Need for a ‘new normal’ economic recovery

The pre-Covid world was a neoliberal world, which exacerbated income inequality between the rich and poor within countries, and the gap between the developed and developing countries in general. This approach hastened the pace of existential threat of climate change crisis, playing a role in turn in not just causing the Covid pandemic but also increasing economic vulnerability.

A post-pandemic world needs sharp correction in this course of action, to enable moving away from the Washington-Consensus policies that favoured unfettered market fundamentalism, towards greater government role in economy, through better public entrepreneurship, incentivization, and regulation of the private sector and markets overall, on one hand, and on the other hand, multilateralism will need to rise above the mindset of appeasing domestic voter base, and priorities of vested interest group within individual countries, to ones that deliver the best outcomes for both majorities within countries, and for people overall across the world.

For decades now, under the neoliberal assault on the ‘New Deal’-type policies of the post-World War II world in general, led to perpetuation of wealth and power in a tiny segment of elites in both advanced and developing countries overall, with consequences including falling real wages, rising income and wealth inequalities, and greater voter disenfranchisement on policy, due to increasing weight of money – coming from this elite group – in determining election outcomes. Hence, policy over the years safeguarded elitist interests, in both advanced and developing countries, which was ensured through, among other steps, by elites to push for least role of government in economy, and in particular markets. This needs to be reversed by governments through effectively intervening in their respective economies, to deter previously virtually unchecked private interests from chasing markets signals that brought them short-term gains, but that produced long-term costs for environment, economy, and democracy.

Post-pandemic, adopting the same runs the risk of a similar ‘K-shaped’ economic recovery, whereby the already rich and powerful elites will ride the tide of economic growth to their own advantage, while a large segment of people will see their incomes and wealth falling. Going forward, policies should not work in exacerbating this gap, by allowing them to be heavily influenced by strong vested interest groups.

An important element of causing this ‘K-shaped’ recovery is happening in the shape of vaccine inequality. A recent Project Syndicate article ‘Avoiding a K shaped global recovery’ by Michael Spence, Joseph E. Stiglitz, and Jayati Ghosh highlighted some of the steps developed countries and multilateral institutions should take to move towards recovery for a greater number of people in both developed, and in developing countries.

Firstly, the article indicated the need for eradicating Covid everywhere, for which it was important that developed countries rose above the interests of powerful corporate lobbies and pushed for suspension of intellectual property rights related with Covid vaccines. Two Nobel laureates – Spence and Stiglitz – and a renowned economist, Jayati Ghosh strongly argued in favour of avoiding ‘pandemic nationalism’. According to them, ‘It is thus critical that vaccines, personal protective equipment, and therapeutics be distributed everywhere as quickly as possible. Insofar as today’s supply constraints are the result of a poorly designed international intellectual-property regime, they are essentially artificial. While IP reform in general is long overdue, what is needed most urgently now is suspension or pooling of the IP rights attached to products needed to fight Covid-19. Many countries are pleading for this, but corporate lobbies in advanced economies have resisted, and their governments have succumbed to myopia.’

Secondly, the article rightly pointed towards the need to avoid austerity and build on the achieved benefits of greater government spending during the pandemic-caused recession, and also to support developing countries financially in this regard. Here, the article notes that multilateral institutions like the International Monetary Fund (IMF), in their programmes during the pandemic should have allowed greater allowance of stimulus spending for programme countries. Hence, while advanced countries were able to support individuals and businesses to effectively deal with the recession, developing countries were able to provide only a fraction of such support in comparison, and the role of the IMF in this regard did not help as well, as pointed out in the article: ‘But when it comes to setting the terms for loans to countries facing balance of payments stress, the IMF’s actions are not always consistent with its statements. An Oxfam International analysis of recent and ongoing standby agreements finds that between March and September 2020, 76 of the 91 IMF loans negotiated with 81 countries required public-expenditure cuts that could undermine healthcare systems and pension schemes, freeze wages for public-sector workers (including doctors, nurses, and teachers), and reduce unemployment insurance, sick pay, and other social benefits. Austerity – especially cutbacks in these vital areas – won’t work any better for developing countries than it would for developed ones.’

Moreover, given the high balance of payments (BoP) needs of developing countries, the IMF should immediately move towards indicated release of $650 billion in special drawing rights (SDR) support of developing countries for freeing up their fiscal space, and not wait till June as indicated by managing director (MD) of the IMF, Kristalina Georgieva, in her statement on March 23, 2021. According to her, ‘I intend to present by June a formal proposal to the Executive Board to consider a new allocation of US$650 billion, based on an assessment of IMF member countries’ long-term global reserve needs, and consistent with the Articles of Agreement and the IMF’s mandate.’ Hence, it is indeed very important to immediately release this already over-due support – since it has been more than a year since the pandemic hit globally – given the significant nature of needs developing countries have, as the MD herself pointed out in her same statement by stating that ‘If approved, a new allocation of SDRs would add a substantial, direct liquidity boost to countries, without adding to debt burdens.

It would also free up badly needed resources for member countries to help fight the pandemic, including to support vaccination programs and other urgent measures. And it would complement the range of tools deployed by the IMF to support our membership in this time of crisis.’

An important feature of a ‘new normal’ recovery is taking strong steps towards reversing climate change crisis, and for achieving inclusive growth,; and for this, stimulus spending should be made in a ‘mission oriented’ approach, as renowned economist, Mariana Mazzucato put it while giving an interview recently to Bloomberg. According to Mazzucato, ‘Recovery should not just be a bailout but it really needs to do what [US President] Biden talks about, which is “Building Back Better”, but it doesn’t happen if you don’t nest it within the contracts, and you know that’s why purpose-driven-approach needs to be not just about what’s to be done, but how, and how actually to set up really more symbiotic public-private partnerships.’ Moreover, as Mariana pointed out in the same interview, that adopting such an approach was important to avoid simply bailing out the economy, as was done after the Global Finance Crisis (GFC) of late 2000s, but to ensure that invested money is both made to follow a climate-conscious investment path, and not re-invested into financial sector, something that happened in a large way after GFC, but injected liquidity rather also lands in the shape of investments in real sector in a significant way, for reducing unemployment, and for increasing economic output, more directly.

Moreover, the developed world should come true on its climate-related financing commitments with the United Nations towards supporting developing countries, in this regard. Prime Minister Imran Khan highlighted the urgent need for this in his recent article ‘COP26 will end in failure without a finance deal’ in The Times. According to him, ‘The Global Climate Risk Index ranks Pakistan as the 8th most vulnerable country to climate impacts. Over the past decades, the frequency and intensity of climate disasters have been constantly rising. Since 2000, Pakistan has lost 9,989 lives, suffered economic losses worth $3.8 billion and witnessed 152 extreme weather events — all triggered by climate change… . In 2015, analysis indicated that developing countries would need about $400 billion in climate finance support… [yet there is] the failure of developed countries to deliver the promised $100 billion a year of climate finance by 2020.

Unless there is a debt relief programme for the global south and enhanced global climate finance leveraging clean investments in these regions, the default fossil fuel powered pathways will remain unchanged and the invaluable opportunity of a clean energy transition will wither away.’

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021