Climate change, debt, and inflation

“If you’ve been feeling confused and as though everything is impacting on you all at the same time, this is not a personal, private experience,” says historian Adam Tooze. “This is actually a collective experience.”

And that experience has a name - ‘polycrisis’. It describes the interplay between the COVID-19 pandemic, the war in Ukraine and the energy, cost-of-living and climate crises.’ – An excerpt from a May 07, 2023 World Economic Forum (WEF) published article ‘This is why ‘polycrisis’ is a useful way of looking at the world right now’

Among the biggest existential threats facing humanity is indeed climate change. A highly consequential target in the shape of global average temperatures not breaching the 1.5C threshold is appearing all the more uphill task, given a rather lackluster policy approach by individual countries – especially rich, advanced countries with highly significant carbon footprint–and multilateral institutions like International Monetary Fund (IMF) apparently, significantly persisting with neoliberal, austerity-based programmes which, among other things, increase the cost of capital that in turn squeezes, otherwise, much-needed climate finance space, in particular for developing countries, a number of which, like Pakistan, are already under high debt pressure, and overall have little fiscal space to start with; along with reportedly lack of climate-related project focus by World Bank.

At the same time, there have been rising greenhouse gas emissions, as a June 08, 2023 Guardian published article ‘Global greenhouse gas emissions at all-time high, study finds’ pointed out: ‘Greenhouse gas emissions have reached an all-time high, threatening to push the world into “unprecedented” levels of global heating, scientists have warned.

The world is rapidly running out of “carbon budget”, the amount of carbon dioxide that can be poured into the atmosphere if we are to stay within the vital threshold of 1.5C above pre-industrial temperatures, according to a study published in the journal Earth System Science Data on Thursday.

Only about 250 billion tonnes of carbon dioxide can now be emitted, to avoid the accumulation of CO2 in the atmosphere that would raise temperatures by 1.5C. That is down from 500bn tonnes just a few years ago, and at current annual rates of greenhouse gas emissions, of about 54bn tonnes a year over the past decade, it would run out well before the end of this decade.’

Moreover, a recent Financial Times (FT) published article ‘Global warming likely to exceed 1.5C within five years, says weather agency’ shared a rather shocking revelation made by World Meteorological Organization (WMO), whereby while recent studies on climate change had indicated that the threshold of 1.5C – after which irreversible consequences of global warming are highly likely to be faced globally – will roughly take around a decade to reach the current rate of carbon emissions, WMO expected it be around half that time.

The article pointed out in this regard: ‘Global temperatures are likely to exceed 1.5C above pre-industrial levels for the first time in human history within the next five years, the World Meteorological Organization has said in its latest annual assessment.’

The window with regard to reversing the consequences of global warming are closing rather more quickly than thought before, and worryingly not that long ago, as the same article pointed out the following: ‘In a stark conclusion, scientists said for the first time there was a 66 per cent chance that the annual mean global surface temperature rise would temporarily surpass 1.5C above pre-industrial levels in “at least” one year by 2027.

The chances of this outcome were also “increasing with time”, the report said. The assessment of a two-thirds chance of a temporarily breach of the 1.5Cthreshold compares with estimates of around 48 per cent a year ago, and “close to zero” in 2015.’

This indeed calls for a much stronger commitment from countries, multilateral institutions, and the private sector than previously. The upcoming 28th edition of the Conference of Parties (COP28) in November-December 2023 in the United Arab Emirates (UAE) will, therefore, needed to be taken as an important opportunity by countries, multilateral institutions, and private sector to show far greater policy- and financial commitment to tackle fast-unfolding climate change crisis a lot more effectively.

Even before COP28, it is important that rich countries should come true on their commitment regarding providing $100 billion annually in climate finance to developing countries’ needs to be fulfilled. This is indeed very important for countries like Pakistan with already very high gross financing needs over the medium-term, and which are among the most climate vulnerable countries.

Not just bilateral countries, calls are also being made for some time now, especially under the ‘Bridgetown Initiative’, and more specifically through the document titled ‘Bridgetown 2.0’, for release of adequate level of climate finance by multilateral institutions.

A June 05, 2023 FT published article ‘New World Bank chief under pressure as ‘Bridgetown initiative’ seeks $100bn’ indicated in this regard: ‘The World Bank is under increasing pressure to reform, following a call for $100bn in fresh capital to drive climate and development finance ahead of a summit in Paris to be co-hosted by the leaders of Barbados and France.’

Another very important challenge facing global economy is the soaring level of debt for a number of countries, which not only poses a challenge to individual countries’ solvency, but also fast brewing a likely global banking crisis at the back of over-board monetary austerity at play – with multiple central banks (wrongly) using interest rates as the main tool to fight inflation that has otherwise strong supply-side and over-profiteering nature.

Here, high interest payments, have in turn, led to increasing pressures on domestic currencies against the US$ of multiple countries, including Pakistan, and have squeezed fiscal space for making much-needed climate change related investments. Moreover, weakened macroeconomic fundamentals, as a consequence of rising debt burdens, have also diminished capacity of these countries to borrow from capital markets.

Unfortunately, under an apparently weak spirit of multilateralism, there has been slow progress on both debt relief when compared to the fast-unfolding climate change crisis, and the recession-causing pandemic, and before that in bringing much-needed improvement in the debt restructuring framework, especially one that meaningfully engaged China and private creditors – where the proportion of both in overall debt portfolio, and in comparison with debt owed to Paris Club countries, has drastically increased over the last decade or so.

Having said that, with the introduction of ‘New York Taxpayer and International Debt Crises Prevention Act’ reportedly in the legislative process, there appears a stronger possibility of better debt relief consequences for developing countries.

Bill Number S4747, and titled ‘An act to amend the debtor and creditor law, in relation to the recoverability of sovereign debt’ has been introduced in this regard in the US Senate on February 12, 2023, where indicating the intent, Section 1 indicates ‘Therefore, the legislature finds and declares that it shall be the policy of the state of New York to support international debt relief initiatives for developing countries in, or at high risk of, debt distress, to ensure that the cost of such debt relief is allocated in a fair and equitable manner, and that such costs do not fall disproportionately on the residents and taxpayers of the state of New York, and for other purposes.’

As per a June 06, 2023 Bloomberg published article ‘How a New York Bill Could Help Fix the Sovereign Debt Crisis’, the Bill will help in debt restructuring by reining-in possible over-ambitiousness of private creditors in terms of financial gains they can reach in the case of a country goes into debt restructuring.

The article pointed out in this regard: ‘Lawmakers in New York State, whose laws govern roughly half the foreign bonds issued by emerging-market countries — about $800 billion of outstanding debt — are considering legislation that would limit how much private investors are allowed to recoup when governments default and seek to restructure.

Proponents of the change say it’s about social justice and protecting developing nations from exploitation. …The NY Taxpayer and International Debt Crises Protection Act would mandate “equitable burden-sharing between public and private creditors.” That means that private investors couldn’t get better treatment in a default than the US or another sovereign lender like the International Monetary Fund.

The legislation, introduced in both the Assembly and the Senate, would apply to all future bonds, as well as existing emerging-market hard-currency bonds governed by New York law. The bill’s backers say this would speed up negotiations and reduce legal costs for governments in default, because it would reduce the incentive for private creditors to drag out debt talks or seek higher payouts through litigation.’

Then there is the problem of inflation that has continued to balloon in the wake of the pandemic, and the war in Ukraine creating strong supply-side bottlenecks, and apparently to a smaller extent due to the increase in purchasing power at the back of stimulus – mainly in rich countries – provided during the pandemic.

Yet, even so, wrongly the most emphasis by major central banks to respond to the inflation challenge has been through deeply relying on monetary austerity – a trend followed quite rigorously by many developing countries, including Pakistan, in an effort to compete for otherwise highly volatile foreign portfolio investment (FPI) — which has made highly active the imported- and cost-push inflationary channels by lack of focus to improve the supply-side, on one hand and, on the other, unjustifiably led to greater domestic and external debt burden, and also caused deeply lowering of economic growth rates in a number of countries.

Having said that, there has also been another major source of inflation, which has started to receive more attention by academics and policymakers, and that is the role of over-profiteering, or ‘greedflation’, whereby prices have been increased by sellers, by more than the contribution of inflation.

For instance, in her recent statement, President of the European Central Bank (ECB), Christine Lagarde pointed out in this regard: ‘The contribution of profit to inflation, which had gone a little bit missing, for a very simple reason, which has to do with the fact that we don’t have as much and as good data on profit as we do on wages.

I think that, you know, if I had the choice, I would like to improve our data on profit, on an aggregate basis as well as on a more granular basis to really fully understand and appreciate the transmission of the cost-push that was suffered by many corporate sectors into final prices.

…We have observed, late in [20]22 and certainly early in [20]23 that over the course of the year 2022 certain sectors in particular of the economy had taken advantage of, as you said, the mismatch between supply, constrained by bottlenecks, and demand, enhanced by recovery, and a situation of, everybody’s in the same position, we’re all going to increase prices, which can be concerted practice, which can be just market driven practice, and in those circumstances, those sectors have taken advantage to push costs through entirely without squeezing on margins, and for some of them to push prices higher than just the cost push that would have resulted from the imported inflation.

…I think that it is important that competition authorities could actually look at those behaviours, and I would certainly regard that as perfectly called for in order to fully understand and appreciate the legitimacy of some practices, or the concerted practices if they apply.’

With regard to inflation, one of the main dissenting voices to routine mantra of raising interest rates as the main tools to check inflation, noted economist, Isabella Weber, called for strategic price controls, instead of over-fixation with monetary tightening, especially during extraordinary times, like the current situation of polycrisis, including aggregate supply shock, and apparently deep over-profiteering.

In a June 06, 2023 ‘The New Yorker’ published article ‘What if we’re thinking inflation all wrong?’ pointed out: ‘But Weber’s argument was carefully grounded in history. Price controls, she argued, had been an essential element of the U.S. mobilization strategy during the Second World War.

And there were several striking similarities between the economy of the nineteen-forties and that of the present day, including very high consumer demand for goods, record corporate profits, and production bottlenecks in important areas. …The solution pressed by Summers and like-minded thinkers was to induce millions of layoffs.

By raising interest rates, the Fed could make borrowing more difficult for businesses, forcing many to cut costs by firing workers. …“It’s quite a painful way to bring inflation down,” Weber told me.

This story didn’t sell with her, and she began to find data points that contradicted it. …To Weber, people like Summers were looking at the situation from the wrong side.

The focus ought to be on sellers, not buyers. The pandemic had upended global supply chains, making it harder for corporations to acquire the stuff they needed to make their products. This should have squeezed their profit margins. Instead, as the economy began opening up, corporate profits were wildly outpacing growth in consumer spending power.’

Similarly, in Pakistan, there is lack of data on profits, whereby especially in the wake of the pandemic, and global aggregate supply shock, there strongly appears to be a significant role of over-profiteering in price determination; perhaps at all stages of the production, up to the point of retail, and with particularly high proportion of over-profiteering coming from the middle-men.

This requires a better focus by, for instance, Pakistan Bureau of Statistics, and by the Competition Commission of Pakistan in terms of checking these over-profiteering practices, and in improving the data gathering exercise to better understand calculation of profit.

For a more dedicated effort, it may also make sense that the government formulates a ‘Price Commission’ which not only checks how profits are calculated across sectors, and also the overall underlying mechanism of reaching prices, and not just prices of goods, but also of prices of labour, or wages, or incomes.

On the basis of the work of this Commission, and also given the high importance of commodities for the economy, it makes a lot of sense to introduce ‘strategic price controls’ like, for instance, China did during its formative years on the economic front during the 1980s.

Copyright Business Recorder, 2023