extreme levels of property over a long period of time, they build resentment and feel neglected by the state. They feel their needs are not acknowledged, and with this resentment comes a disregard for the state, its laws, and the police, and they feel they have the right to rise up and take what they need,” Burger said.

“And if they rise up in large enough numbers, it will be very difficult for the state to suppress this kind of uprising. The potential for this to happen is very real – it’s almost visible; it’s just beneath the surface,” he said.

Burger said all that was needed to spark unrest was a potential trigger, as had occurred in KwaZulu-Natal with a pro (former president Jacob Zuma campaign ahead of the July 2021 riots.

“The danger is it could spread very quickly because those levels of poverty and deprivation exist in almost all our communities across the nation. In 2008 the Xenophobic riots spread in a question of days, and we saw 69 people killed and many more injured and displaced,” he said.

He warned that localized protests about service delivery had been occurring for years, and if left unattended, these could also get to a point where “resistance will explode.”

“It is growing dissatisfaction with their situation, and many of poor communities see themselves as the neglected part of South Africa. They have not shared in anything promised when democracy came in terms of employment and service, and they go hungry once this happens; there is a division between a part of our population and the institutions that govern us, which is why there is real potential for large scale insurrection,” Burger said.

Head of the Justice and Violence Prevention Programme at the Institute for Security Studies,  Gareth Newham, said rising food security and hunger, with around 60 percent of the population now living in poverty and a large proportion of households facing hunger weekly, created a high level of despair and frustration.

“This challenge has been around some time, and increasing food prices could make that worse,” he said.

However, he said the current causes of most public violence were labor-related disputes and service delivery failures.

“We historically don’t have an issue where food insecurity has been a major driver of public violence, but it doesn’t mean it won’t be. There could arguably be a level of hunger that does lead to it,” he said.

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Australia is set to become the first country or jurisdiction to require large multinational corporations (MNCs), with a global consolidated income of at least AU$1 billion, to publicly report country-by-country (CbC) tax information. The new Labor Government announced on 25 October, 2022 in its budget paper that MNC’s public CbC tax reporting will begin from 1 July, 2023. Australia’s public CbC reporting rules will apply to all companies headquartered in Australia and companies headquartered elsewhere with sufficient nexus in the country.

Kate Lappin

All countries in the Organisation for Economic Cooperation and Development (OECD), including Australia and the US, have required large MNCs to privately report CbC tax data under Action 13 of the OECD/G20 project against Base Erosion and Profit Shifting (BEPS). In November 2022, the European Parliament approved a directive to mandate public CbC reporting for large MNCs within the bloc, with a range of limitations discussed below, from 22 June, 2024.

The Australian move comes a month before a new push at the United Nations to convene a global tax body to set international taxation standards, after years of faltering efforts among the world’s richest countries at the OECD.

Losing billions
The Paradise Papers and the Luxembourg Leaks of the International Consortium of Investigative Journalism (ICIJ) shed light on tax manoeuvres of more than 100 MNCs. Apple alone shifted profits around the world to accumulate US$252 billion offshore. A 2021 ICIJ study revealed that, in one year alone, MNCs shifted US$1 trillion offshore, depriving governments of hundreds of billions in revenue.

Anis Chowdhury

Research by the Centre for International Corporate Tax Accountability and Research uncovered tax dodging by MNCs that bled money from public services and workers including in scandal ridden aged care homes in Australia. It exposed how Microsoft receives billions in outsourced government IT Contracts, while lodging over AU$2billion in profits via its Bermuda based subsidiaries where it pays little tax.

Almost 800 large corporations paid no tax in 2020-21, Australian Taxation Office report reveals. The country loses about AU$8 billion a year due to MNCs profit-shifting.

Poor countries bleed most
The 2021 ICIJ study finds African countries the most “vulnerable” to profit-shifting. In 2017, the Tax Justice Network found that low-income countries were the biggest victims of profit shifting.

In some countries such as Zambia and Argentina, losses exceeded 4% of GDP. In Pakistan the losses due to profit shifting were 40% of total tax revenues, and in Chad, the estimated losses were larger than all taxes collected (106.2% of total tax revenue)!

The State of Tax Justice 2021 finds that low-income countries collectively lose the equivalent of 48% of their public health budgets.

Low-income countries rely more heavily on corporate income tax for the revenue required to fund cash-starved public services, making corporate tax transparency vital in addressing global poverty and inequality.

Rich countries serving corporate interests
International taxation rules have been designed by rich nations, especially by their club, OECD. Tax justice activists, such as the African Tax Administration Forum allege that developing countries are “not at the table” at the OECD, but on the menu, with OECD rules designed to allow multinationals to continue to extract profits in the global south, without making fair contributions.

The OECD’s standards for MNCs tax reporting are riddled with loopholes. As Oxfam points out, the OECD rules do not allow people in low-countries to have access to information about MNCs’ profit made or tax paid in their countries and nor do most tax authorities in low-income countries.

Similarly, the European Union’s CbC reporting is seriously watered-down. Tax transparency is only required for the 27 EU member states and the 21 black-listed or grey-listed jurisdictions on their flawed list of tax havens. Oxfam points out this means secrecy is retained for more than 75% of the world’s nearly 200 countries. The EU also provide a “corporate-get-out-clause” for “commercially sensitive information” for 5 years; and limit reporting to companies with consolidated turnover above EUR 750 million, excluding 85 – 90% of MNCs.

Unions’ play a critical role
The Labour movement has taken on the fight to end corporate tax avoidance. Labour’s share in GDP has been declining since the early 1970s in advanced countries and since the early 1980s in developing countries. Some unions have recognised that corporate tax avoidance erodes the public services workers need and undermines collective bargaining, while increasing corporate power.

The global union federation, Public Services International (PSI), co-ordinated union action to in support of public CbC reporting amongst other tax reforms. PSI joined the technical committee that drafted new Global Reporting Initiative (GRI) Tax Standards and worked with union pension funds to back the standards, which are now widely regarded as the best benchmark for corporate tax accountability.

In Australia PSI and affiliates exposed corporate tax avoidance in aged care, labour hire companies and corporations receiving large government contracts and worked with unions to shape the Labor party’s policy platform.

The announcement reflects one of the recommendations PSI and the International Trade Union Congress made to the Australian Treasury in its submission on Multinational Tax integrity and enhanced tax transparency.

Can Australia lead?
Since being elected in May 2022, the new Australian government has sought to improve its international standing by setting stronger climate targets, increasing engagement with Pacific Island countries and rebuilding capacities of the Department of Foreign Affairs and Trade. If the government can make good on its promise to implement the GRI standards and require public CbC reporting, it will have significantly contributed to the global public good and set a precedent for the EU and other countries to follow.

In addition to setting new tax transparencies standards, the Albanese Government should support the push by African countries for a truly inclusive UN tax convention – which could slash the scope for tax abuse by MNCs and wealthy individuals. Together, these contributions would deliver more to low-income countries than Australia’s entire development aid budget.

Kate Lappin is the Asia Pacific Regional Secretary for Public Services International (PSI), the Global Union Federation representing more than 30 million workers who deliver public services in 154 countries and territories. Kate headed the Asia Pacific forum on Women, Law and Development (APWLD) for eight years and has worked across labour, feminist and human rights movements for more than 20 years.

Anis Chowdhury is Adjunct Professor, Western Sydney University. He served as Director of Macroeconomic Policy & Development and Statistics Divisions of UN-ESCAP (Bangkok) and Chief, Financing for Development Office of UN-DESA (New York).

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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’.

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As the year 2022 drew to an end, the United Nations Conference on Trade and Development (UNCTAD) warned, “Developing countries face ‘impossible trade-off’ on debt”, that spiralling debt in low and middle-income countries (LMICs) has compromised their chances of sustainable development.

Anis Chowdhury

Debt on the rise
Debt build-up accelerated in the wake of the 2008-2009 global financial crisis (GFC). The World Bank’s, Global Waves of Debt reveals that total (public & private; domestic & external) debt in emerging market and developing economies (EMDEs) reached an all-time high of around 170% of GDP ($55 trillion) – more than double the 2010 figure – by 2018, before the onset of the COVID-19 pandemic.

Total debt in low-income countries (LICs), after a steep fall from the peak of around 120% of GDP in the mid-1990s to around 48% ($137 billion) in 2010, increased to 67% of GDP ($270 billion) in 2018.

Pandemic debt
The COVID-19 pandemic greatly lengthened the list of EMDEs in debt distress as rich nations and institutions dominated by them, e.g., the World Bank, failed to provide any meaningful debt reliefs or increase financial support to adequately respond to the health and economic crises.

The World Bank’s chief economist advised, “First fight the war [pandemic], then figure out how to pay for it”. The IMF’s managing director counselled, “Please spend, spend as much as you can. But keep the receipts”.

The World Bank’s International Debt Statistics 2022 reveals that the external debt stock of LMICs in 2021 rose to $9.3 trillion (an increase of 7.8% compared to 2020) – more than double a decade ago in 2010. For many countries, the increase was by double digit percentages.

Riskier debt
Over the past decade, the composition of debt has changed significantly, with the share of external debt owed to private creditors increasing sharply. At the end of 2021, LMICs owed 61% of their public and publicly guaranteed external debt to private creditors—an increase of 15 percentage points from 2010.

The private creditors charge higher interest rates, and offer little or no scope for restructuring or refinancing at favourable terms, as they maximise profit. The private creditors also usually offer credits for shorter duration, while development financing needs are for longer-terms.

Failed aid promises
Development needs of developing countries have increased many-folds, especially for meeting internationally agreed development goals, such as the Millennium Development Goals (MDGs) and now Sustainable Development Goals (SDGs). The LMICs’ estimated aggregate investment needs are $1.5–$2.7 trillion per year—equivalent to 4.5–8.2% of annual GDP— between 2015 and 2030 to just meet infrastructure-related SDGs. But the rich nations spectacularly failed to honour their promises of finance made at the 2015 UN conference on financing for development (FfD) in Addis Ababa.

In fact, they failed all their past aid promises, e.g., to provide 0.7% of their gross national income (GNI) as aid, a promise made over half a century ago. While aid hardly reached half the promised percentage of GNI, it in fact declined from the peak of around 0.55% of GNI in the early 1960s to around 0.34% in recent years. Oxfam estimated 50 years of unkept promises meant rich nations owed $5.7 trillion to poor countries by 2020!

At their 2005 Gleneagles Summit, G7 leaders pledged to double their aid by 2010, earmarking $50 billion yearly for Africa. But actual aid delivery has been woefully short. G7 and other rich OECD countries also broke their 2009 pledge to give $100 billion annually in climate finance until 2020.

Promoting private finance
Meanwhile institutions dominated by rich nations – the World Bank and OECD, in particular – promoted private financing of development. The World Bank, the IMF and multilateral regional development banks, e.g. Asian Development Bank jointly released From billions to trillions, just before the 2015 FfD conference.

The document optimistically but misleadingly advised governments to “de-risk” development projects for enticing trillions of dollars of private capital in public private partnerships (PPPs). While de-risking effectively meant governments bearing financial risks, or socialise private investors’ loss, PPPs are found to have dubious impacts on SDGs, especially poverty reduction and enhancing equity.

Meanwhile the OECD donors advocated “blended finance” (BF) to use aid money to leverage, again trillions of dollars of private capital. But as The Economist noted, BF is struggling to grow, stuck since 2014 “at about $20 billion a year…far off the goal of $100 billion set by the UN in 2015”, despite suspected double counting. Like PPPs, BF has effectively transferred risk from the private to the public sector. On average, the public sector has borne 57% of the costs of BF investments, including 73% in LICs.

Collateral damage
In the wake of the GFC the rich countries followed so-called unconventional monetary policies that kept interest rates exceptionally low – in some cases at zero – for a decade. This saw capital flowing from rich countries to EMDEs in search for higher returns, as exceptionally low interest rates enticed EMDE governments and businesses.

The opportunity to borrow at low rates also made the EMDE governments lazy in their domestic revenue mobilisation efforts. Such policy complacency was rewarded by the donor community, especially the World Bank, through its now discredited Doing Business Report, encouraging a harmful race to the bottom tax competition among countries to cut corporate and other direct taxations. The World Bank and IMF also advised to remove or lower easier to collect indirect taxes, e.g., excise duties in exchange for regressive and difficult to implement goods & services or value-added tax in poorer countries.

Bleeding revenues
Meanwhile transnational corporations (TNCs) continue to avoid and evade paying taxes using creating accounting, aided by tax havens, mostly situated in rich nations’ territories. Developing countries lost approximately $7.8 trillion in illicit financial flows from 2004 to 2013, mostly through TNCs’ transfer mispricing, or the fraudulent mis-invoicing of trade in cross-border tax-related transactions.

African countries received $161.6 billion in 2015, primarily through loans, personal remittances and aid. But, $203 billion was extracted, mainly through TNCs repatriating profits and illegally moving money out of the continent.

International tax rules are designed by the rich nations. They continue to oppose developing countries’ demand for an inclusive international tax regime under the auspices of the UN.

Perfect storm
Global supply-demand mis-matches due to the pandemic, the Ukraine war and sanctions are a perfect recipe for a perfect storm. The advanced countries’ inflation fight is causing adverse spill-over on developing countries.

Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, depreciating their currencies, besides lowering export earnings. Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s.

In October 2022, a United Nations Development Programme (UNDP) report estimated that 54 countries, accounting for more than half of the world’s poorest people, needed immediate debt relief to avoid even more extreme poverty and give them a chance of dealing with climate change.

Rich nations fail again
As pandemic debt distress became obvious, the G20 countries devised the so-called Debt Service Suspension Initiative (DSSI) for 75 poorest countries, supposedly to provide some modest relief between May and December 2020. DSSI does not cancel debt, but only delays re-payments, to be paid fully later with the interest cost accumulating – thus effectively “kicks the can down the road”. As the private lenders refused to join the G20’s initiative, unsurprisingly only 3 countries expressed interest in DSSI. Moreover, the G20 initiative does not address debt problems facing MICs, many of which also face debt servicing, including repayment issues.

Although the IMF acted innovatively at the start of the pandemic debt distress with debt service cancellation for 25 eligible LICs (estimated at $213.5 million), the World Bank’s Chief refused to supplement, let alone complement the IMF’s debt service cancellation for the most vulnerable LICs. Nonetheless, the Bank’s President hypocritically advocates debt relief as “critical”. He wants to have the cake and eat it too; apparently wanting to increase lending, but without sacrificing the institution’s AAA credit rating.

China debt trap diplomacy?
Meanwhile the rich nations accuse China of “debt trap diplomacy” that China is deliberately pushing loans to poorer countries for geopolitical and economic advantages. Less than 20% of LICs external debt is owed to China as against more than 50% to the commercial lenders.

Most Chinese loans are concessional, and China has provided more debt relief than any other country, bilaterally negotiating around $10.8 billion of relief since the onset of the pandemic.

Unsurprisingly, independent studies debunked the Western accusation. And China has emerged as a major source of development finance for poorer countries. A recent IMF study concluded, “Beijing’s foreign assistance has had a positive impact on economic and social outcomes in recipient countries”.

Damaging trade-off
Rising debt servicing in the face of higher import costs, falling export revenues and declining remittances, are forcing developing countries to a damaging trade-off. They are forced to service external debt owed to rich nations and international financiers at the cost of development.

For many African nations, the increased cost of debt repayments is the equivalent of public health spending in the continent, according to the UNCTAD. But, “No country should be forced to choose between paying back debts or providing health care”.

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African countries are looking for cheaper funding for infrastructure development. Credit: Busani Bafana/IPS

By Busani Bafana
BULAWAYO, Jan 20 2023 (IPS)

African countries, many reeling under high debt and experiencing economic recession, could benefit from the reallocation of Special Drawing Rights (SDR), financial instruments of the International Monetary Fund (IMF).

SDRs are interest-bearing units of accounts created by the IMF in 1969 to increase the official reserves of member countries. External shocks that have hit the world in the last two years have reversed socioeconomic gains and efforts to protect vulnerable communities in Africa, says Adam Elhiraika, Director of the Macroeconomics and Governance Division at the Economic Commission for Africa (ECA).

Normally, many African countries would get concessional finance, borrow money from the markets or mobilise it domestically – all options the global pandemic has compromised.

The ECA, in collaboration with African ministries, is advocating for the issuance of new SDRs and the re-allocation of existing SDRs to countries most in need.

“We need to reform the G20 Common Framework to make access to international financial markets and debt restructuring effective and inclusive,” Elhiraika told IPS in an interview.

He added that: “Africa would benefit from having a permanent seat at the G20 through its African Union, just as European Union and the Organization for Economic Cooperation and Development (OECD) are represented. This will bring the voice of more than one billion people into the G20 processes, including discussions around debt restructuring and inequality of the SDR quota system.”

To date, nearly USD 1 trillion US dollars has been allocated by the IMF, including USD 456 billion and SDR equivalent to USD 650 billion, approved in August 2021 to help low and middle-income countries cope with the impact of COVID-19.

According to the United Nation Conference on Trade and Development (UNCTAD), African countries need more than 200 billion USD to counter the socioeconomic impacts of the COVID-19 pandemic.

Adam Elhiraika, Director for the Macroeconomics and Governance Division at the Economic Commission for Africa. Credit: Daniel Getachew

Excerpts:

IPS: Why is it necessary to reallocate SDRs, and how would this reallocation benefit African countries?

AE: SDR is a supplementary reserve asset which the Board of the IMF unconditionally allocates to all or part of its membership when it determines that there is a need to boost global liquidity. Allocations are based on economic size hence poorer countries receive less than rich countries. For instance, Africa collectively received 5.1 percent of the recent SDR650 allocation. Consequently, while the SDR allocation provided very welcome liquidity to African countries to cope with the pandemic crisis, the considerable financing needs associated with the pandemic and the overlapping crises currently facing Africa (including the climate, food, and energy crises) mean that Africa needs more than its current allocation.

The recent SDR allocation has mostly been used by African countries to bridge their post-COVID liquidity challenges. More specifically, most countries in Sub-Saharan Africa allocated part of their SDR holdings to address their pandemic response or social spending needs. At least 41 Sub-Saharan countries made use of SDRs for various public spending, including vaccine procurement and pandemic relief, ration cards, welfare payments, wages, and budget support.

Further, the median SDR utilization rates of G7 countries are about 5.9 percent, which means that G7 members alone could potentially reallocate $266 billion of SDRs to vulnerable countries. So, recycling/reallocations of the unused SDRs from countries with strong external positions, such as G7 and G20, could provide much-needed and affordable resources to vulnerable African countries.

Already, African countries are constrained by high debt, is tapping SDRs a viable route to affordable financing for economic development and SDGs?

SDR reallocations are made by countries that choose to make their own SDRs available to other countries that need them by lending them to an institution like the IMF. Tapping into SDRs is one of the options for improving Africa’s access to affordable external finance.

African ministers have been advocating for an acceleration of the implementation of SDR re-allocation mechanisms aligned with the needs of African economies. This includes considering channelling unused SDRs by G20 through regional banks, such as the African Development Banks, to support the development financing of Africa. Since the interest rates associated with SDR lending are much lower than prevailing market rates, on-lending SDRs via market mechanisms can lower the cost of borrowing and leverage critical investments in countries with market access.

IPS: The ECA has advocated for the reform of the IMF and Global Financial Architecture; why and what benefits would this reform have for African countries in need of development finance?

AE: Recent global shocks, including the COVID-19 pandemic and the recent war in Ukraine, have exacerbated the already constrained Africa’s fiscal space. While Africa has benefited from bilateral and multilateral support, particularly during the pandemic, the global financing architecture is still grossly inadequate for low—income countries and Africa.

In consultation with African finance ministries and others, the High-Level Working Group is working to identify structural challenges within the Global Financial Architecture impacting African economies. Furthermore, it also working to advance near and long-term policy recommendations for the IMF’s consideration which proposes a new working agenda for the IMF to better respond to the challenges Africa faces in the current global financial architecture.

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Inflation worries topped Ipsos’s What Worries the World survey in 2022 overtaking COVID concerns. The return of inflation caught major central banks, e.g., the US Federal Reserve (Fed), Bank of England, European Central Bank “off guard”. The persistence of inflation also surprised the International Monetary Fund (IMF). The return of inflation and its persistence exposed the poverty of the economics profession, unable to agree on its causes and required policy responses. It also exposed the profession’s anti-working class biases.

Anis Chowdhury

The US Fed was not alone in failing to see inflation coming. The Governor of Australia’s central bank – the Reserve Bank of Australia (RBA) – was so confident of low inflation that he declared in March 2021 that the interest rate would remain at a historic low until at least 2024. Inflation in advanced economies during 2021 exceeded the average of forecasters’ expectations by around 5–8 percentage points. The IMF’s forecasts have badly and repeatedly undershot inflation.

There was a widespread view among most central bankers and leading economists that the price increases (or inflation) that began in mid-2021 were temporary, and price increases would slow or inflation would drift downwards in 2022. Some, of course, insisted otherwise, and wanted immediate anti-inflationary measures. Thus, policy confusion ruled.

Inflation phobia and dogma
Soon inflation phobia overtook and central banks were advised to act decisively with interest rate hikes even if it meant slowing the economy or a rise in unemployment. Exaggerated claims were made without evidence that not acting now would be more costly later.
References to rare episodes of hyperinflation were made to justify tough policy stances.

The dogmatic inflation hawks ignored the fact that, in most cases, inflation does not accelerate to become harmful hyperinflation, but remains moderate. They also ignored their own neo-classical macroeconomic model, which suggests small welfare loss from moderate inflation.

Notwithstanding the IMF’s Article IV preamble which provides that economic policies should aim to foster “orderly economic growth with reasonable price stability, with due regard to [country specific] circumstances”, a one-size-fits-all policy of steep interest rate hikes became the only medicine to be applied to achieve a universal inflation target of 2%, a figure plucked from thin air. Yet, central bankers and mainstream economists boast their credibility!

Inflation excuse for class war
Inflation is primarily an expression and outcome of conflicting claims over the distribution of national output and income, e.g., firms’ profit mark-ups vis-à-vis workers’ wages. Thus, no sooner inflation spiked early in the year due to slow adjustment of COVID-induced supply shortages to pent-up demand, exacerbated by war and sanctions, leading central bankers and mainstream economists found an excuse to weaponise economic policies against the working class.

Stoking the fear of wage-price spirals, they advocate the use of an interest rate sledgehammer to create unemployment and, in turn, discipline labour. This is despite research within the IMF and the Reserve Bank of Australia which found no evidence of wage-price spirals since the 1980s due to declines in labour’s bargaining power. Thus, Bloomberg headlined, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”.

Research conducted by the IMF also found increases in firms’ or corporations’ market power, resulting in higher prices and profit margins. Yet, the IMF does not think such factors “are contributing in any sizeable way to the current inflationary environment”. Instead, it justifies such fattening of profits on the ground that “they provide flexible buffers between general wage and general price increases” and that it is only a catching-up “after taking a hit in 2020”!

But no such compassion is extended to the working people who have lost their lives and livelihoods. The calls for “front-loaded interest rate hikes simply got louder. The Bank for International Settlements (BIS) warned, “With the prospect of higher wages as workers look to make up for the purchasing power they lost, inflation could be high for long”.

Labour a clear loser
Labour is a clear loser. Labour’s income share in the GDP has been in decline since the early 1970s. Casualisation, off-shoring, anti-union legislation and technological progress have greatly reduced labour’s bargaining power, while privatisation and dilution of anti-monopoly legislation hugely strengthened corporate power and their collusive anti-competitive behaviour. Meanwhile, CEO compensation packages swelled to obnoxious levels, rising 940% since 1978 in the US as opposed to a 12% rise for workers during that period. Profiting from the pandemic, CEO pay increased by 16% in 2020 when workers suffered, and to a record level in 2021.

Leading central bankers and mainstream economists conveniently created a dogma around a 2% inflation target to justify their anti-labour stance. The 2% inflation target has become a global norm akin to the law of gravity, even though it has no theoretical or empirical basis. The law of gravity differs depending on altitude, but the 2% target is said to be universal regardless of circumstances!

Collateral damage
Meanwhile, the advanced countries’ inflation fight is causing adverse spillover into developing countries. Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, thereby depreciating their currencies and lowering their export earnings.

Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s. The rating agency S&P estimates that central bank rate rises could land global borrowers with US$8.6t in extra debt servicing costs in the coming years.

Instead of providing genuine debt-relief, the G20 kicked the can down the road. As wealthy nations failed the poor countries during the pandemic, the IMF is moving to debt-distressed countries with conditionality-laden one-size-fits-all austerity packages. Thus, a Foreign Policy op-ed asked, “The International Monetary Fund: Holy Grail or Poisoned Chalice?”

Meanwhile, the chiefs of the World Bank and the BIS urged “supply-side” policies professed to increase labour force participation and investment. These are code words for further labour market deregulation, privatisation and liberalisation.

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The World Food Program has been active in Venezuela since last year, delivering bags of food to families of schoolchildren in some poor areas, such as remote areas accessed by river in the Arismedi municipality, in the southwestern plains state of Barinas. CREDIT: Gabriel Gómez/WFP

By Humberto Márquez
CARACAS, Dec 15 2022 (IPS)

The social crisis and humanitarian emergency in Venezuela became international headline news again once the government and the opposition, bitter adversaries for two decades, agreed to direct three billion dollars in state funds held abroad to social programs.

When the pact was signed on Nov. 26, renowned nutritionist Susana Raffalli published a photograph of the legs of a girl whose height is eight centimeters shorter than what is appropriate for her age. “I measured her today. Her growth has been irreversibly stunted,” she said.

“Between the first announcement of the social roundtable (meetings to that purpose were already held in 2014) and the one signed today in Mexico, a generation of Venezuelans like her was born. The agreement is not a trophy. It is a commitment to hope,” Raffalli stated.

The Social Agreement signed in Mexico “is an important contribution, which could mean urgent aid for children, the elderly, the disabled and indigenous people, whose situation is extremely critical,” Roberto Patiño, founder of Alimenta la Solidaridad, a network of soup kitchens for children, told IPS.

The resources involved in the agreement are Venezuelan state funds frozen in the United States and European nations that in 2019 refused to accept the re-election of President Nicolás Maduro, in power since 2013, adopted sanctions and recognized opposition lawmaker Juan Guaidó as president.

Now, in talks between the government and the opposition, with the mediation of governments from this region and Norway, an agreement was reached to unfreeze part of the funds and allocate them to social programs under United Nations supervision.

The United States and European countries are participating in the deal as sanctioning parties and the UN as manager of the released funds and social programs covered by them.

“These are absolutely insufficient resources in the face of the crisis, but well-managed they can have a positive impact given the country’s complex humanitarian emergency,” Piero Trepiccione, coordinator of the network of social centers in Latin America and the Caribbean run by the Catholic Jesuit order Society of Jesus, told IPS.

The HumVenezuela Platform, made up of dozens of civil society organizations, has maintained since 2019 that the social situation in this South American country is a complex humanitarian emergency, based on its records on food, water and sanitation, health, basic education and living conditions.

The sharp deterioration in the living conditions in this country over the last decade has gone hand in hand with the decline of the Venezuelan economy – a collapsed oil industry and several years of hyperinflation – whose most visible international consequence has been the migration of seven million Venezuelans.

Renowned nutritionist Susana Raffalli published, as an example of a generation of children born and growing up with malnutrition and other problems in Venezuela, a photograph of the legs of a girl who, the day the government-opposition agreement was reached, was eight centimeters shorter than the appropriate size for her age. CREDIT: Susana Rafalli/Twitter

Barrier against life

In recent years, U.S. sanctions and the political clash with other governments, as in the case of Colombia, a neighbor with which the borders and the transit of people and goods were closed, have had a major impact.

For example, tragedy struck the low-income family of Michel Saraí, a five-year-old girl with pneumonia who was treated at a small hospital in La Fría, a small town in the southwest near the border with Colombia, which lacked the equipment needed for the necessary tests and treatment.

When her health took a turn for the worse on Nov. 30, her parents decided not to take her to the public hospital in the regional capital, San Cristóbal, because they did not have the dozens of dollars charged there to accept patients, who must bring their own supplies and pay for tests.

A Civil Defense ambulance, with fuel donated by a neighbor – gasoline is scarce in the state of Táchira and others – took the girl and her mother some 25 kilometers to the border bridge in the town of Boca de Grita, so that she could be treated free of charge in the cities of Cúcuta or Puerto Santander, on the Colombian side.

With the border formally closed, the Colombian military agreed to receive the ambulance due to the emergency, but the Venezuelan National Guard refused to allow passage of the vehicle carrying the little girl connected to oxygen.

“We had no money to offer them to see if they would let her get through,” the father, Jonathan Pernía, told local reporters a few days later.

In desperation, the mother and an aunt accepted what seemed like the only alternative: disconnecting her from the oxygen, placing her on a wheelbarrow – “as if she were a sack of potatoes,” Pernía lamented – and running with her through the rain to the Colombian side of the bridge, where another ambulance was waiting for them. But the little girl arrived without vital signs.

At the morgue of the hospital in San Cristobal her parents picked up the body. A week later they were still trying to find the money needed to pay the burial expenses.

Jonathan Pernía, the impoverished father of a little girl who died when an ambulance was prevented from crossing the border between Venezuela and Colombia to give her emergency treatment, shows journalists the bill for the funeral expenses, which he has not been able to cover either. CREDIT: Courtesy of Bleima Márquez

Figures behind the crisis

In Venezuela, poverty – defined as those who cannot afford the basic food basket – currently affects 81.5 percent of the population (90.9 percent in 2021), according to the Living Conditions Survey of the Andrés Bello Catholic University, which surveyed 2300 households throughout the country. This is the first time in seven years that it has gone down, partly attributable to a rebound in the economy and remittances from migrants.

Meanwhile, multidimensional poverty – which takes into account housing, education, employment, services and income – fell from 65.2 percent in 2021 to 50.5 percent in 2022, and extreme poverty dropped from 68 percent in 2021 to 53.3 percent in 2022.

Venezuela is the most unequal country in the Americas, and along with Angola, Mozambique and Namibia is one of the most unequal in the world, as the richest 10 percent earn 70 times more (553.20 dollars per month on average) than the poorest 10 percent (7.90 dollars).

Seven million children are in school, down from 7.7 million in 2019, and an estimated 1.5 million children and adolescents are not in the educational system. Preschool and daycare coverage is just 56 percent.

The survey reported an improvement in formal employment and income this year, with average monthly earnings of 113 dollars for public employees, 142 dollars for the self-employed, and 150 dollars for people working in private sector companies.

As a consequence, food insecurity declined from 88 percent of Venezuelans worried about running out of food in 2021, to 78 percent, while the proportion of people who have gone a whole day without eating dropped to 14 percent, from 34 percent in 2021.

More than 90 percent of poor households have received food assistance from the government -especially carbohydrates- but only one third receive these products monthly.

In health, according to the survey, the use of public services is decreasing (70 percent) and health care is becoming more expensive because, while prices in private clinics are skyrocketing, 13 percent of those who turned to public services had to pay in outpatient clinics and 16 percent in hospitals, and in 65 percent of the cases they had to pay themselves for the medicine that was prescribed for them.

Venezuelan government and opposition negotiators, meeting in Mexico with that country’s Foreign Minister Marcelo Ebrard and Norwegian mediator Dag Nylander, agreed to help address social needs in their country, as a preliminary step to a possible agreement to solving the political crisis. CREDIT: National Assembly of Venezuela

Mexican formula

Jorge Rodríguez, president of the legislative National Assembly and the ruling party’s lead negotiator, said that with the funds released after the agreement reached in Mexico, the infrastructure and materials in 2300 schools will be covered, and the vaccines required in accordance with the World Health Organization (WHO) guidelines will be purchased.

Medicine for oncological and HIV patients will be obtained, radiotherapy programs, blood banks and at least 21 hospitals will be revived, while more than one billion dollars will be allocated to the national electricity grid.

The World Food Program (WFP), meanwhile, which now delivers food to families of 100,000 schoolchildren in poor areas in the north of the country, hopes to raise funds to provide meals to more than one million people by the end of 2023.

According to Trepiccione, of the Jesuit network, resources should be directed “to the recovery of the infrastructure of hospitals and schools, which are in terrible condition, because that generates a chain of jobs, services and economic activity along with the obvious improvements in the provision of health care and the quality of education.”

“The same can be said of reactivating the electrical system, hit by blackouts that affect above all the economy and the life of people in the western part of the country,” he added.

Patiño, from the network of soup kitchens, said priorities were “programs for early childhood care, pregnant women, school feeding, as well as care for the elderly and indigenous communities, segments where many are dying too young due to lack of urgent health care.”

Groups of retirees and pensioners hold constant demonstrations in Caracas and other cities in protest against their tiny pensions, which in Venezuela are equal to the legal minimum wage and this December barely reached the equivalent of nine dollars for the entire month. CREDIT: Courtesy of Efecto Cocuyo

Government pensions, which are equal to the minimum wage, were equivalent to 30 dollars at the beginning of the year, but with the depreciation of the local currency they are equivalent to just nine dollars per month as of this December.

“We must also emphasize that this social agreement is absolutely insufficient in the face of the precarious conditions that exist in our country. These are resources that will be exhausted and the needs will not disappear,” said Patiño.

In his view, “the only thing that can really solve the crisis, the best possible social program, is a decent job, with a sufficient income and with a social security and public health program that takes care of the most needy.”

Funds for the agreement, frozen in banks in industrialized countries, will be released gradually under the supervision of a government-opposition committee and with UN agency management to tender, implement and oversee the programs, in 2023 and 2024.

And over the coming year new meetings will be held and further political agreements are expected, which may lead to an easing or lifting of sanctions and, eventually, to an improvement in the living conditions of Venezuela’s 28 million people.

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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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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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.

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Credit: IMF

By Bhumika Muchhala
NEW YORK, Oct 26 2022 (IPS)

Held in-person for the first time in three years, the annual meetings of the International Monetary Fund and World Bank last week in Washington, D.C. failed to offer solutions to the dozens of developing countries in debt distress or on the forewarned global recession instigated by monetary tightening.

Meanwhile, austerity measures are reinforced through a repeated emphasis on fiscal tightening, underpinned by a monetarism upheld by the IMF and rich country central banks.

The scenario of a dual tightening in both monetary and fiscal policy is only exacerbated by the absence of political will among creditors to cooperate in debt restructuring, bolstered by narratives of losing market access to financial flows.

New loan programs are created by the IMF to boost concessional financing for food price shocks, climate transitions and liquidity shortfalls. However, these very loans create new debt and reinscribe the very austerity measures that worsen the challenges of inflation and climate.

Within these asymmetries of power and access in the world economy, and the foreclosing of developmental policy tools for developing countries, what then is the fate of the vast majority of people and nations in the world?

The IMF’s World Economic Outlook warned of an imminent recession amidst a shift of financial regime from cheap and easy money to an aggressive synchronization of global monetary tightening.

“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” said IMF Chief Economist Pierre-Olivier Gourinchas. Convening the world’s finance ministers, central bank governors, and financial market leaders, the IMF announced a slowdown in global growth by 2.7%, down from the 3.2% growth projected for this year.

On the heels of a global pandemic followed by the war in Ukraine, the US Federal Reserve’s interest rate hikes, aimed toward domestic price stability, is creating a global push toward more expensive money.

A stronger dollar, higher international and domestic interest rates, coupled with depreciating currencies and sell-offs in many developing country assets, is generating protracted economic and social pain across the globe.

The spillover impacts are seen in soaring food and fuel prices, increases in dollar-denominated debt and imports costs, volatile commodity markets and debt distress intensifying into a 50-year record across the developing world.

The UN’s 2022 Trade and Development Report warns that the most vulnerable countries and communities are being hit the hardest. Warnings of another ‘lost decade’ abound, in that the current interest rate hikes resemble those of 1979-82, which triggered debt crises in over 40 developing countries where ‘structural adjustment programs’ through IMF loans contributed to a decade of lost growth and development across the Global South.

Inflation targeting consumes financial rule makers

The tightrope global central banks are walking is acknowledged by IMF Managing Director, Kristalina Georgieva, who says, “Not tightening enough would cause inflation to become de-anchored and entrenched — which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people.

On the other hand, tightening monetary policy too much and too fast — and doing so in a synchronized manner across countries — could push many economies into prolonged recession.”

Meanwhile, the topline recommendation of the IMF’s Global Financial and Stability Report is that “central banks must act resolutely to bring inflation back to target.” Doing otherwise would risk credibility and market volatility, or in other words, create difficulties in market access to financial and investment flows and/or worsen borrowing terms.

One of the central tenets of neoclassical economic consensus among global central banks is that of maintaining price stability through a low inflation target of 2%. Financial rulemakers have for decades deemed inflation a threat to economic growth by way of the specter of hyperinflation. However, empirical evidence points to the contrary.

Collating data from 31 countries from 1961-94, World Bank chief economist Michael Bruno and William Easterly concluded that the inflation does not lead to lower growth, even when the significant oil price increase of 1974-75 is included.

The US Federal Reserve’s own historical archives demonstrate that the so-called ‘Great Inflation’ of 1965-82 did not harm growth either. In light of these studies by neoclassical economists and central bank institutions, economists Anis Chowdhury and Jomo Kwame Sundaram argue that “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.’”

From press conferences to panel speeches, the IMF leadership repeats that the danger of “entrenched” inflation requires a global commitment to tackle it head on through global to domestic monetary tightening.

This stems in large part from a belief that once inflation begins, it has an inherent tendency to accelerate. Consequently, IMF loans and surveillance recommend central bank independence (from the executive) as a means to ensure unbiased financial policymaking, while critics contend that it has only enhanced the influence and power of big banks and financial actors, largely at the expense of the real economy.

However, history again demonstrates that inflation does not accelerate easily, even when workers have more bargaining power, or wages are indexed to consumer prices – as in some countries.

Lost decade redux?

The IMF’s Fiscal Monitor, published on October 12, called upon all policymakers to “maintain a tight fiscal stance, so that fiscal policy does not work at cross-purposes with monetary policy.” In essence, fiscal policy must serve monetary policy in its “fight against inflation,” by retrenching public spending for the singular objective of sending “a powerful signal that policymakers are aligned in the fight against inflation.”

The rationale is straightforward: “In a time of high inflation, policies to address high food and energy prices should not add to aggregate demand.” Increased demand is anathema, as it “forces central banks to raise interest rates even higher.”

The fiscal tightening is not new. In 2021, 131 governments started scaling back public spending. The geographic and population scale of austerity cuts is expected to intensify up to 2025.

Governments are implementing, or discussing, a range of fiscal adjustment policies, such as targeting social protection, regressive taxation, reducing public expenditure in social sectors, eliminating subsidies, privatizing public services or State-Owned Enterprises, pension reforms, labor flexibilization.

All have long histories of negative social impacts on economic and social rights, such as the right to food, water, health, housing, education, and livelihoods. The human impact will reach over 6 billion people, or 85% of humanity, in 2023.

In a time of poly-crisis, retrenching public spending and imposing regressive taxes that disproportionately hurt the poor, especially women, not only extinguishes the hope of achieving the Sustainable Development Goals by 2030, but more fundamentally, regresses decades of fighting poverty.

Meanwhile, the IMF’s Board has approved the creation of two new loan facilities, the new Food Shock Window, available for a year to countries reeling from the global food price crisis, and the Resilience and Sustainability Trust (RST), through which many rich countries may re-channel their unused Special Drawing Rights if the funds are used to address “external shocks, including climate change and pandemics” by rules set out by the Fund.

While both loans address urgent threats, they also create new debt. The RST is also conditional upon an IMF loan program hinged on fiscal consolidation.

The severity of the food crisis warrants aid in the form of grants not loans. Based on prior research done by the World Bank and Center for Global Development on food price spikes, Oxfam estimates that another 65 million people could be pushed below the $1.90 extreme poverty line as a consequence of food price increases.

Debt crises nearing point of no return

Despite the imminent threat of a debt crises imploding across many developing countries, sovereign debt solutions, the Group of 20, IMF, World Bank as well as the Institute of International Finance, the consortium of private financial actors, have to date failed to create viable solutions.

The G20’s Debt Service Suspension Initiative, which suspended debt payments for 73 low-income countries, was terminated at the end of 2021. And two years after the Common Framework was established in 2020, it’s multiple flaws have led even the World Bank to call it a ‘slow-motion debt tragedy.’

One key dilemma is the lack of political will to enforce a comparability of treatment, where all creditors, including private, participate on equivalent terms or restructuring and in the principle of burden sharing. Another challenge is the glacial pace of restructuring is not only protracted but also riddled with uncertainty.

Middle-income countries, where the vast majority of the world’s poor reside and where serious debt defaults are taking place, are not included. Low-income countries fear that access to commercial financing will be cut off if they apply to the Common Framework, as evidenced by Fitch and S&P slashed Ethiopia’s sovereign rating when the nation applied to the Common Framework in 2021.

Out of the three countries that have so far asked for their debt to be treated – Chad, Ethiopia and Zambia – only Zambia has seen some forward movement.

The narratives coming from within the IMF reiterate a subservience to market access and creditor interests. Across panels and webinars, senior level IMF staff remarked that a large debt restructuring is a serious event, which may result in a decrease of future multilateral and private financing, in amounts that outweigh the financing gained in relief or restructuring.

Some warned that private creditors will not participate in debt restructuring where national fiscal instability reigns. To secure market access, countries have to tighten fiscal belts even more. The logic here is that financial stability imperative for accessing private credit requires fiscal consolidation that generates social devastation.

The lack of official creditor participation and the dilemma of transparency, referring in large part to China, was repeatedly stressed as a key problem. At the same time, an old and wholly condescending trope of the need to increase debtor discipline in light of its financial mismanagement and irresponsibility repeatedly emerged.

Meanwhile, there is no mention of the often-legalized corruption of private actors, such as tax evasion and avoidance, speculative and/or rigged trading. Amidst the talk, actual debt solutions are in omission. While political will is already in short supply, the lack of cooperation toward problem-solving is exacerbated by the finger-pointing between the creditor groups of bilateral, private, and multilateral.

History has repeatedly illustrated the way forward on debt, and the waves of austerity that it generates. For decades, advocates and policymakers alike have called for a transparent and binding debt workout mechanism within a multilateral framework for debt crisis resolution, in a process convening all creditors.

The UN General Assembly has adopted multiple resolutions calling for such a mechanism over the years. Debt justice movements from across the developing world have urged for the cancellation of all unsustainable and illegitimate debts in a manner that is ambitious, unconditional, and without repercussions for future market access.

Past cases show how reducing debt stock and payments allow for countries to increase their public financing for urgent domestic needs.

The principle of burden-sharing ensures genuine debt relief, as does the commitment to include all creditors in an automatic or orderly way. Recognizing that multilateral institutions account for around one-third of the outstanding debt of low- and lower-middle-income countries, the World Bank and IMF must participate in such efforts.

They should both cancel debt payments owed, and the IMF should eliminate surcharges. Protection needs to be provided to debtor states against holdouts and lawsuits by non-participating creditors, while laws and procedures for responsible borrowing and lending need to be ensured to protect citizens and communities against corrupt, predatory and odious debts.

Last but not least, an automatic mechanism for a debt standstill in the wake of an extreme exogenous shock should be created. As proposed by the G77 group of developing countries in the UN General Assembly in response to the global financial crisis of 2007-8, such a mechanism must “be established for a determined period in response to external catastrophe events, as climate and natural disasters, health pandemic, military conflict and inflation.” The prescience of the G77 group in 2009 offers a salient message.

While the developing world has little recourse but to ‘dance to the tune of the Federal Reserve,’ the devastating toll of the human, social and economic crisis must be addressed through tools and choices that can be generated.

The question is how to muster political will, be it from the moral pressure of global justice movement to analysis of the effects that soaring poverty and intensifying climate change will have on the very survival of our planet and species.

Bhumika Muchhala is development economist and senior advocate on economic governance at Third World Network. She works on research, analysis, advocacy and public education on the international political economy of development, feminist economics and decolonial theory and approaches.

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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The G20 membership comprises a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85 per cent of global gross domestic product and over 75 per cent of global trade. The members of the G20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.

By Matti Kohonen and Isabel Ortiz
LONDON / NEW YORK, Oct 24 2022 (IPS)

Finance ministers of the G20 and the world met in Washington, October 10-16, to discuss how to navigate multiple crises, including rising cost-of-living, broken global supply chains, climate shocks, and the lingering COVID-19 pandemic.

All this weighted heavily on the IMF outlook, pointing to a bleak future ahead.

This is particularly bad news for developing countries. Using IMF data, our research showed that recovery spending in the last two years of the pandemic in the Global South was only 2.4% of GDP on average, a quarter of the level recommended by the UN and a fraction of what rich countries spent.

Meanwhile, only 38% of the total went to social protection, with corporate loans and tax breaks getting the lion’s share.

Things will get worse unless there is a fundamental policy change. This year recovery funds have dried up and, as most countries are heavily indebted, the IMF projects large expenditure cuts.

In 2023, at least 94 developing countries are expected to cut public spending in terms of GDP. Our report estimates that 85% of the world’s population living in 143 countries will live in the grip of austerity measures by 2023, and the trend is likely to continue for years.

Unless these policies are reversed, people in developing countries will suffer as a result cuts to social protection and public services at a time they are most needed, with 3.3 billion people (or nearly half of mankind) expected to be living below the poverty line of US $5.50/day by the end of 2022.

This crisis will affect especially women who received half less COVID-19 recovery funds than their male counterparts.

But the impact goes far beyond women. Elderly pensioners and persons with disabilities will receive lower pension benefits. Workers around the world will see less job security, poorer pay and working conditions as regulations are dismantled.

A recent study on inequality found that the vast majority of countries were making labor markets more flexible to help big corporations. As inflation keeps rising, worsened by higher consumption taxes, families will be much affected while any support they receive will be less due to austerity cuts.

South Africa reflects the crisis of countries falling into the austerity trap. The government provided Social Relief of Distress (SRD) grants of R350 (US$24 in 2021) per month that were instituted at the start of the pandemic, supporting for the first-time low-income individuals who are of working age.

These grants have been extended several times, providing a lifeline for those worst hit by the pandemic.

However, despite the cost-of-living crisis, the government -advised by the IMF- is now considering reducing social expenditures and helping only the most vulnerable, leaving many low-income households without any support. Other austerity measures being discussed include cuts to the salaries of civil servants, and labor flexibilization reforms.

Instead of these austerity cuts, the South African government and the IMF should focus on raising additional revenues to fund social protection and public services, making sure everyone pays taxes, reducing corporate tax loopholes and exemptions, taxing excess profits and wealthy individuals.

Similarly, Ecuador has been shaken by social unrest because of austerity reforms. In 2019, after large riots, the government of Lenin Moreno flew from the capital and had to stop a loan with the IMF that had proposed cuts to subsidies and other austerity reforms.

In 2021, the same austerity policies were proposed again by the IMF, such as cuts to subsidies and public services, reducing social protection and labor regulations.

In 2022, farmers, indigenous men and women, marched again to the capital with pitchforks to join students and workers protesting austerity policies, forcing President Lasso to back down and agree to grant subsidies and other demands.

These are only two examples reflecting the austerity storm gathering around the world. This is extremely unfair and will generate unnecessary social hardship, as populations are struggling with a severe cost-of-living crisis, especially at a time when many countries are losing significant amounts of revenue to tax abuses, illicit financial flows and tax exemptions to large corporates that are wholly unnecessary.

Austerity cuts are not inevitable, there are alternatives even in the poorest countries. Instead of austerity cuts, governments can increase progressive tax revenues, restructure and eliminate debt, eradicate illicit financial flows, and re-allocate public expenditures, among other options.

Policy makers must act on this. All the human suffering and social unrest that austerity inflicts is unnecessary.

Civil society organizations have launched a global campaign to End Austerity, including, among others, ActionAid International, European Network on Debt and Development (Eurodad), Fight Inequality Alliance, Financial Transparency Coalition and Oxfam International.

Austerity campaign calls on citizens and organizations from all around the world to fight back against the wave of austerity sweeping the globe, supercharging inequality and compounding the effects of the cost-of-living crisis.

Our decision-makers need to wake up and change course. There is no time to lose.

Matti Kohonen is Executive Director of Financial Transparency Coalition; Isabel Ortiz is Director of the Global Social Justice Program at Joseph Stiglitz’s Initiative for Policy Dialogue

IPS UN Bureau

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Rich countries have the resources to end the debt crisis, which has deteriorated rapidly in part as a consequence of their own domestic policies. October 2022. Credit: UNDP

By Lars Jensen and George Gray Molina
UNITED NATIONS, Oct 19 2022 (IPS)

Developing low- and middle-income economies are taking hard hits from global economic developments outside their control. Monetary tightening in advanced economies coupled with increasing fears of a global recession have weakened currencies, sent interest rates soaring, and investors fleeing.

All of which is contributing to a rapid deterioration of an already damaging debt crisis which is, as ever, hitting the most vulnerable the hardest.

In new research released by the United Nations Development Programme (UNDP), 54 developing (low- and middle-income) economies are identified as suffering from severe debt problems, equal to 40 percent of all developing economies. ¹

Providing this group of countries with the debt relief they need should be a manageable task for the international economy as the group only accounts for little more than 3% of the world economy. Failing to do so, however, could result in catastrophic development setbacks as the group of 54 accounts for more than 50 percent of the world’s extreme poor and 28 of the world’s top-50 most climate vulnerable countries.

Countries are stuck between a rock and a hard place. They cannot spend what is required to protect their citizens and safeguard their development prospects while continuing to also service their fast-rising debt burdens.

Time is running out. Without an urgent step-up of debt relief efforts from the international community, many more defaults will follow, and the debt crisis will turn into an entrenched development crisis as history has taught us.

Contrary to the advice given in the early stages of the COVID-19 pandemic, in the face of high interest rates, inflation, and debt levels, the International Monetary Fund is now urging countries to reign in fiscal spending while providing targeted and time-bound support to vulnerable populations.

But many developing economies cannot easily shift to effective and targeted social transfers or quickly increase tax revenues, – as the administrative capacity to do so takes years to build up.

Without a viable alternative in the form of access to orderly and comprehensive debt restructuring, and additional liquidity support from the international community, countries will have to choose between a string of messy and costly defaults and/or abrupt spending cuts with disastrous consequences for low-income and vulnerable populations and development prospects at large.

Furthermore, both options greatly increase the risk of political and social unrest threatening further setbacks and a deepening crisis.

We must also remember that these things are happening against the backdrop of an intensifying climate crisis which we can only combat together as a global community. Without a rethink on debt relief the global climate transition will be delayed, the economic costs of the transition will rise, and developing economies, who have contributed the least to the problem, will continue to bear a disproportionate size of the costs.

Developing economies must be allowed sufficient fiscal space to undertake ambitious sustainable development plans – including the undertaking of much-needed climate adaptation and mitigation investments.

Debt relief is one of several crucial components of providing it. The G20’s Common Framework for Debt Treatments, under which countries with debt distress can seek a restructuring, will have to be reformed, including a shift in focus towards comprehensive debt restructurings in return for sustainable development objectives.

This will require a change in attitude and sense of urgency, especially among major official creditors, as well as full debt transparency from both debtors and creditors. In our latest paper we discuss possible ways forward for the Common Framework focusing on country eligibility, debt sustainability analyses, official creditor coordination, private creditor participation, policy conditionalities and the use of debt clauses that target future economic and fiscal resilience.

Decisions on debt relief can no longer wait.

Nineteen developing economies – more than one-third of developing economies issuing dollar debt in international markets – have now lost markets access on account of skyrocketing interest rates, more than doubling from 9 countries at the beginning of 2022.

Similarly, credit ratings have been sliding with 27 countries – close to one-third of credit-rated developing economies – rated either ‘substantial risk, extremely speculative, or default’, up from 10 countries at the beginning of 2020.

Hard-won development gains achieved in the global south over decades are now being eroded by the intertwined cost-of-living and debt crises. Not only will a deepening development crisis result in great human suffering, but the cost of regaining whatever development gains are lost will increase substantially the longer we wait.

It is inconceivable, both morally and economically, that we would allow a development crisis to escalate when the international community has the resources needed to stop it now.

Lars Jensen is Economist at UNDP Strategic Policy Engagement Unit.; George Gray Molina is Head of Strategic Engagement and Chief Economist at UNDP

¹ https://www.undp.org/publications/avoiding-too-little-too-late-international-debt-relief

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 International Monetary Fund (IMF) and the World Bank share a common goal of raising living standards in their member countries. This week, the two international institutions will convene in Washington DC (through October 16) for their annual meeting. The strength of the US dollar will be a key talking point. By adjusting their lending practices, these institutions have a unique opportunity to relieve suffering in the world’s poorest countries.

By Alexander Kozul-Wright and Ruurd Brouwer
GENEVA, Oct 11 2022 (IPS)

In the last week of September, emerging market (EM) bond fund outflows hit $4.2 billion, according to JP Morgan, bringing this year’s total to a record $70 billion. The exodus, set off by a rising U.S. dollar, is heaping pressure on low-income countries.

The greenback’s rise has been fuelled by interest-rate hikes by the Federal Reserve. Since March, the Fed has raised rates by three percentage points, prompting global investors to move their funds into U.S. financial assets and away from (riskier) EM investments.

While economists continue to wrangle over their U.S. growth forecasts, this ‘flight to quality’ has sent financial shockwaves across the developing world, already straining under elevated costs for food and fuel – typically priced in U.S. dollars. Moreover, attempts by EM policy makers to stem the dollar’s rise have largely failed.

Over the course of this year, central banks around the world have drained their U.S. dollar reserves at the fastest rate since 2008. To stem currency depreciations, they have also raised interest rates aggressively. In Argentina, for instance, policy makers raised rates to 75% last month. To little avail.

The MSCI Emerging Market Currency Index, which measures the total return of 25 emerging market currencies against the U.S. Dollar, is down nearly 9 percent from January 1st. The Egyptian pound has depreciated by 20% over the same period, according to Bloomberg data. In Ghana, the Cedi has fallen by 41%.

On top of higher imports costs, a plunging currency makes the servicing of dollar- denominated debt more expensive. This concern may seem abstract to people in advanced economies. In developing nations, however, the effects are painfully real.

As the dollar appreciates relative to other currencies, more domestic currency (in the form of tax revenues) has to be generated to service existing dollar debts. For low-income governments, budget cuts have to be implemented in the hope of avoiding sovereign default.

Currency depreciations have the power to strongarm authorities into reducing health and education spending, just to stay current on their debts. This leaves officials with a grim choice: either risk unleashing a full-blown debt crisis, or confiscate essential public services.

Given the painful costs of insolvency, governments tend to prioritize austerity over bankruptcy. Together with the oft-publicized effects of lost access to foreign investment, subdued growth and high unemployment, sovereign default also imposes severe social tolls.

In August, the World Bank published a paper measuring the decline in country living standards – looking at access to food, energy and healthcare – after state bankruptcies. The paper showed that ten years after default, countries experience 13% more infant deaths per year, on average, compared to the synthetic control (counterfactual) group.

Admittedly, more developed emerging markets like Brazil and India can issue bonds in their own currency to limit budget cutbacks. In most of the world’s poor countries, however, financial markets are too shallow to support domestic lending.

With no recourse to borrow from private creditors, public bodies like multi-lateral development banks (MDBs) usually step in to fill the gap. Indeed, almost 90% of low-income countries’ (LICs) funding takes the form of concessional, or non-commercial, loans from official lenders.

Even accounting for these favourable terms, financial pressures are beginning to build outside of well-known hot spots like Lebanon, Sri Lanka and Pakistan. As it stands, LICs have outstanding debts to MDBs and other official creditors to the tune of $153 billion (mostly denominated in USD).

Given the exogenous trigger for capital outflows from developing countries this year, multi-lateral lenders need to be more innovative. Where possible, they should use their robust credit ratings to assume greater risk by lending to poor countries in domestic currencies.

Failing that, they could lend in synthetic local currencies. These instruments index dollar debts to local exchange rates, allowing borrowers to service liabilities in their own currency while ensuring that creditors receive payments (both interest and principal) in dollars.

Synthetic currencies can improve debtor credit profiles by limiting foreign capital outflows and, by extension, improve debt management capacity. In particular, they boost economic resiliency by making government finances less a function of international currency volatility.

Multilateral financial institutions have been tasked with designing a stable international monetary system to try and ease global poverty. But the loans provided by these groups undermine their own mission, as dollar debts force currency risk onto the countries least able to handle it.

This week, the World Bank and the IMF will convene in Washington (October 10-16) for their annual meeting. The strength of the USD will be a key talking point. By adjusting their lending practices, these institutions have a unique opportunity to relieve suffering in the world’s poorest countries.

Alexander Kozul-Wright is a researcher at Third World Network and Ruurd Brouwer is Chief Executive Officer at TCX, a currency hedging firm (https://www.tcxfund.com).

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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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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A partial view of the city of Punto Fijo, with the Cardón refinery in the background, on the Paraguaná peninsula, projected as a special economic zone overlooking the Caribbean in northwest Venezuela. CREDIT: Megaconstrucciones

By Humberto Márquez
CARACAS, Sep 3 2022 (IPS)

Venezuela is preparing to replicate the experience of Special Economic Zones (SEZs), a mechanism with which more than 60 countries have tried to draw investment and accelerate economic growth, while under its avowedly socialist government a “silent neoliberalism” is gaining ground.

The aim of the SEZs is “to provide special conditions to gain the economic confidence of investors from all over the world, and productive development to put an end once and for all to oil rentism,” said President Nicolás Maduro when he promulgated the Organic Law of Special Economic Zones on Jul. 20.

The SEZs, “90 percent of which are in the global developing South, are a catalyst for economic restructuring processes and go hand in hand with the expansion of the neoliberal economy,” sociologist Emiliano Terán, a researcher with the non-governmental Venezuelan Observatory of Political Ecology, told IPS.

According to the United Nations Conference on Trade and Development (Unctad), there were 5,383 SEZs in the world in 2019 and another 508 under construction, of which 4,772 were in developing countries – 2,543 in China alone and 737 in Southeast Asia.

In Latin America and the Caribbean there were 486 – 73 in the Dominican Republic, some 150 in Central America, seven in Mexico and 39 in Colombia.

SEZs are mainly commercial, such as free ports or free trade zones, where import quotas, tariffs, customs or sales taxes are eliminated; industrial, with an emphasis on improving infrastructure available to companies; urban or mining ventures; or export processing.

Their main characteristic is that, in order to stimulate investment, especially foreign investment, there are more flexible regulations on taxes, investment requirements, employment, paperwork and procedures, access to resources and inputs, export quotas and capital repatriation.

One of the camping areas improvised by tour operators on La Tortuga, an island with no permanent population where tourist developments are being planned that are triggering environmentalist alarms, as they may severely affect the still almost pristine ecosystem of the island and its surrounding Caribbean waters. CREDIT: Jorge Muñoz/Aleteia

An eye on the environment

In Venezuela, the first five zones decreed are the arid Paraguaná Peninsula, in the northwest; Margarita Island, in the southeastern Caribbean; La Guaira and Puerto Cabello, which are the largest ports, along the central portion of the Caribbean coast; and the remote La Tortuga Island, some 200 kilometers northeast of Caracas.

Paraguaná (an area of 3,400 square kilometers) is home to a large oil refining complex, and Margarita Island (1,020 square kilometers) has for decades been a sales tax-free zone and a tourist mecca for Venezuela’s middle class.

Puerto Cabello and La Guaira are essentially ports for imports to the populated north-central part of the country, whose main exports, oil and metals, are shipped from docks in the production areas in the east and west.

Hotel complexes, airports, marinas and golf courses are being planned for La Tortuga, which covers 156 square kilometers and has no permanent population. Environmental groups warn that its waters, reefs and the island itself are home to five species of turtles, 73 species of birds and dozens of species of fish and cetaceans.

Sociologist Emiliano Terán (R) with economists Luis Crespo (C) and Carlos Lazo (L) take part in a forum at the Central University of Venezuela critical of the announced special economic zones. CREDIT: Humberto Márquez/IPS

Limited economy

“The environmental issue is a concern, but it is hard to believe that the government has the resources or the investors for the number of hotels planned for La Tortuga,” economist Luis Oliveros, a professor at the Metropolitan and Central Universities of Venezuela, told IPS.

The decreed Venezuelan SEZs “seem more like announcements than realities, and although we like the government to think of growth and development hand in hand with private investment, much more is needed. It has yet to be clarified what exactly the government is pursuing with these zones,” Oliveros said.

In Venezuela “creating SEZs has limitations, such as the sanctions (imposed by the United States and the European Union) and the need to generate macroeconomic stability and legal certainty, which are pending issues,” he added.

After seven years of sharp decline – and three years of hyperinflation – Venezuela’s annual gross domestic product, which exceeded 300 billion dollars a decade ago, now stands between 50 and 60 billion dollars, according to economists.

Oil production, the main lever of the economy and source of tax revenues, has shrunk and is starved of new investments, while the State desperately seeks income by exporting crude oil at a discount or selling gold that is extracted at the cost of great environmental damage in the southeast of the country.

Attracting investment may be an uphill struggle for SEZs that have still not been fully mapped out, considering that, for example, major companies have not knocked on the door to raise oil production – 600,000 barrels per day when a decade ago it was three million – despite the favorable signals sent by the United States.

Since March, informal contacts between Washington and Caracas, prompted by the impact of the war in Ukraine on the world energy market, have explored, without success so far, easing sanctions and other measures to bring Venezuela back to the U.S. oil market with new investments.

Juan Griego Bay in the north of Margarita Island, already half a century old as a sales tax-free zone and tourist mecca for Venezuela’s middle class, is now one of the country’s five special economic zones. CREDIT: Mipci

Neoliberal plan

In the southeast of the country, an area rich in gold, iron, diamonds, coltan and other minerals, the 112,000 square kilometer Orinoco Mining Arc (larger than Bulgaria, Cuba or Portugal) was decreed in 2016 as a “strategic development zone”, and its control and management was handed over to the armed forces.

The Mining Arc “has been a precedent for a new model promoted by the State to attract investments, but with depredation of the environment and restriction of wages and workers’ rights,” warned Luis Crespo, professor of Economics at the Central University of Venezuela, during a forum at that university.

“The special economic zones are part of a silent neoliberal adjustment plan driven forward by the government of President Maduro,” said Crespo.

The Venezuelan SEZ law – enacted by the legislature, which has been boycotted by most of the political opposition – states that its purpose is to develop a new production model, promote domestic and foreign economic activity, and diversify and increase exports.

It also aims to promote innovation, industry and technology transfer, create jobs and “ensure the environmental sustainability of production processes.”

The terminology about socialism or transition to socialism, frequent in the political discourse of the government and the ruling United Socialist Party, is absent from the legislation of the SEZs and from the repeated calls for private capital.

“The example of China is being followed, as it is by other countries, in using the SEZs as a showcase for heterodox forms of capital accumulation, in a process of progressive neoliberalization of the economy, as the oil model of production and distribution of wealth is being exhausted,” Terán said.

He added that “the SEZs cannot be seen only in terms of macroeconomic indicators,” as they become “zones of social and environmental sacrifice, with a new political geography of dispossession, and with the cheapening of labor, especially that of women workers.”

According to UNCTAD, although there are differences in SEZs from one country to another and within countries, their common features include having a clearly defined geographic area, a regulatory regime that is distinct from the rest of the economy, and special infrastructure support for the development of their activities.

A view of the border crossing between Colombia and Venezuela over the Simón Bolívar Bridge (in southwest Venezuela and northeast Colombia), when there was free transit and intense activity before the border was closed and relations between the two countries broke down. Now Caracas proposes to create a binational special economic zone in the area. CREDIT: Humberto Márquez/IPS

More politics

Venezuela’s SEZs will be guided by a council to be freely appointed by the president, each will have a single authority to be named by the president, and the decree establishing one of the zones must be considered by the legislature within 10 working days or it will be approved, without discussion.

Areas such as the SEZs, the Mining Arc or special military zones in practice modify the political-administrative division of the country, which only in theory is a federal republic with 23 states plus a capital district.

In another political move, on Aug. 23 Maduro publicly proposed to his new Colombian counterpart, leftwing President Gustavo Petro, who took office on Aug. 7, the creation of a special binational economic zone between southwestern Venezuela and northeastern Colombia.

“We are going to propose to President Petro the construction of a large economic, commercial and productive zone between the department of Norte de Santander (Colombia) and the state of Táchira (Venezuela),” Maduro said.

Diplomatic, political, commercial and transit relations between the neighboring countries have been severed since February 2019.

In Táchira, business spokespersons have expressed their support for this Andean state of 11,000 square kilometers to obtain special regimes that favor trade with the neighboring country, and their peers in Colombia are betting on a recovery of bilateral trade, which prospered until the first decade of this century.

Terán described the projected creation of the SEZs as a possible “new pact of elites in Venezuela,” after more than 20 years of acute political confrontation, but warned that “there is an alternative, because although fragmented, dispersed and with a new look, protests against these pacts have never ceased.”

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.

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Credit: World Food Programme (WFP)

By Thalif Deen
UNITED NATIONS, Aug 22 2022 (IPS)

The ominous warnings keep coming non-stop: some of the world’s developing nations, mostly in Africa and Asia, are heading towards mass hunger and starvation.

The World Food Programme (WFP) warned last week that as many as 828 million people go to bed hungry every night while the number of those facing acute food insecurity has soared — from 135 million to 345 million — since 2019. A total of 50 million people in 45 countries are teetering on the edge of famine.

But in what seems like a cruel paradox the US Department of Agriculture estimates that a staggering $161 billion worth of food is dumped yearly into landfills in the United States.

The shortfall has been aggravated by reduced supplies of wheat and grain from Ukraine and Russia triggered by the ongoing conflict, plus the after-effects of the climate crisis, and the negative spillover from the three-year long Covid-19 pandemic.

While needs are sky-high, resources have hit rock bottom. The WFP says it requires $22.2 billion to reach 152 million people in 2022. However, with the global economy reeling from the COVID-19 pandemic, the gap between needs and funding is bigger than ever before.

Controlling the loss and waste of food is a crucial factor in reaching the goal of eradicating hunger in the world. Credit: FAO

“We are at a critical crossroads. To avert the hunger catastrophe the world is facing, everyone must step up alongside government donors, whose generous donations constitute the bulk of WFP’s funding. Private sector companies can support our work through technical assistance and knowledge transfers, as well as financial contributions. High net-worth individuals and ordinary citizens alike can all play a part, and youth, influencers and celebrities can raise their voices against the injustice of global hunger,” the Rome-based agency said.

In 2019, Russia and Ukraine together exported more than a quarter (25.4 percent) of the world’s wheat, according to the Observatory of Economic Complexity (OEC).

Danielle Nierenberg, President and Founder, Food Tank told IPS the amount of food that is wasted the world is not only a huge environmental problem–if food waste were a country, it would be the third largest emitter of greenhouse gas emissions.

But food waste and food loss are also moral conundrums. It’s absurd to me that so much food is wasted or lost because of lack of infrastructure, poor policymaking, or marketing regulations that require food be thrown away if it doesn’t fit certain standards.

This is especially terrible now as we face a worldwide food crisis–not only because of the Russian aggression against Ukraine, but multiple conflicts all over the globe.

“We’ve done a good job over the last decade of creating awareness around food waste, but we haven’t done enough to actually convince policymakers to take concrete action. Now is the time for the world to address the food waste problem, especially because we know the solutions and many of them are inexpensive,” she said.

Better regulation around expiration and best buy dates, policies that separate organic matter in municipalities, fining companies that waste too much, better date collection around food waste, more infrastructure and practical innovations that help farmers.

“And there are even more solutions. We can solve this problem–and we have the knowledge. We just need to implement it,” said Nierenberg.

The US Food and Drug Administration (FDA) said last November food waste in the United States is estimated at between 30–40 percent of the food supply.

“Wasted food is the single largest category of material placed in municipal landfills and represents nourishment that could have helped feed families in need. Additionally, water, energy, and labor used to produce wasted food could have been employed for other purposes’, said the FDA.

Effectively reducing food waste will require cooperation among federal, state, tribal and local governments, faith-based institutions, environmental organizations, communities, and the entire supply chain.

Professor Dr David McCoy, Research Lead at United Nations University International Institute for Global Health (UNU-IIGH), told IPS the heartbreaking image of food being dumped in landfills while famine and food insecurity grows, must also be juxtaposed with the ecological harms caused by the dominant modes of food production which in turn will only further deepen the crisis of widespread food insecurity.

“The need for radical and wholesale transformation to the way we produce, distribute and consume food has been recognized for years. However, powerful actors – most notably private financial institutions and the giant oligopolist corporations who make vast profits from the agriculture and food sectors – have a vested interest in maintaining the status quo. Their resistance to change must be overcome if we are to avoid a further worsening of the hunger and ecological crises, he warned”.

Frederic Mousseau, Policy Director at the Oakland Institute, told IPS that according to the Food and Agriculture Organization (FAO), global food production and stocks are at historic high levels in 2022, with only a slight contraction compared to 2021.

“Skyrocketing food prices seen this year are rather due to speculation and profiteering than the war in Ukraine. It is outrageous that WFP has been forced to expand its food relief operations around the world due to speculation, while also having to raise more funds as the costs of providing food relief has increased everywhere”, he said.

Mousseau pointed out that WFP’s costs increased by $136 million in West Africa alone due to high food and fuel prices, whereas at the same time, the largest food corporations announced record profits totaling billions.

Louis Dreyfus and Bunge Ltd had respectively 82.5% and 15% jump in profits so far this year. Cargill had a 23% jump in its revenue. Profits of a handful of food corporations that dominate the global markets already exceed $10 billion this year – the equivalent of half of the $22 billion that WFP is seeking to address the food needs of 345 million people in 82 countries.

At a press conference in Istanbul, UN Secretary-General Antonio Guterres held out a glimmer of hope when he told reporters August 20 that more than 650,000 metric tons of grain and other food are already on their way to markets around the world.

“I just came back from the Marmara Sea, where Ukrainian, Russian, Turkish and United Nations teams, are conducting joint inspections on the vessels passing through the Black Sea on their way in or out of the Ukrainian ports. What a remarkable and inspiring operation.”

“I just saw a World Food Progamme-chartered vessel – Brave Commander – which is waiting to sail to the horn of Africa to bring urgently needed relief to those suffering from acute hunger. Just yesterday, I was in Odesa port and saw first-hand the loading on a cargo of wheat onto a ship.

He said he was “so moved watching the wheat fill up the hold of the ship. It was the loading of hope for so many around the world.”

“But let’s not forget that what we see here in Istanbul and in Odesa is only the more visible part of the solution. The other part of this package deal is the unimpeded access to the global markets of Russian food and fertilizer, which are not subject to sanctions.”

Guterres pointed out that it is important that all governments and the private sector cooperate to bring them to market. Without fertilizer in 2022, he said, there may not be enough food in 2023.

Getting more food and fertilizer out of Ukraine and Russia is critical to further calm commodity markets and lower prices for consumers

“We are at the beginning of a much longer process, but you have already shown the potential of this critical agreement for the world.

And so, I am here with a message of congratulations for all those in the Joint Coordination Centre and a plea for that vital life-saving work to continue.

You can count on the full commitment of the United Nations to support you,” he declared.

IPS UN Bureau Report

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The production floor of an apparel exporting factory in Bangladesh. Credit: ILO/Marcel Crozet

By Ngozi Okonjo-Iweala, Rebeca Grynspan and Pamela Coke-Hamilton
GENEVA, Aug 16 2022 (IPS)

We are in the toughest period the world economy has faced since the creation of the multilateral system more than three-quarters of a century ago. A quadruple shock of COVID, climate change, conflict and cost-of-living has undone years of hard-fought development gains.

As financial conditions tighten, even countries that had seemed on track to prosperity and stability now stare into the abyss of debt distress, fragility and uncertainty about the future.

Coordinated, multilateral action is necessary to tackle the crises we face. Both aid and trade have key roles to play in reversing the impacts of this quadruple shock and putting the world back on track to achieve the Sustainable Development Goals.

We head the three international agencies that comprise the Geneva trade hub – the World Trade Organization (WTO), UN Conference on Trade and Development (UNCTAD) and the International Trade Centre (ITC).

The WTO makes and monitors the rules for global trade. UNCTAD delivers research and consensus-building to guide governments. ITC helps small business go global, especially firms led by women and young entrepreneurs. We work together so that trade works better for development.

All three of us share a deep commitment to trade-led prosperity. All three of us understand that a world in crisis means no more business as usual. And all three of us want our organizations to “walk the talk” on making aid and trade deliver for real people.

To guide aid and trade towards a better world, policymakers need to pivot in three fundamental ways.

First, make trade greener. Global trade can play an important role in a transition to a low-carbon economy. Preliminary research at the WTO suggests that removing tariffs and regulatory trade barriers for a set of energy-related environmental goods would reduce global CO2 emissions by 0.6% in 2030 just from improved energy efficiency, with additional potential gains from innovation spillovers and as lower prices accelerate the shift towards renewable energy and less carbon-intensive products.

Second, make trade more inclusive. Promoting greater trade by small businesses and greater participation by women and youth make companies and countries more competitive, drives economic transformation and reduces poverty.

Yet ITC business surveys found that one only out of every five exporting companies is women-led. WTO data show that micro, small and medium-sized firms represent around 95 percent of all companies globally but only one-third of total exports.

Third, make trade more connected. In our networked world, the future of trade is through digital channels and platforms, especially for small businesses. During the pandemic, we saw how doing business online went from being useful to critical for survival. UNCTAD data shows that digitally delivered services reached almost two-thirds the level of global services exports.

These themes were discussed at the Global Review of Aid-for-Trade, which took place 27-29th July in Geneva.

The event took place one month after the WTO’s successful Twelfth Ministerial Conference, which put trade multilateralism back on track and delivered a landmark agreement on fisheries subsidies, and two months before the COP27 meeting in Egypt (November 6-18) that could determine the world’s chances to keep the 1.5C target alive.

The data shows promising signs that aid-for-trade is tilting towards greater sustainability, inclusivity and connectivity. OECD and WTO data reveal a record high of nearly US$50 billion in aid for trade disbursements in 2020, of which half were either climate or gender related, and one-third supported the digital economy.

Despite growing budgetary pressures at home, it is critically important to continue and increase these aid-for-trade flows.

Apart from a stronger thematic focus on sustainability, inclusivity and connectivity, maximizing the contribution of aid for trade to achieving the Sustainable Development Goals requires a resolute focus on the “where” and “how” of delivering development results.

This means a focus on those countries whose trade and development needs are highest – particularly Least Developed Countries and fragile/conflict-affected countries – and regional initiatives like African Continental Free Trade Area, to ensure they become stepping-stones to wider and more inclusive regional value chains and trade-led growth.

It means partnership across international organizations. The WTO, UNCTAD, and ITC already collaborate on initiatives like the Global Trade Helpdesk, which simplifies market research by bringing key trade and business information into a single portal, as well as on support to cotton-exporting countries in Africa.

Last but certainly not least, it means mobilizing public and private finance. The IFC estimates a worldwide US$300 billion financing gap for women, and the global trade finance gap has nearly doubled from an already-staggering $1.5 trillion. Without access to finance, firms cannot grow, diversify or formalize.

We want to end with a call to action. Creating a more sustainable, inclusive and connected future is the moon shot of our times. Aid, trade and multilateralism – working together – are part of the solution.

It is normal and understandable that governments act to shore up their own economies in troubled times. But we must act now to ensure that the world’s poorest and most vulnerable can still see a pathway to prosperity through global trade.

The joint opinion piece is authored by Ngozi Okonjo-Iweala, Director-General, World Trade Organization, Rebeca Grynspan, Secretary-General, UN Conference on Trade and Development, and Pamela Coke-Hamilton, Executive Director, International Trade Centre.

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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View of a demonstration by social organizations in a Buenos Aires square in July. The scene occurs almost every day in the capital of Argentina, a country where poverty has held steady at around 40 percent of the population since before the COVID-19 pandemic. The possibility of a social uprising is one of the fears in the face of the deepening socioeconomic crisis. CREDIT: Daniel Gutman/IPS

By Daniel Gutman
BUENOS AIRES, Jul 27 2022 (IPS)

Darío is a locksmith in Flores, a traditional middle-class neighborhood in the Argentine capital, who will have to stop working in the next few days. “Suppliers have suspended the delivery of locks, due to a lack of merchandise or because of prices,” he laments. His case is an illustration of an economy gone mad in a country that once again finds itself on the brink of the abyss.

The problems that have been dragging on in this South American country, where the vast majority of the population has become poorer over the last four years and social unrest is on the rise, exploded this month with an exchange and financial crisis that created enormous uncertainty about what lies ahead.

The Central Bank ran out of dollars, and imports, which in large part are a source of inputs for domestic production, were restricted to the maximum. The result is fear, speculation, increased social unrest and out-of-control inflation, which is causing price references to be lost and some companies and businesses are hedging their bets with preventive increases, or they even decide not to sell.

Today, in the streets and in the media, the questions raised are whether the country is on the eve of a social outbreak and whether President Alberto Fernández, so politically isolated that he is questioned by his own government coalition, will reach the end of his term in December 2023.

At that time, Argentina will be celebrating 40 years of democracy, marked by a succession of economic crises that have left an aftermath of growing inequality and have caused distrust to spread easily in society at the first signs that things are not going well.

The crisis deepened at the beginning of the month, when the Jul. 2 resignation of then Economy Minister Martín Guzmán triggered a 50 percent drop in the parallel exchange rate — known locally as the dollar blue — the only one that can be freely acquired in a country with exchange controls, and this, in turn, further fuelled inflation, which in 2021 stood at 50 percent and this year is already expected to end above 90 percent.

“There has been a series of imbalances in Argentina’s macroeconomy for years, which means that today the government does not have the tools to deal with exchange rate and financial pressures,” Sergio Chouza, an economist who teaches at the public University of Buenos Aires (UBA), told IPS.

“In this country the value of the dollar dominates expectations about prices and as a result it is increasingly difficult to avoid a ‘spiral’ of inflation. At the same time, government bonds have collapsed and are already yielding less than those of Ukraine,” he adds.

Chouza says that the COVID-19 pandemic was one of the major contributing factors in triggering a situation that seems to have gotten out of control.

“There was an expansion of public spending, as in most of the world. But the problem is that while most countries financed it with credit, Argentina could not do so because it was already over-indebted,” the expert explains.

Homeless people who survive by picking through garbage in Buenos Aires sleep on the corner of a central street in Argentina’s capital. In 2021 the country experienced an economic recovery after the first year of the pandemic, but a rise in inflation in 2022 has aggravated the crisis once again. CREDIT: Daniel Gutman/IPS

Social protests

The square in front of the Palacio de Tribunales, in the heart of downtown Buenos Aires, is overflowing with people. The youngest protesters hold banners from social movements from poor outlying neighborhoods, but there are also entire families with small children in their arms. Traffic in the surrounding area is completely cut off as the columns of marchers continue to pour in.

It is a Thursday in July, but this is an image that can be seen practically every day in the Argentine capital, where the most vulnerable social sectors are staging a series of protests because, in the midst of the crisis, the government has suspended the expansion of the Potenciar Trabajo program.

This is the name of the National Program for Socio-productive Inclusion and Local Development, which offers a stipend from the government in exchange for four hours of work in social enterprises, such as soup kitchens or urban waste recyclers’ cooperatives.

“In our neighborhoods things have been very hard for many years, but now it’s getting worse because we can no longer afford to put food on the table,” Fernando, who preferred not to give his last name, told IPS. He is a young man from Laferrere, one of the poorest localities on the outskirts of Buenos Aires, who was a waiter in a bar before becoming unemployed in 2021. Today he does occasional construction work.

Santiago Poy, a researcher at the Observatory of Social Debt at the private Argentine Catholic University (UCA) tells IPS that, with the combination of currency devaluation and inflation since 2018, wages have lost around 20 percent of their purchasing power.

“Poverty stood at around 25 percent in 2017, climbed to 40 percent in 2019 and remained steady after that. Today there is a feeling of widespread impoverishment, despite the fact that the unemployment rate is only seven percent, because 28 percent of workers are poor,” says Poy, describing the situation in this Southern Cone country of 47.3 million people.

After the height of the pandemic in 2020, social indicators improved in 2021 but are worsening again this year and the vast social assistance network does not seem to be sufficient to curb the decline.

“Social aid is not going to solve things in Argentina, because the macroeconomy is a permanent factory of poverty,” says Poy.

One of the operations carried out last weekend by Economy Ministry personnel in supermarkets in Buenos Aires, in order to control price hikes on basic products and “dismantle speculative maneuvers,” as reported. CREDIT: Economy Ministry

The price race

“I am ashamed to set some prices at which I have to sell such basic things as bread, flour or sugar,” Fernando Savore, president of the Federation of Grocery Stores of the province of Buenos Aires, which groups 26,000 businesses in the country’s most populous region, tells IPS.

Savore says that since the beginning of the year the price hikes by suppliers have been constant, but that they skyrocketed in the first week of July, after the economy minister resigned.

“We have seen increases of more than 10 percent in food and more than 20 percent in cleaning products. I don’t think they are justified, but every time the dollar goes up, prices go up,” says Savore, who adds that grocers are hesitant to sell some products because of uncertainty about the costs of restocking them.

And in a context of overall jitters, the government unofficially leaks rumors about economic measures, which do not then materialize but fuel the sense of uncertainty.

President Fernández said that the lack of dollars would be solved if agricultural producers sold a good part of their soybean harvest, which they are currently withholding, worth 20 billion dollars.

They are obliged to export at the official exchange rate, whose gap with the parallel dollar has reached a record level of more than 150 percent, and they are apparently waiting for a devaluation.

On Jul. 25, the new economy minister, Silvina Batakis, met in Washington with the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, to assure her that this country will comply with the agreement signed with the multilateral lender this year, which includes goals to reduce the fiscal deficit and increase the Central Bank’s reserves.

But in Argentina, few people dare to predict where the crisis is heading, and how quickly it will evolve.