Eve is here. Major international organizations try to give economic forecasts a positive spin, even if it is not rosy. Mr Jomo said fiscally-obsessed monetary tightening policies in developed countries were making this bad situation even worse, and a bleak new IMF report further confirmed his warnings of an impending economic crisis for poorer countries. is drawing.
By Jomo Kwame Sundaram, former United Nations Assistant Secretary-General for Economic Development. It was first published in Jomo’s website
The IMF has warned that in 10 years’ time, the poorest countries will be at their worst, with “low growth” and “popular discontent”. But, like the inaction in Gaza, little is being done multilaterally to avert an impending catastrophe.
IMF grim prognosis
International Monetary Fund (IMF) Managing Director Kristalina Georgieva issued the stark warning ahead of the Bretton Woods institutions’ spring meetings held last month, noting that the global economy has lost $3.3 trillion since 2020. did.
Instead of prioritizing economic recovery, finance ministers and central bank governors in Washington agreed to continue policies that worsened the situation. After all, controlling inflation helps preserve the value of financial assets.
Current policies to suppress demand are justified as necessary for financial stability. They have done nothing to address the various “supply-side disruptions” that are primarily responsible for ongoing inflationary pressures.
These include “new geopolitics,” the COVID-19 pandemic, war, illegal unilateral sanctions, and market manipulation. Ostensibly anti-inflation measures thus exacerbate the pressures that perpetuate the recession.
A brave new world!
The new Cold War and other geopolitical considerations of the past decade have increasingly shaped economic and financial policies around the world. Powerful states have weaponized their formulation, implementation, and enforcement.
Years of economic stagnation have reduced production capacity and competitiveness. On the other hand, recent geopolitics has changed geo-economic relations, hegemony and its discontents. Laws, regulations and judicial procedures are increasingly introduced for political and economic gain.
Western governments have thus created inflationary pressures through their economic and geopolitical policies, even if inadvertently. Perceptions of strategic decline are primarily due to policies being pursued on an ostensibly market basis.
The European Central Bank is following the US Federal Reserve’s interest rate hikes starting in 2022. Both still maintain high interest rates, ostensibly to curb inflation. Naturally, monetary authorities in most developing countries have had to raise interest rates to reduce capital flight and increase exchange rates.
These interest rate hikes by central banks raise the cost of funds, putting pressure on both consumption and investment. Although interest rate hikes proved to be overt and limited, more appropriate measures curbed inflation more effectively.
Instead of curbing inflation due to supply disruptions, higher interest rates squeezed both investment and consumer spending by both the private sector and the government. These cuts are hurting demand, employment and incomes around the world.
Although global interest rate increases have been tapering, other U.S. macroeconomic policies since the 2008 global financial crisis have kept the world’s largest economy at full employment, and most other countries Only limited profits were obtained.
The hands of the rulers are tied
Many developing country governments borrowed heavily in the late 1970s, primarily from Western commercial banks. However, after the US Federal Reserve significantly raised interest rates starting in 1979, a severe sovereign debt crisis paralyzed many heavily indebted governments in Latin America and Africa for at least a decade.
Over the decade to 2022, government borrowing from bond markets increased, exposing many developing countries to debt stress. The situation could be even worse than it was in the 1980s, as debt levels rise and creditors become more diverse.
Debt resolution is much more difficult because the debt exposure is much higher, it is more market-based, and there is less borrowing from banks. Many governments also guarantee the loans of state-owned enterprises, and some governments also provide guarantees to closely connected private companies.
On the other hand, policy makers in today’s developing countries are more constrained by their own national contexts. They are susceptible to market fluctuations, have fewer macroeconomic policy tools available, and face market pressures and cyclical policy biases from supporting institutions.
In addition to financial market pressures for austerity, multilateral financial institutions such as the IMF are imposing such conditions on countries seeking emergency loans and other debt relief.
All of this has led to significant cuts in government spending, especially public investment, which is essential for the recovery of the real economy. The government therefore commits not to spend such counter-cyclical spending, even though it is urgently needed.
Voluntary vulnerability?
A central bank’s independence usually means that it is more sensitive to market pressures and private financial interests than to national or government policy priorities.
Central bank independence and autonomous fiscal policy authorities have disarmed developing country governments in the face of greater external vulnerability, instead of strengthening national capacities and potential.
This toxic combination may leave weak governments in a long-term debt burden that they may be unable to escape from, let alone give them room to create new conditions for growth.
Economic liberalization and globalization have brought about irreversible changes in the economies of developing countries, with lasting effects. Export opportunities are further limited, especially due to the weaponization of economic policy.
Meanwhile, most developing countries rely on private creditors despite rising interest rates and borrowing costs. However, with the US Federal Reserve’s sharp interest rate hikes, even private market lending to the poorest countries will dry up after 2022.
Rising Fed interest rates caused financial institutions to abandon developing countries for the “safety” of the US market. As debt servicing costs soar, distress risks are rising rapidly.
As a result, many economies in the Global South were barely growing, especially after the initial collapse in commodity prices, which then worsened further as initial investment increased supply and demand fell.
