Important global economic challenges

Decades of neoliberal assault of advocating greater market fundamentalism, and lesser government regulation produced a global financial and economic order with serious resilience, and equity issues, which were glaringly exposed, firstly by the Global Financial Crisis of 2007-08, and then by the fast-unfolding existential threat of climate change crisis – at the back of much more frequent, and a lot more intense climate change caused disasters globally – and Covid pandemic.

Hence, during the pandemic, managing director (MD) of the International Monetary Fund (IMF), Kristalina Georgieva, brought to table the need for involving greater learning from factors other than the usual- macroeconomic stabilization, and growth enhancement variables into economic policy formulation like environmental, and epidemiology determinants for reaching sustainable, green, and inclusive growth.

There is still little reflection of such internalization into IMF programmes and policy prescription, that is yet to move away from neoliberal and austerity-based policy in any significant way.

Resultantly, the world, especially the developing countries, still remain a lot less resilient than they should be in a world that the head of the IMF recently indicated during the annual meetings of IMF and World Bank in Marrakesh, Morocco, was to continue to be faced with shocks.

An October 12, Guardian published article ‘Shocks are new normal for weakened global economy, says IMF head’ highlighted the comments of IMF’s MD that she made during the annual meetings in Marrakesh, as follows: ‘“Shocks are becoming the new normal for a world that has been weakened by weak growth and economic fragmentation,” she told the IMF’s annual meeting in Marrakech on Thursday.

Georgieva said the realisation that interest rates would need to stay higher for longer to ease cost of living pressures was “throwing more cold water on already anaemic growth”.

She added that there was no guarantee that the orderly adjustment of bond prices to a higher interest-rate environment would last: “A sharp further tightening of financial conditions could hit markets, could hit banks, and could hit non-banks.”’

The risk has indeed been highlighted by the IMF MD as a result of continued application of monetary austerity for economic growth, and financial stability.

This could mean a much bumpier road being laid in the way of bringing forth greater climate finance, and for making pro-poor spending, especially when the multilateral spirit has continued to remain weak in terms of debt relief, and IMF’s greater allocation of special drawing rights for instance.

Be that as it may, a recent article ‘Making the international financial system work’ in Project Syndicate (PS) co-authored by French minister of state for development, and Egypt’s minister of international cooperation seems to portray a rather over-joyed sense of accomplishment of multilateralism, which is misleading, given a serious lack of multilateral spirit as highlighted above.

Unlike what the article tries to highlight as achievements, is indeed shocking to say the least, since for instance, SDR allocation of $650 billion came not only around one-and-a-half year after the pandemic started, more than half of it went to already rich countries – since it followed the routine quota-based allocation criteria – not much overall was relocated since then; while numerous appeals to release a fresh allocation continue to remain unattended.

Also, there has been serious lack of any meaningful debt relief provided both bilaterally, or multilaterally, not to mention putting in place a sound mechanism for enabling countries to meaningfully restructure their private debt, proportion of which has significantly increased related to the bilateral/multilateral debt of country’s debt composition in general.

A recent report ‘Debt relief by multilateral lenders: why, how and how much?’ by Marina Zucker-Marques, Ulrich Volz and Kevin P. Gallagher, produced under a project titled ‘Debt Relief for a Green and Inclusive Recovery’ highlighted the lack of multilateral spirit by multilateral development banks (MDBs) for instance as ‘As the sovereign debt crisis in the Global South continues to unfold, the lack of involvement of multilateral development banks (MDBs) in debt relief efforts has become a contentious issue among major creditors.

Although the Group of 20 (G20) has explicitly called for MDBs to develop options to share the burden of debt relief efforts, MDBs have not presented any concrete and systemic plan thus far on how to contribute to debt relief efforts to countries applying for the G20 Common Framework.

Combined with other points of dispute, the ongoing negotiations within the Common Framework have yielded disappointing results with little to no substantial debt relief provided despite protracted discussions.’

The Report proposed ‘[1] …Donor countries should contribute to a new round of debt relief through funds like the Debt Relief Trust Fund, which pools resources from donors and international financial institutions, and consider making debt relief a regular component of concessional finance policies, with a dedicated portion of funding in each IDA replenishment specifically allocated to debt relief efforts.

2- Explore avenues for increasing the equity of MDBs so that precautionary balances could be freed up and used partially for debt relief efforts without negatively impacting the institutions’ credit ratings.

3- While politically challenging, a well-designed IFTT [international financial transaction tax] on various financial transactions could generate substantial revenues, which could be directed toward MDBs to support debt relief and other development efforts. However, careful consideration is needed to avoid double taxation on private sector debt holders.’

IMF’s MD in her July 2023 Foreign Affairs (FA) article ‘The price of fragmentation’ raised serious concern that, on the one hand, there was a lack of readiness globally in the face of polycrisis it faced, and a shock-prone future, and on the other a lacking level of cooperation among countries.

She pointed out in this regard: ‘We are living through turbulent times, in a world that has become richer but also more fragile.

Russia’s war in Ukraine has painfully demonstrated that we cannot take peace for granted. A deadly pandemic and climate disasters remind us how brittle life is against the force of nature. Major technological transformations such as artificial intelligence hold promise for future growth but also carry significant risks.

Collaboration among nations is critical in a more uncertain and shock-prone world. Yet international cooperation is in retreat.

In its place, the world is witnessing the rise of fragmentation: a process that begins with increasing barriers to trade and investment and, in its extreme form, ends with countries’ breaking into rival economic blocs – an outcome that risks reversing the transformative gains that global economic integration has produced.’

While her concerns are indeed warranted, whereby greater cooperation is needed, her analysis, like by many in multilateral institutions in general, along with ‘Chicago boys’-styled policymakers, is flawed since it does not realize the negative consequences of Neoliberalism, and austerity policies that formed the framework of the so-called liberal economic, financial, and trade order that led to increasing level of income, and wealth inequality within countries, and significantly contributing lack of debt sustainability, on one hand, and low fiscal space for making needed development, and welfare spending, especially in developing countries.

Copyright Business Recorder, 2023