Non-austerity policy needed for resilient, inclusive, sustainable growth

The world is fast entering deep recesses of environmental, public health, and economic crises. Virtually, over the last four decades, global policy, which is equipped with wings of neoliberalism and austerity on each side and wearing strong blinkers of strong market fundamentalism, and shortsighted profit-mindedness has not been allowing the fast unfolding of an existential threat of climate change, until the hard landing in the shape of Covid pandemic, and disasters like catastrophic floods in Pakistan for instance.

Noted economist, Adam Tooze in his October 28, Financial Times (FT) published article ‘Welcome to the world of the poly crisis’ highlighted the severity of the crises at hand as follows: ‘Pandemic, drought, floods, mega storms and wildfires, threats of a third world war — how rapidly we have become inured to the list of shocks. …As former US Treasury secretary, Lawrence Summers, recently remarked: “This is the most complex, disparate and cross-cutting set of challenges that I can remember in the 40 years that I have been paying attention to such things.”’

Moreover, describing the very difficult nature of crises, and reflecting on Adam Tooze’s thoughts in the article above, a recent FT published article ‘How to think about policy in a poly crisis’ by Martin Wolf, pointed out ‘Welcome to the “poly crisis” — a world in which, as historian Adam Tooze says, “economic and non-economic shocks” are entangled “all the way down”.

We have an inflation shock that emanates from the disruptions caused by a pandemic, the policy responses to that pandemic and an energy shock caused by a war. That war in turn is related to the breakdown in relations among great powers.

Slow growth, rising inequality and over-reliance on credit have undermined political stability in many high-income democracies. The credit boom led to a great financial crisis whose outcome included a decade of ultra-low interest rates and so even more financial fragility worldwide. Adding to these stresses is the threat of climate change.’

Having said that, these shocks are frighteningly still not strong enough to move big policy players in the shape of rich, advanced countries, and multilateral institutions such as the International Monetary Fund (IMF) and World Bank to adopt drastic revisionist policies away from their overall neoliberal and austerity-based policy approach, as seen from rather lukewarm attention to this from the recent COP27 meetings, and before that the annual meetings of the IMF and World Bank.

These challenges call for climate-conscious spending, for which finances need to be freed up from the wrong thinking of practicing austerity and over-reliance on monetary policy tightening to curtail inflation, when clearly this raises the burden of already high debt levels, increases the cost of borrowing, causes capital flight from developing countries, and not tackle inflation effectively – rather significantly boosts it from the cost-push channel – since it has a meaningful supply-side emphasis.

Regarding a fast-worsening debt and a very difficult borrowing situation, a recent Bloomberg published article “Global debt costs are soaring. Here’s where it will hurt most” pointed out: The world is emerging from the cheap-money era with a mountain of debt that’s now getting painfully expensive. All around the globe, there are borrowers deeper in the red than ever before.

The total owed by households, businesses and governments stands at $290 trillion, up by more than one-third from a decade ago, according to research by the Institute of International Finance. Although the world’s debt has declined from a pandemic-driven record early this year, the risks it poses to economies and financial markets are intensifying. That’s because many borrowers face a relentless increase in their interest payments, as the Federal Reserve and other central banks raise rates at the fastest pace in decades to subdue inflation.’

Moreover, while the IMF continues to prescribe austerity to programme countries, and rather than basically providing resources to a specific country facing current account deficit needs, micromanages through conditionalities that favour mostly a neoliberal, aggregate demand squeeze type of policy mindset – where the recent increase in policy rate by 100 basis points to 16 percent in Pakistan, perhaps under the pressure of IMF austerity-minded IMF programme conditionalities, went quite clearly against the apparent over-whelming consensus among economists locally that such increase was unwarranted in an already low economic growth situation, and a significantly supply-side nature of inflation.

Hence, instead of IMF apparently pushing for procyclical policies in return for financial support, programme countries should be left to adopt policies much more independently; and given the current economic situation nationally and globally, of high inflation and low economic growth overall, it would make sense for countries to follow counter-cyclical policies, to reduce debt burden, stymie the cost-push and imported inflation channel, and allow spending/investment in moving towards a green, resilient, inclusive, and sustainable economy.

This calls, for instance, and very importantly, for reforms at the IMF and World Bank, including following ‘The Bridgetown Initiative’ presented and continually developed thereafter by the Barbados Prime Minister, Mia Mottley.

A recent Foreign Affairs (FA) published article ‘Time to rethink climate finance’ pointed out in this regard: ‘A new agenda for climate finance should begin with reform of the major development finance institutions, including the World Bank and the IMF.

Currently, these institutions are simply not putting sufficient funding into clean energy and climate change mitigation. …In remarks to the IMF’s International Monetary and Financial Committee in October, U.S. Treasury Secretary Janet Yellen called on the World Bank to “explore areas of reform to its vision, incentives, operational approach, and financial model to better respond to global challenges” such as climate change. …Developing countries are also calling for international finance institutions to be reformed to incorporate the promotion of global public good into their missions.

The Bridgetown Agenda, led by Barbados Prime Minister Mia Mottley, for instance, calls for a new global mechanism for disbursing reconstruction grants to countries imperiled by a climate disaster and for the IMF to issue $500 billion in special drawing rights or other low-interest, long-term financial instruments to accelerate private investment in clean energy or climate-resilience measures.’

Devastating floods, and lack of public health sector preparedness, not to mention stimulus and social safety spending to reverse the negative impacts of recession-causing pandemic on already difficult situation of poverty and income inequality, Pakistan needs a reversal of policy emphasis of over-reliance on raising interest rates to tackle inflation both by rich, advanced countries, especially the United States given the widespread usage of dollars, and dollar-denominated debt, and by the IMF in terms of aggressive, but unwarranted, monetary tightening, and browbeating countries, including Pakistan, into practicing austerity.

Here, austerity does not mean not bringing economic efficiency in making public and private expenditures, and in intelligently pursuing an effective import compression policy through putting in place meaningful incentive and governance structures, but rather significantly curtailing making needed public and private sector investments during both a recession-like situation, and in moving towards a green, resilient economy in the face of climate change, and pandemic.

A recent Guardian published article ‘Is the IMF fit for the purpose’ by Jamie Martin pointed a serious lack of understanding of the IMF with regard to its misplaced emphasis on austerity, especially even when they need to make investments in the wake of catastrophic flooding.

The article indicated not only the likely counter-productive consequence of IMF’s emphasis on austerity for recipient countries of IMF’s resources, it also brought out a lack of walking the talk where the IMF recognised the issues with austerity emphasis in its policy prescription, but yet persists with it!

The article pointed out in this regard: ‘In late August, as the scale of this catastrophe was becoming clear, the Pakistani government was trying to avert a second disaster.

It was finally reaching a deal with the International Monetary Fund (IMF) to avoid missing payment on its foreign debt. …The terms of the deal were painful: the government was offered a $1.17bn IMF bailout only after it demonstrated a real commitment to undertaking unpopular austerity policies, such as slashing energy subsidies. …The correlation of Pakistan’s crises – exceptionally devastating floods and the threat of economic meltdown – was partly bad luck.

But it was also emblematic of a challenge faced by many countries at the forefront of the climate crisis: how can they afford to deal with extreme weather events and prepare themselves for the coming disasters, while suffering under crippling debt loads and facing demands for austerity as the price of relief? …Over the past decade, the IMF has made significant efforts to repair its reputation.

In the wake of the global financial crisis, it became routine for IMF officials to publicly acknowledge that austerity could be counterproductive and that tackling inequality had become one of the institution’s central concerns. …But in practice, the IMF’s transformation has itself been oversold. …As the scholars Alexander Kentikelenis, Thomas Stubbs and Lawrence King showed in an article from the same year, the IMF, despite these rhetorical shifts, continued to insist on just as many, if not more, of the same structural reforms of borrowers as ever – sacking civil servants, cutting pensions, lowering minimum wages.

A 2020 study by the Global Development Policy Center at Boston University found something similar. Today’s IMF, it noted, recognises that austerity constrains growth – while continuing to demand austerity from states in receipt of its aid.’

Moreover, it is all the more strange that rich, advanced countries with a lot of say in the IMF, rather than following the approach of austerity and pressing on the Fund to walk the talk on austerity are rightly pursuing a policy of seeing huge investments being made in their respective economies to deal with this situation of policy, although they do need to revisit their policy of over-reliance on monetary tightening.

In a recent FT published article ‘Industrial strategy demands a new deal with the private sector’ renowned economist, Mariana Mazzucato highlighted in this regard: ‘Industrial strategy is experiencing a renaissance.

Provoked by multiple crises — financial, climate and health — countries around the world are investing heavily in promoting economic growth and resilience. The war in Ukraine, with its impact on supply chains, has made this even more important.

The EU, for example, is investing more than €2tn in economic recovery and transformation while President Joe Biden is putting more than$2tn into a “modern American industrial strategy”. Similar investments are being made from Japan to Latin America.’

Copyright Business Recorder, 2022