Inequality, poverty, and austerity — II

Unfortunately, both the IMF and individual countries practicing these, in or outside of the IMF programme, are not learning from this experience of over-board implementation of monetary- and fiscal austerity policies.

In fact, practice of the over-board monetary austerity policies in particular in rich, advanced countries especially in the wake of fast unfolding of climate change crisis in recent years, recession-causing pandemic, global supply shock (accentuated by the war in Ukraine) and reversal of otherwise falling trend in poverty, and sharp rise in inequality with negative consequences for democracy in terms of rising political instability, and in the rise of parties thriving on politics of hate and division has considerably increased already difficult external- and domestic servicing situation of developing countries.

Inequality, poverty, and austerity–I

It is, in turn, having a diminishing effect on their foreign exchange reserves. This has dwindled both their capacity to borrow from international capital markets, weakened their position in terms of attracting both foreign — direct and portfolio investments, and has increased the level of imported inflation and, in turn, cost-push inflation in developing countries in general, and especially in those which are net importers of oil such as Pakistan.

Yet, austerity policies continue to be pursued with great vigour in policy prescription in developed - and developing countries like Pakistan, with particular damaging effect on the latter, due to the traditionally at least half of inflation determinacy coming from supply-side factors due to underlying significant informal economy, and lack of financialization in the economy, not to mention the ever so higher impact of these factors in the wake of global supply shock.

Hence, countries like Pakistan are stuck in a vicious monetary austerity policies cycle, whereby inflation is significantly increased by higher policy rate due to lack of disentangling of supply-side bottlenecks, which are also not focused properly due to fiscal austerity not allowing making needed development expenditures.

Instead, growth sacrifice policy is (wrongly) adopted as the main way to decrease inflation, whereby aggregate demand is squeezed on the premise that money supply has increased in the economy.

Notwithstanding the fact that inflation is significantly caused by supply-side and governance-related factors both traditionally, and particularly all the more in the current situation of global supply shock and strongly apparent over-profiteering tendencies – domestically and internationally – yet the same argument is being made in developing countries, including Pakistan, in general, whereby monetary- and fiscal austerity is being prescribed.

Here, increase in money supply, in the case of Pakistan for instance, has been due to significant increase in government borrowing, especially since the pandemic, mostly for domestic debt servicing, in providing some level of fiscal stimulus/welfare spending in the wake of the pandemic, and even just to meet current expenditures that have increased in the wake of rising inflation at the back of mainly imported- and cost-push inflation from (wrongly) over-board monetary tightening abroad by major central banks, and by global supply shock.

Hence, real effect of increased current (or non-developmental) expenditures in generating new demand may in fact not be positive even if old levels may not be maintained at all, while reduced development spending both due to discretionary fiscal austerity policy, but also because high cost-push inflation also diminishing the capacity of development expenditures of even previous levels.

Moreover, money supply increase’s major chunk does not go into any broad-based transmission into consumer spending in the economy, because interest earned by banks has both little potential for private lending in the wake of very high interest rates, and sky-rocketing cost-push inflation, and also because of high banking spread bringing relatively lesser returns.

Also, a sharp rise in windfall profits for certain sectors during the pandemic, overall high level of income and wealth inequality, lack of pre- and post-distributive policies, high level of inflation and reduced development expenditures dimming possibilities of public-private partnerships – not to mention traditionally low level of economic institutional quality, and weak market fundamentals, especially in terms of transaction costs –are the factors resulting in money supply ending up mostly in a few hands who under weak investment attracting policies and high financial returns, do not mostly end up translating that money supply into demand for goods and services in the real sector.

Hence, real wages have not increased; rather unemployment, poverty, and inequality have been increasing with negative consequences for not only economic growth (IMF in its July 2023 report on Pakistan, for instance, indicated estimated growth rate for FY2022-23 at negative 0.5 percent, which means that unlike a weak growth estimation by government at 0.3 percent, economy may in fact have contracted) but also the capacity to repay external debt due to likely negative outfall on exports with likely wider negative consequences for foreign exchange reserves build-up and greater imported inflation outcomes.

It is, therefore, important that austerity policies are reversed at the earliest possible, domestically and internationally, given the fact that reduced fiscal space, and diminishing growth outcomes, especially for developing countries and the high cost of borrowing, makes it difficult to move towards climate resilient economies with much stronger public health sectors to deal with the Pandemicene phenomenon; not to mention the difficulty these policies encounter in terms of making needed welfare spending.

Here, rich, advanced countries and multilateral institutions also need to see that by lack of provision of needed climate finance in general, and also through enhanced allocation of IMF’s special drawing rights (SDRs) with more appropriate allocation formula and IMF also suspending its surcharge policy – whereby fine is charged on late repayments on loans – developing countries, especially those that are highly vulnerable to climate change crisis, such as Pakistan, will be under more pressure to pursue austerity policies.

In this regard, it is also important that greater debt relief is provided to developing countries, where the recently announced debt pause clause by World Bank for countries affected by climate disasters is indeed but a lot more debt relief effort is needed, especially in terms of bringing in an appropriate debt restructuring framework, particularly with meaningful participating by multilateral institutions, and private lenders.

Here, the fast-tracked adoption of ‘New York Taxpayer and International Debt Crises Prevention Act’, which is currently under the legislative process, will also likely bring a lot of debt relief for developing countries.

With global heatwaves breaking daily temperature records quite frequently, and with fast-closing window to curtail global warming to below the significant threshold of 1.5C, not to mention increasing intensity and frequency of climate disasters, it is important that better policy understanding is brought to the fore by both individual countries, and by multilateral institutions, but also in much improved spirit of multilateralism, especially in terms of improving the global financial architecture in moving it away from neoliberal, and within it austerity policies to perhaps counter-cyclical, social democratic ones.

(Concluded)

Copyright Business Recorder, 2023