Global economic crisis and Neoliberalism

‘The global multilateral economic system has been stress tested twice this century. The first time was with the 2008 global economic meltdown; the second – with the COVID-19 pandemic. And the results are not good.

While more than six million lives have been lost across the world, a deteriorating climate has continued to exact a further toll on lives and livelihoods, and 100 million people have been pushed back into poverty by the crisis, a new billionaire has emerged every day of the pandemic.

The system of global economic governance appears increasingly bewildered and hamstrung by the challenges of the 21st century.’ – An excerpt from a recent ‘Al Jazeera’ published article ‘The global economic system is in in dire need of an overhaul’ by Kevin P. Gallagher, and Richard Kozul-Wright

Giving an interview to Russian news channel ‘RT’ recently, Prime Minister Imran Khan highlighted the two main challenges facing humanity in the following words: ‘Well the world faces two huge challenges. One is climate change… so that is the biggest challenge I think for human beings.

The second biggest challenge is the plunder of the developing world by the ruling elites of the developing world, where every year huge amounts of money… the illicit, the illegal money laundered by the ruling elites, are over 1.5 trillion dollars every year moves to the offshore accounts and western capitals.

Now, this is going to have severe consequences on food, on hunger, on starvation, on imbalance between the rich and the poor, and so I don’t think enough attention is being paid to the second one because the richer countries benefit from it…’

The two quotations, when taken together, highlight the underlying workings of Neoliberalism, both in domestic policy in general, and also form the basis of policy prescriptions/conditionalities of multilateral institutions like the International Monetary Fund (IMF).

A November 2018 ‘Eurodad’ published report ‘Unhealthy conditions: IMF loan conditionality and its impact on health financing’ by ‘Eurodad’ indicated: ‘The International Monetary Fund (IMF) practice of attaching policy conditions to its loans for crisis-hit countries continues to trigger outrage and protest. This report investigates the conditions attached to the IMF loans for 26 country programmes that were approved in 2016 and 2017.

In at least 20 of those countries, people have gone on strike or taken to the streets to protest against government cutbacks, the rising cost of living, tax restructuring and wage bill reforms pushed by IMF conditionality.’

Moreover, these conditionalities were on the rise and rose as the programmes progressed in general, as pointed out by the same Report as follows: ‘The average number of structural policy conditions per loan is 26.8 conditions for 26 countries, including those in reviews. The programmes approved in 2011 to 2013 had only 19.5 conditions per loan. In addition, this research also counted quantitative conditionalities, which previous Eurodad research did not.

These accounted for, on average, an additional 8.7 quantitative conditions per programme. Conditionality can significantly increase after a programme has been approved, due to conditionalities added during reviews. Even countries that start with modest conditionality requirements can be confronted with a high conditionality burden in less than two years following loan approval, caused by ‘conditionality escalation’.’

Neoliberalism, in turn, has served as a very useful tool to perpetuate policy and institutional design that allows extraction of resources, and in turn, political voice and influence, from the middles- and lower income classes, to the rich politico-economic elites as collusive entity where the business has used resources to influence public policy over time through mainly election campaign finance, and overall, financially investing in political parties, in return for preferential treatment.

And this has happened both in domestic policy in general, for at least around the last four decades in particular, after the backlash by moneyed interests against the ‘New Deal’ type policies that primarily created a more competitive, and welfare-oriented policy framework, which, in turn, had risen from the ‘Gilded Age’, and its catastrophic consequences in the shape of the Great Depression of the 1930s.

For the colonized world, the Neoliberal assault started much earlier when the so-called ‘sound principles’ of economics, on similar lines to their latter incarnation in the shape that came to be coined as the ‘Washington Consensus’ and more broadly ‘Neoliberalism’, where in each age the income inequality exacerbated and extractive institutional design perpetuated in favour of the ruling elites.

The same elites, after the Bretton Woods, made a comeback and with influence over multilateral institutions like the IMF and World Trade Organization (WTO) continued such elitist perpetuation with one glaring manifestation of such perpetuation happening in the phenomenal increase in inequality of the very rich.

The foremost challenge facing humanity in the shape of the existential threat of climate change, needs a lot more effort than was highlighted at COP26 meetings in Glasgow last year, mainly in terms of how climate finance, especially for developing countries will be arranged over the coming years and decades and much greater details, in an overall effort to reach net-zero carbon emissions at the earliest possible.

The other important challenge facing countries in general, especially developing countries is money laundering, and it’s associated consequences feeding into raising income inequality, weakening of democracy, greater political instability and lowering economic resilience. Taken together, these challenges require dealing with the common underlying basis of Neoliberalism, and the extractive institutional design it has perpetuated over time.

Hence, under the influence of Neoliberalism, both individual country and multilateral policy in general is as Martin Luther King Jr. pointed out ‘We all too often have socialism for the rich and rugged free market capitalism for the poor,’ whereby the collusive institutional design has meant that using the principles of Neoliberalism in public policy, and through weakening the economic strength and political voice of demos, politico-economic elites have safeguarded their own interests, at the cost of majority demos.

With regard to the second point made by the PM, and rightly so, economics Nobel laureate Joseph Stiglitz, in his recent Guardian published article ‘Credit Suisse has allowed the morally bankrupt to steal from the poor far too long’ made a similar argument as follows: ‘The bombshell revelations of the Suisse secrets… are a continuation of the path-breaking work of the Panama Papers and the Paradise Papers. …it appears the countries that suffer the most from the bank’s assistance to bad actors are developing countries and emerging markets. …How many stories, how many revelations, how many exposés, will it take for Switzerland, the US, the UK and other countries to change their laws on secrecy in banking and real estate, and all the other activities that facilitate money laundering and promote crime and corruption? While this treasure trove showed Switzerland benefiting from a flow of money from poor countries, the system itself is corrupting: the rot of tainted money spoils all that it comes in touch with.’

There is a need, for instance, for reform in WTO, whereby intellectual property rights (IPRs) and trade-related biases against the developing countries are diminished on an urgent basis, especially in the wake of the onslaught of climate change crisis and pandemic consequences, in terms of inequality, poverty, and lack of influence of majority demos on public policy.

Then, for instance, there is a need for restraining the IMF from continuing with its pro-cyclical policy stance. One manifestation of this is that even in the days of the pandemic and the rising challenge of keeping debt situation sustainable for developing countries and allowing them to keep investing appropriately, especially in making the health-related expenditures during the pandemic, called for the discontinuation of ‘surcharges’ on the financial assistance it provides to programme countries.

The same 2018 ‘Eurodad’ published report pointed towards the negative role of IMF programme conditionalities on recipient country’s health expenditure, something which holds all the more importance given the pandemic, as follows: ‘In a second step, this research identified knock-on effects of IMF conditionalities on health system financing and access to health services.

The adjustment measures potentially directly affecting healthcare are those mandating budget cuts and public sector employment reductions. Budget constraints as a consequence of loan conditionality risk compromising a country’s capacity to scale up public investment to provide essential health services, while public employment reductions have a heavy impact on the health sector and the enjoyment of the rights to health.’

With regard to the issue of keeping surcharges, a September 2021 study ‘IMF surcharges: counterproductive and unfair’ of the Center for Economic and Policy Research (CEPR) pointed out as follows: ‘This report finds that International Monetary Fund (IMF) surcharges are inappropriate and unjustifiable, particularly during a pandemic combined with a very uneven recovery from a pandemic-driven world recession.

The IMF’s advertised headline lending rate is low, but it charges significant additional costs— surcharges… IMF surcharges can have a damaging impact on the economies of countries facing deep economic difficulties, diverting hard currency from countries when they most need it. Surcharges add additional interest payments to some of the most heavily indebted borrowing countries. For example, Argentina will spend US $3.3 billion on surcharges from 2018 to 2023. This is equivalent to nine times the amount it would have to spend to fully vaccinate every Argentine against Covid-19.’

Moreover, Joseph Stiglitz, in a discussion with CEPR recently, highlighted the damaging effects of ‘procyclical’ nature of surcharges. According to him, ‘The surcharges are procyclical – they go exactly against the objective of good economic policy. …the IMF is supposed to help countries with foreign exchange problems, but with surcharges they are making things worse. …the arguments that have been put forth for the surcharges make absolutely no sense.’

Renowned economist, Jayati Ghosh, also extended similar comments on the matter of surcharges, and the shortcomings of the ‘IMF Resilience and Sustainability Trust’ in the following words: ‘It’s very important to enable the re-channeling of SDRs… and I do believe that are many important and imaginative ways in which the United States government can use its own SDR allocation in this way.

I believe that the sustainability trust set up by the IMF is not the ideal mechanism. It’s too small, it’s only 50 billion dollars, it evolves debt, which is an additional problem. With associated conditions, it’s only for low-income countries that are IMF programme countries, which really means that it’s so limited that it is unlikely to have much impact. Instead, we should actually think of other ways of using the SDRs, including the US allocation, the additional allocation, which it will never otherwise use.’

Similarly, a ‘Eurodad’ published January 2022 article ‘Why the IMF Resilience and Sustainability Trust is not a silver bullet for Covid-19 recovery and the fight against climate change’ pointed towards the loopholes in the IMF trust: ‘Since its explosion, the Covid-19 pandemic has made the inadequacy of the global multilateral system more evident than ever, most notably in ensuring vaccine access to all and in responding to the debt crisis. Despite many calls for a reform of the system, these have so far been inconclusive.

In 2021, the IMF finally agreed and implemented a new allocation of US$650 billion worth of Special Drawing Rights, but only a third (about US$251 billion) went to low and middle income countries. …In recognition of this gap, the IMF announced in October last year the creation of the Resilience and Sustainability Trust (RST), which will be funded by rich countries’ unused SDRs. …Despite its presentation as a key innovation of the international financial architecture, the RST is far from a silver bullet for fixing the Covid-19 recovery and the climate crisis. In fact, it may instead reproduce the dysfunctionalities and inequalities of the system, including attributing additional power to the IMF in areas outside its mandate, such as climate action.’

There is an overall need to revisit the current nature of Bretton Woods system and institutions, away from its neoliberal basis, which should also be the case for domestic economic policy. Such a shift has not taken place in Pakistan in a meaningful and effective manner.

A recently published article ‘How to deal with a “Bretton Woods moment”’ by Institute for New Economic Thinking taking a broader view in terms of directions for reforming the Bretton Woods system has called for: ‘… a revival of cooperation, an acceptance of effective updated rules governing trade and finance, and new or modernized institutions to deal with the challenges of the twenty-first century.’

Yet, given ample record of the cracks in the multilateral system from the onslaught of Neoliberalism during the last four decades or so, the situation underscores need for more concrete actions. According to the same ‘Al Jazeera’ published article, for example, ‘A renewed multilateral order must prioritise the role of global public goods that are needed to deliver shared prosperity and a healthy planet, promote cooperation and collective actions to bring fairness and balance to market outcomes, coordinate policy initiatives to mitigate common risks, and ensure that no nation’s pursuit of these broader goals infringes on the ability of other nations to pursue them.

The G20 should push for a reformed IMF, tasked with reducing speculative financial flows and augmenting capital in support of productive, low-carbon investments, including through the monitoring and elimination of misguided subsidies and the elimination of illicit financial flows.

What is more, when crises do occur, the remedy should be expansionary fiscal spending and direct financial transfers to households rather than austerity which further squeezes incomes and causes social unrest.’

That there is an urgent need to push global economic system away from Neoliberalism is only an understatement, given the likely catastrophic consequences in terms of the fast unfolding existential threat of climate change, rising inequality, diminishing confidence in democratic systems and multilateralism, and fast movement of demos towards xenophobia.

(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