Huge global economic policy challenges

‘The world is facing numerous extreme, interlinked challenges, including a climate emergency and growing economic inequalities between and within countries. Tackling these problems requires funds to flow in the right direction, towards reducing carbon emissions, supporting education, health and other essential services and overhauling global infrastructure.

All of this will, in turn, require massive increases in public spending.’ – An excerpt from a recent Economist published article ‘Finding the money to fix the world requires a rethink on tax, says Jayati Ghosh’ by noted economist, and co-chair of ‘Independent Tax Commission’, Jayati Ghosh.

Global challenges, from existential threats, like climate change, and Pandemicene phenomenon, and macroeconomic issues, for instance, debt distress, and inflation have continued to deepen cracks in the neoliberal, austerity-based, procyclical policy framework that mainly govern the global policy framework for the last four decades or so.

Four aspects of challenges, among possibly others, need urgent policy attention, which are mainstream economic philosophical underpinnings, economic institutional quality, meaningful debt relief and restructuring framework, and adequate level of finance.

Mainstream underpinnings of global economic philosophy for the last four decades or so, as witnessed through a policy unravelling over the course of this time, for instance, by the World Health Organization (WHO) and the Bretton Woods institutions such as the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO) have revolved around Neoliberalism.

Under this philosophy, a lot of emphasis has been given on market fundamentalism, lesser regulation, and smaller governments. Here, the role of governments has been mostly reduced to market fixers.

Hence, this approach over time has left the world too unprepared, mainly in terms of resilient economies, to appropriately deal with existential threats, and to allow for more far-sighted public policy to avoid reaching unsustainable debt levels in the face of shocks like the Covid pandemic.

Plus, over-individualism both at the level of individual people favouring public policy choices that served narrow, and apparently frequently short-term interests of demos, and also at the multilateral level where greater inward looking attitude of major countries in terms influence over policy matters has strongly exhibited a rather weak sense of response to major global issues in general – for instance vaccine nationalism – and in terms of rich countries mostly with significant carbon footprint showing a lukewarm attitude to coming true on climate finance pledges.

Rather than fixing these Neoliberal policy inclinations, macroeconomic consequences of neoliberal policies, for instance, inflation, where weak supply chains under limited regulation is not fixed as such, and more emphasis is placed on squeezing the aggregate demand side through throwing weight behind monetary-, and fiscal austerity policies.

Instead of resolving macroeconomic issues, inflation, and debt sustainability score card has continued to worsen for individual countries. Here, lack of multilateral spirit has also meant insufficient finances.

Foremost, fixing these philosophical underpinnings requires doing away with Neoliberalism, and within it austerity policies, which are being adopted in a procyclical way that further perpetuates the problem of stagflation, causes greater unemployment, brings greater inequality, and poverty. This needs to be reversed, and quickly given the fast-unfolding existential threats.

A second Bretton Woods moment needs to be invoked, where the philosophical shift needs to be made towards non-neoliberal, non-austerity, counter-cyclical policies.

Moreover, such a shift will also allow moving towards much more improved economic institutional quality in individual countries as the mantra of government is the problem is replaced with moving towards an ‘entrepreneurial state’. More balanced individualism, and appropriately regulated markets will give the correct signals, incentivization, and protection of interests of public at large, reducing in turn inequality and poverty.

Rollback of austerity policies and a more collaborative approach will allow managing public debt more appropriately, and in channelizing finance more meaningfully to support making economies more resilient, and in inducing greater greener investments.

Jayati Ghosh, in her same article, for instance, pointed towards better tax policies to create greater fiscal space: ‘But the current international economic and financial architecture—from the structure and goals of multilateral lenders to the regulation of financial flows — is inadequate and even obstructive.

World leaders will meet in Paris next week to discuss ways to fix this architecture. But already the level of ambition seems to be low; all that may result is yet another ineffective talking-shop. Yet two obvious strategies to increase public resources across the world are available: ending tax avoidance by multinational companies and taxing extreme wealth.’

Moreover, the ‘New York Taxpayer and International Debt Crises Prevention Act’ also needs to be adopted by legislature to greatly improve upon the current debt restructuring framework on a much-needed basis.

A recent article ‘Ambitious N.Y. bill takes aim at global debt woes’ pointed out in this regard: ‘A bill quietly making its way through the New York state legislature could upend the world of sovereign debt investing. …It would require private sector creditors holding New York-law bonds… to accept the same losses on their holdings that “official sector” creditors… agree to take in a restructuring.… [Currently] There’s no bankruptcy regime for sovereigns. Therefore, when a country’s debt reaches unsustainable levels, the only option for relief is to undergo what’s known as a debt restructuring process.

That entails negotiations with creditors about reducing the amount of money that will ultimately be paid back. …The bill aims to simplify that process, by imposing a cramdown on all New York-law creditors. That would put an end to “the US government bailing out the private sector,” says Eric LeCompte of Jubilee USA, a nonprofit that advocates for debt relief for developing countries.

He’s referring to the fact that private creditors, on average, recover an estimated 20 cents on the dollar more than official sector creditors in sovereign restructurings. It would also weaken the hand of “predatory vulture funds” that buy the debt at a discount and demand outsized payouts, he says.’

Highlighting the immense need for finance to support countries in a world faced with ‘polycrisis’, and the challenges at hand in this regard, new president of World Bank, Ajay Banga pointed out in his recent interview on CNN with Fareed Zakaria as follows: ‘I think the estimates in climate change in the emerging markets alone are trillions of dollars, let alone in the rest of the world.

Clearly, government money, philanthropy, MDB money, people like the Bank, we cannot add up to those numbers, although there is an exercise underway in the Bank, as part of the evolution agenda to see what we can do with our current balance sheet to literally extract more from it. And then there is a lot of interest in governments, and philanthropies to add to that corpus over time. But I think that still doesn’t do it. We are talking tens of billions, if not trillions in this effort. So, the only way Fareed is to find a way to get the private sector to believe that this is part of their future.’

Here, while it is important that private sector involvement is indeed important; in addition to support from bilateral development partners, the role of enhanced allocation of IMF’s special drawing rights (SDRs), including yearly provision of climate related SDR allocation to highly climate vulnerable countries, also need to be mobilized.

Also, moving away from austerity policies will allow greater economic growth, with larger domestic resource mobilization, and along with lesser external- and domestic interest payments as a consequence will both enhance the fiscal space at hand with individual countries, will more effectively allow lowering of inflation – with positive consequences for purchasing power of government, investors, and consumers – and will help lower inequality and poverty; along with strengthening the democratic process.

Moreover, while the enthusiasm of the current president of the World Bank is appreciated, his work in indeed cut out, since in addition to enhancing the lending space of the Bank, he will also have to actively look towards another issue as well, and which is that there has been a reported lack of focus by the Bank in terms of climate change related projects, whereby a recent Financial Times published article ‘Hundreds of World Bank climate projects have no direct connection to climate, research finds’ pointed out: ‘Several hundred World Bank-backed projects with the stated aim of tackling climate change have no obvious connection to climate mitigation, a US report finds, questioning its spending figures over two decades.

Researchers at the Center for Global Development think-tank and the Breakthrough Institute environmental research centre examined more than 2,500 projects in the World Bank climate portfolio listed between 2000 and 2022. They found that “hundreds” of the projects “appear to have little to do with climate change mitigation or adaptation”.’

Copyright Business Recorder, 2023