Developing countries’ lost decade?

Global average temperatures have reached 1.2 degrees centigrade above the pre-industrial era, and most scientific consensus is that if it rises above 1.5 degrees centigrade the climate change crisis will not be possible to be reversed.

It will all be about adaptation then, as even before this temperature threshold the world has seen more frequent, and more intense natural disasters –the catastrophic floods in Pakistan last year, for instance, inundated one-third of the country.

Moreover, it has also become a majority consensus among scientific community that the window is fast closing to avoid reaching this threshold, and it may be at most another ten years before this happens.

Among other things, finance will play an important role in reversing the tide of climate change, in being better prepared to deal with climate disasters before they happen, and for rehabilitation after a climate disaster.

This will require both individual countries to direct from their own fiscal space towards the climate change fight, but given the difficult debt distress situation of the global South in general, and also because they mostly have very little contribution towards the climate change crisis in terms of carbon footprint, it is mainly the responsibility of rich, advanced countries to not only directly deliver in terms of providing climate finance, but to also help correct the hurdles in enabling developing countries better create and manage their finances.

For this, the current neoliberal, austerity, and procyclical policy framework, at the individual country and global level, will have to be undone; especially as adopted in the programme conditionalities of the International Monetary Fund (IMF) for instance, or through the ‘Chicago Boys’-styled policymaking mindset of policymakers in individual countries; for which, a significant revision of mainstream economics will also have to be drastically made.

Short of the above, with debt distress increasing particularly in the wake of the still-ongoing pandemic – which has strong roots in the climate change crisis, and brings to attention the ‘Pandemicene’ phenomenon – and at the back of climate disasters –damages from last years’ floods in Pakistan, for instance, stand at $30 billion – there is increasing likelihood that the 2020s could very well be a lost decade for developing countries.

But given the lack of climate change fight in developing countries could mean overall dent to struggle against this existential threat, and greater chances of pandemics, with stronger variants originating from less prepared health systems – including capacity to make and administer vaccines – of developing countries, not to mention that rising poverty in these countries would put more pressure on global finance to bailout countries through IMF programmes, and for managing possibly higher economic migrants from these countries to the developed world.

So, in turn, this may very well be a lost decade for the global economy, which is even more dangerous when the world sits at the precipice of a fast-closing climate change reversal window.

A number of developing countries have already defaulted; around 60 developing countries are under high debt distress reportedly, according to the IMF, and lack of stimulus spending and high imported inflation have reversed the diminishing trend of absolute poverty globally, not to mention the accentuating rise in already high level of inequality according to Oxfam’s recent report ‘Survival of the richest’ during the pandemic.

Indicating the precarious debt distress situation, a September 2022 Friedrich-Ebert-Stiftung published report ‘A decade of rosy forecasts: how the IMF underestimated debt risks in the MENA [Middle East and North Africa] region’ pointed out: ‘The economic and fiscal impact of the COVID-19 pandemic led to a drastic deterioration of the debt situation in developing countries: The Global Sovereign Debt Monitor shows that, in the Global South, 135 out of 148 countries are in a critical debt situation.

Moreover, 39 have particularly high debt indicators or are already over-indebted, three times as many as before the pandemic began in 2020. …As early as October 2020, IMF economists and the IMF Managing Director warned of the imminent danger of a lost decade of development in poor countries, triggered by the worsening debt situation and resulting sovereign defaults.’

The world needs development expenditures into creating resilient, green, sustainable economies. But the onslaught of Neoliberalism for over four decades now has meant, for instance, weak global supply chains, lesser capacity of the public sector to deliver more than what the expanding and increasingly unregulated private sector has in terms of short-term profit gains undermining crucial resilience in the economies – for instance, in terms of education, health, and disaster preparedness – not to mention the rising level of inequality created by finance flowing away from real output growth to riskier financialization.

Moreover, rather than fixing the neoliberal mindset of global policy, austerity prescription is generally dished out - and even that in a procyclical way – rather than providing meaningful financial support/debt relief to developing countries.

So, for instance, rather than programme conditionalities of IMF binding special drawing rights (SDRs) support to countries implementing a non-neoliberal, non-austerity reform agenda, they push countries to austerity, and in creating primary surplus.

Sadly, such requirements (as these have taken place in the case of highly debt- and food and fuel inflation distressed and climate change disaster suffering country Pakistan) have significantly contributed to already high economic misery from which people are suffering.

True, IMF’s managing director’s recent comments that Pakistan should put the tax burden on the rich is indeed welcome, yet given the high economic misery of the country and increasing debt default risk, and overboard monetary tightening approach both globally and domestically – another consequence of the flaw in the neoliberal thinking of wrongly giving less recognition to the supply determined nature of inflation, overall globally currently, but also in the traditional way in developing countries – adding to pressures on foreign reserves and imported/cost-push inflationary channel, and retarding economic growth, call for greater support of the IMF in terms of allocating significant amount of SDRs to fill the financing gap in the short term, then to expect Pakistan being able to dismantle decades’ old grip of elites on economic policy against progressive taxation; which, for all practical purposes is achievable in a medium to long-term time.

Copyright Business Recorder, 2023