Global economic crisis: Neoliberalism, debt sustainability, SDRs, and multilateralism

The global economy is facing existential threats of climate change and Pandemicene crises. The underlying basis for the perpetuation and hastening of both the crises is Neoliberalism.

Here, it needs to be indicated that while the neoliberal wave made its most recent return around four decades ago, during which time this has been given this name, when there is neither nothing ‘new’ nor ‘liberal’ about it, as Noam Chomsky pointed out in his 2010 published book ‘Hopes and Prospects’ as follows: ‘History shows that, more often than not, loss of sovereignty leads to liberalisation imposed in the interests of the powerful.

In recent years, the regime thus imposed has been called “neoliberalism”. It is not a very good term, as the social-economic regime in question is not new; nor is it liberal, at least as the concept was understood by classical liberals. The very design of neoliberal principles is a direct attack on democracy.’

Global South overall, with its traditionally weak economic institutional quality, stark market imperfections, inefficient expenditure rationalization, and frail domestic resource mobilization effort, has not been able to improve much on virtually all of these counts over the last many decades mainly due to perpetuation of Neoliberalism, and within it over-inclination towards monetary and fiscal austerity policies, diminishing role of government and regulation.

Moreover, little debt relief given amid Covid pandemic and climate challenges has also had a narrowing effect on fiscal space in developing countries, while less than modest provision of International Monetary Fund’s (IMF’s) special drawing rights (SDRs) has also not helped in easing balance of payments concerns of these countries; it, in fact, negatively impacted fiscal space once again. Calls for reforming the Bretton Woods institutions such as the IMF and World Bank have thus continued to increase.

Underlining the need for improving the current debt relief/restructuring framework, economics Nobel laureate, Joseph E. Stiglitz in his May 23, 2023 Tweet emphasized the need for passage of the ‘New York Taxpayer and International Crises Protection Act’, and indicated in this regard in the same Tweet as follows: ‘The bill is timely.

There’s a looming debt crisis in the Global South following Covid-19 and advanced economies’ contractionary monetary policies as a flawed response to the inflationary consequences of the war in Ukraine. Sovereign debt distress has massively risen globally—and will likely continue to increase. But countries are unable to restructure unsustainable debts.

Restoration of debt sustainability is both a matter of efficiency and equity. With no international system for restructuring sovereign debts, decentralized negotiations and outcomes are bad – too little, too late restructurings. The G-20 tried to fill this vacuum through the creation of the Common Framework for Debt Treatment (CFDT). But it is failing. …The bill will play a powerful role in changing the incentives of private creditors to hold out, and also of sovereign debtors to postpone necessary restructurings.’

In particular, there have been calls to revisit the allocative mechanism of SDRs. For instance, noted economist Jayati Ghosh in her recent Project Syndicate (PS) published article ‘Building a better SDR’ calls for a fresh allocation of SDRs and improving its allocative mechanism as follows: ‘With much of the developing world teetering on the edge of a debt crisis, the calls for a new issuance of special drawing rights (SDRs, the International Monetary Fund’s reserve asset), have grown louder and more urgent.

But to have the desired effect, the IMF must modify its allocation criteria and clarify how SDRs can be used to support low- and middle-income countries through the current economic turmoil. The idea of channeling SDRs to multilateral institutions like the World Bank and regional development banks, which are uniquely equipped to assist emerging and developing countries, has become increasingly popular in recent years.’

Giving a specific example to bring much needed novelty in the way SDRs are distributed, Center for Global Development (CGD) president, Masood Ahmed recommended in his May 22, 2023 published article ‘Now is the time to recycle SDRs through the African Development Bank’ that ‘This week, the African Development Bank (AfDB) will hold its annual meeting in Sharm El Sheikh, Egypt.

This is the right moment for its shareholders and other donors to commit to allocating some of their excess Special Drawing Rights (SDRs) to the hybrid capital fund that the AfDB has proposed to create with SDRs. The G20’s promise to recycle $100 billion SDRs to vulnerable countries has yet to be fulfilled. The AfDB proposal offers an opportunity to show results.’

Africa, like developing countries in other parts of the world, including Pakistan, needs better allocation of SDRs. Given the existential challenges at hand, a difficult debt situation for a number of developing countries, and greater spending needs for resilient economies in the face of climate change and possible more pandemics, it is important that rich countries realize the importance of improving the current weak spirit of multilateralism.

In a recent Financial Times (FT) published article ‘Africa needs international help to avoid a lost decade’ chief economist of United Nations Economic Commission for Africa, Hanan Morsy pointed towards the need for greater international support of Africa as ‘African countries are facing a cost of living crisis, tightening global liquidity and worsening climate shocks.

All of this is intensified by unsustainable debt burdens, which have been deepened by the devaluation of local currencies against the dollar and the US Federal Reserve’s interest rate hikes. …A succession of international moments in the past two years – G20 and G7 Summits, IMF and World Bank meetings – could have provided opportunities to change this dynamic but largely failed to do so.’

Building on the same thread of weak level of multilateralism, noted economist, Martin Wolf, in his recent FT published article ‘The G7 must accept that it cannot run the world’ highlighted the need for G7 to give more weight to cooperation in an ever-increasing world of greater multi-polarity. He pointed out in this regard: ‘Today, hopes of a co-operative global economic order, which reached their zenith at the G20’s London summit of April 2009, have evaporated. …An even bigger issue is how the global economy is to be managed.

Are the IMF and World Bank to be bastions of G7 power in a world increasingly divided? If so, how and when are they going to get the new resources they need to deal with today’s challenges? How, too, will they co-ordinate with organisations that China and its allies are creating? Would it not be better to admit reality and adjust the quotas and shares, to recognise the huge shifts in economic power in the world? China is not going to disappear. Why should we not allow it a bigger say in return for full participation in debt negotiations?’

Contrary to the leadership qualities needed to be shown by rich, advanced countries, overall, a May 20, 2023 press release by Oxfam, and titled ‘Oxfam: G7 has failed the Global South in Hiroshima’ indicated the comments of Oxfam International’s Head of Inequality Policy at Oxfam, Max Lawson, as follows: ‘G7 countries have failed the Global South here in Hiroshima. They failed to cancel debts, and they failed to find what is really required to end the huge increase in hunger worldwide. They can find untold billions to fight the war but can’t even provide half of what is needed by the UN for the most critical humanitarian crises.’

In a similar vein, Jayati Ghosh in her same article pointed out ‘...governments that control global reserve currencies... have pumped massive amounts of liquidity into the banking sector. ... In contrast, debtor countries that have applied for debt relief... have been waiting for years for a fraction of those sums.’ For instance, in the ‘G7 Hiroshima Leaders’ Communiqué’ released on May 20, 2023, while there was emphasis on recycling of already released SDRs, as the Communiqué indicated ‘We have further advanced our joint efforts to support countries most in need through the voluntary channeling of Special Drawing Rights (SDRs) or equivalent contributions.

We welcome that additional pledges by Japan and France, amongst others, together with our previous contributions and commitments, put the global ambition of $100 billion within reach and call for the delivery of existing pledges and for further pledges from all willing and able countries to fulfill 7 the ambition’, there was no mention of a much-needed and long-awaited release of US$650 billion enhanced allocation of SDRs, and with more needs-based (and not based on the quota) allocation formula.

Copyright Business Recorder, 2023