Covid-19: a pandemic that lays bare deep cracks in the neoliberal economic order

The pandemic has exposed the limited institutional capacity of both individual governments, and multilateral institutions, primarily reached under the neoliberal mantra of limited governments which, among other things, meant outsourcing significantly public service delivery, and in turn has had diminishing capacity to safeguard the interest of demos, against the ‘profit-over-people’ mindset of private interest.

As a corollary, during the neoliberal period starting in early 1980s, increasing influence of private interest over public policy to their advantage at the back of campaign and other financing of political parties, stagnating real wages, and rising indebtedness of both developing countries, a significant portion of people in rich, advanced countries has meant pandemic pushing countries into greater vulnerability as the pandemic unfolded its huge challenge for an otherwise feeble health sector, weak regulatory frameworks and contracts for the private sector to efficiently safeguard their interests of excessive profiteering.

This, overall, has pushed the world into vaccine inequality, divided (primarily, faster in rich, advanced countries with higher inoculation levels) and slowed economic recovery. This has also caused rising inequality and supply-side commodity shock and the high level of inflation not to mention the weakening of democracies and political instability.

Also, the neoliberal basis of the multilateral institutions like the International Monetary Fund (IMF), World Trade Organization (WTO), and World Health Organization (WHO) meant that the rules of managing and utilizing finances internationally, intellectual property rights (IPRs), and health infrastructure, and financing and the relationship with big pharmaceutical companies, overall, led to serious lack of prioritization and safeguarding of public value against private interest, building up of state capacity and allowing it to play a meaningful role in uplifting the demos, and saving the world from the ravages of significantly fluid capital flows and highly concentrated wealth in a few hands.

Even as the rich, advanced countries hoarded vaccines much more than their needs, and at unjustifiably higher pace, and the high level of stimulus injections they provided to safeguard current consumption needs, and saving/hedging/investing capacities of their citizens on the one hand, the already rich, especially those in the pharmaceutical and technological industries on the other hand, could amass their wealth at the back of lose regulatory controls over profit-making.

The misery of majorities in the lower income brackets in developing countries continued to extenuate under, for instance, little debt relief from richer countries, and multilateral creditors, and neoliberal, counter-cyclical policy prescriptions from the IMF, and low level of release of special drawing rights (SDRs), and that too at the routine criteria of most going to big donors.

On top of all that, a clearly supply-sided, weak governance-caused, and stimulus-induced inflation phenomenon is significantly being dealt with through a somewhat hawkish monetary tightening stance rather than a balancing-fiscal focus to safeguard, firstly, already-provided stimulus mainly in rich, advanced countries, secondly, effectively dealing with already high and rising debt distress in developing countries and, thirdly, preserving the need for higher current and future saving/investment capacities.

The need for stimulus injections, the support for balance of payments, and safeguarding against a likely debt default given high level of debt in developing countries, not to mention the limits of monetary and fiscal policy in dealing with inflation, maintaining needed stimulus and development expenditure, and all in an environment of low vaccine inoculation and fast approaching new more potent Covid variants, have all required the IMF to re-visit its counter-cyclical policies emphasis, something which has not worked in much of its life, where frequent users of its resources like Argentina and Pakistan. The IMF is also required to allocate much more SDRs during the pandemic than it was allowed to do (US$650 billion) in last August.

In the case of Argentina, for instance, the recent agreement with the IMF highlighted a much-needed shift away from the usually prescribed austerity pathway by the IMF. Similar stance is needed in other programme countries like Pakistan where the oft-treaded path of overly squeezing aggregate demand, and raising taxes, even during a pandemic, needs to be revised in line with its thought process with Argentina.

A recent article ‘Argentina and the IMF turn away from austerity’ by Joseph E. Stiglitz and Mark Weisbrot pointed out the following in this regard: ‘Last week’s agreement between Argentina and the International Monetary Fund (IMF) to restructure a record high 2018 loan brought the country and the world back from the brink of defaulting, which could have threatened the international financial system’s stability. …Most important, the IMF did not insist, as it usually does, on austerity. The agreement instead provides Argentina with room to continue its economic recovery.’

Pakistan, and many developing countries caught in the same situation of managing macroeconomic imbalances, and continue the momentum of economic recovery and in an inclusive way, require such revisit of thought process of IMF, away from emphasis on austerity, especially during the pandemic.

Moreover, the IMF should provide much more SDR support through an allocation formula that allows rational allocation of resources to more needy countries. Rightly so, for instance, Senators Sanders and Warren reportedly asked for much higher release of SDRs during the pandemic, as pointed out in a recent Bloomberg article ‘Warren, Sanders urge IMF to create $2.1 trillion more in reserve assets for Covid help’. As per the article: ‘A group of progressive Democratic senators including Elizabeth Warren and Bernie Sanders called for the International Monetary Fund to create more than $2 trillion in additional reserves to help developing nations cope with the Covid-19 pandemic. Warren, a member of the Senate Finance Committee, along with Sanders and committee chairman Ron Wyden, wrote to Majority Leader Chuck Schumer, asking him to support the issuance of 1.5 trillion in IMF reserve assets known as special drawing rights, according to a letter seen by Bloomberg News. That’s equivalent to $2.1 trillion. The issuance would be on top of a record $650 billion in reserves created by the IMF last August…’

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

He tweets@omerjaved7

Copyright Business Recorder, 2022