Tag: Anis Chowdhury

Rage, Ignorance and Prejudice — Global Issues

  • Opinion by Anis Chowdhury (sydney)
  • Inter Press Service

SYDNEY, Aug 22 (IPS) – Qur’an burning has become a symbol of intolerance and “Islamophobia”, especially in some Western countries. Following the public burning of a Quran in front of Stockholm’s largest mosque on June 28 during the Islamic Eid al-Adha festival, a copy of the Qur’an was set on fire in the Danish capital on 24 July. Naturally, these events provoked protests from Muslims all over the world, including in Sweden and Denmark. The Swedish Prime Minister Ulf Kristersson is “extremely worried” that such protests could result in more burning of the Quran – thus creating a vicious circle – as the Swedish police received a large number of applications for anti-Islam protests.

Anis ChowdhuryMuslim rage
Burning a copy of the Qur’an itself is not what angers the Muslims. In fact, burning is one of the preferred options for disposing damaged or unusable copies respectfully.

The Muslim anger is due to the disrespect and desecration of the Devine Book which have become a mainstay of far-right extremists in the West.

The Qur’an haters demonstrate their disregard for the Book by throwing it to the ground, sometimes wrapped in bacon or soaked in alcohol – both prohibited in Islam –ripped it apart and spit on copies of the Quran, and dragged it around on a leash like a dog before burning. Some called it “The Whore Book” and “Shit Book”, and told people to urinate on it.

They also insult and ridicule Prophet Muhammed. Besides publishing his caricature cartoons, some called Prophet Muhammad a paedophile murderer.

Far right ignorance
The Qur’an is the only source that confirms the previous Scriptures – the Torah and the Gospel; “…this divine writ , setting forth the truth which confirms whatever there still remains ” (3:3). The Qur’an is “… bestowed … in confirmation of whatever you already possess” (4:27).

It is only in the Qur’an where we find unblemished stories of the past prophets and messengers. It purges the perverse narrations, for example, about two daughters of Prophet Lot, or of a sinner female prostitute some describing her as Christ’s wife.

The Qur’an devotes one full chapter to categorically establish Mary’s chastity and virgin birth of Jesus by God’s will. It honours Mary: “O Mary! Behold, God has elected you and made you pure, and raised you above all the women of the world” (3:42).

The Qur’an also devotes one full chapter on Prophet Joseph to establish Joseph’s righteousness and upright character even when Potiphar’s wife attempted to seduce him.

Western prejudice
Contrary to the common belief that the Qur’an promotes violence and intolerance, the Qur’an declares sanctity of life: “do not take any human being’s life, which God has declared to be sacred other than in justice” (6:151; 17:33; 25:67). Therefore, “if anyone slays a human being …it shall be as though he had slain all mankind; whereas, if anyone saves a life, it shall be as though he had saved the lives of all mankind” (5:32).

The Qur’an promotes tolerance: “O men! Behold, We have created you all out of a male and a female, and have made you into nations and tribes, so that you might come to know one another” (49:13). It commands believers: “Do not insult those they call upon besides God, lest they insult God out of hostility and ignorance” (6:108); and to declare, “… we make no distinction between any of them ” (2:136, 2: 285, 3:84, 4:152).

The Qur’an guarantees freedom of religion: “Unto every one of you have We appointed a law and way of life. And if God had so willed, He could surely have made you all one single community: but in order to test you … Vie, then, with one another in doing good works!” (5:48). The Qur’an declares sanctity of “monasteries and churches and synagogues and mosques … – would surely have been destroyed” (22:40).

The Qur’an prohibits female infanticides (81:8-9) and establishes the human dignity of women (17:70), including their rights to own properties, earn income and alimony (2:231, 2:233, 2:240, 2:241).

The Qur’an is a Guidance for mankind. The Qur’an opens by referring to God as the Lord of all creations (1:1) and concludes by calling God as the Lord of mankind (114:1). Nowhere it refers to God as exclusive to Muslims.

A Book for pondering
The Qur’an says, “there are messages indeed for people who think!” (13:3; repeated 20 times). This is a Book for those who have knowledge; who understand (38:29). Thus, the Qur’an was revealed with the first verse commanding, “Read in the name of your Sustainer; … Read – for your Sustainer is the Most Bountiful One; who has taught the use of the pen; taught man what he did not know” (96:1).

Therefore, burning the Qur’an is a foolish act. Only the fools are oblivious of what is lost if the Qur’an is vanished as they wish. Thus, the only way to avert the risk of violence spiralling as the Swedish PM feared is to create awareness about the Qur’an. The State must bear the responsibility to educate and prevent spreading of misinformation, hate and prejudice.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2023) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Reserve Bank of Australia Review Fails Ordinary Australians — Global Issues

  • Opinion by Anis Chowdhury (sydney)
  • Inter Press Service

SYDNEY, May 15 (IPS) – The Reserve Bank of Australia (RBA)’s latest interest rate hike comes before the ink of the much-awaited review of the RBA, released on 20 April, has dried. The threat of more increases to come is a clear sign of an emboldened RBA as the government accepts all of the panel’s utterly disappointing 51 recommendations.

Anis ChowdhuryRBA Review
The Treasurer, Hon Dr Jim Chalmers, announced the Review in July 2022, designed to ensure that Australia’s monetary policy arrangements and the operations of the RBA continue to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape.

The recommendations of the three-person panel, charged with reviewing the structure, governance, and effectiveness of the RBA, range from creating a separate board to make decisions on interest rates, to giving the Bank a simpler dual mandate to pursue both price stability and full employment.

Utter disappointment
The Review report fails to question the long-held taboos about inflation and Central Bank’s role in a social democracy. While the Review panel leaves the RBA’s 2-3% inflation target unchanged, it outrageously recommends dropping from the RBA’s mandate “economic prosperity and welfare of the people of Australia” and the removal of government’s power to intervene in the RBA’s decisions.

This will make the RBA more inflation hawkish, and more aggressive in its use of the blunt interest rate tool without much regard for the consequences on jobs, especially when the RBA’s full employment mandate is left vague.

Without the power to intervene in the RBA’s decisions, such hawkish interest rate hikes will force the government to cut its expenditure as it has to pay more on interest for its debts while its tax revenue shrinks when the economy slows.

Thus, the well-being of ordinary citizens, especially those who will lose jobs, will worsen as the government struggles to find money for targeted budget support. No wonder the Treasurer termed the latest RBA interest rate decision as “Pretty brutal”.

Voodoo of 2-3% inflation target
In accepting the RBA’s current 2-3% inflation target, the Review panel ignores the fact that the 2-3% inflation target has become a “global economic gospel” without any empirical or theoretical basis.

The 2-3% target was plucked out of the air and it became a universal mantra after a chance remark by the then Finance Minister of New Zealand in a television interview followed by relentless preaching.

The recommendation ignores the changed circumstance since the 2-3% inflation target was first adopted. In the wake of the 2008-2009 Global Financial Crisis, many, including the then IMF’s Chief Economist, Olivier Blanchard suggested a 4% inflation target would be more appropriate.

The inflation-unemployment trade-off relationship (i.e., the Phillips curve) has become flatter over the years due to labour market deregulations, off-shoring and other developments. This means trying to dogmatically achieve such a low inflation target would require a much higher unemployment rate as recognised by the former Fed Chair and current US Treasury Secretary Janet Yellen. That is, the interest rate must rise more steeply inflicting serious damages to the business finances, household spending and government budget.

Full employment, a poor cousin
The Review panel recommends “full employment” mandate along with inflation target. However, while the inflation target has a numerical figure (2-3%), there is no such specific target mentioned for unemployment that may be consistent with the concept of full employment. When asked during a press conference, the Treasurer said, “It’s a contested concept”.

The report mentions full employment 100 times! But does not say what it means; instead, the panel accepts the current RBA’s definition and measure of full employment based on a contestable concept of a “non-accelerating inflation rate of unemployment” (NAIRU). That is, full employment is consistent with an unemployment rate below which inflation will accelerate.

There is general consensus that models based on NAIRU are basically wrong. An article in the RBA Bulletin acknowledged, “Model estimates of the NAIRU are highly uncertain and can change quite a bit as new data become available”. Thus, James Galbraith argued for ditching the NAIRU. And an op-ed in The Financial Times concluded, “The sooner NAIRU is buried and forgotten, the better”.

Social democracy sacrificed
The panel thinks, there are too many factors that affect prosperity and welfare. So, it recommends removal of the RBA’s third mandate “economic prosperity and welfare of the people of Australia”, enshrined in the 1959 RBA Act.

Furthermore, the panel seeks to remove the government’s ability to overrule an RBA decision because it “undermines the independent operation of monetary policy”.

With these recommendations implemented, the RBA will not be bound to the commitment to build a fairer society, although economic prosperity and people’s welfare can remain as an “overarching purpose”.

The Winner
A super independent RBA will have all the power it needs to use its sole weapon, interest rate rises, to keep inflation at 2-3%. The emboldened RBA will declare the consequences to its actions on the job markets as consistent with a vaguely defined full employment, and economic prosperity and welfare of the people.

It can simply assert that job and income losses are short-term pains for long-term gains, without having to provide any evidence. There are no such things as short-term pains.

For many, job loss may cause permanent damages to their mental health, self-esteem and social life often leading to suicides. IMF research shows that the scarring effects of recessions can be permanent.

Thus, the clear winner of the recommended reforms, is the RBA, not the ordinary people struggling to find decent jobs to enable them to put a roof over their heads and two square meals on their tables.

Meanwhile, the RBA’s ideological anti-inflationary fight with a blunt interest rate tool benefits the big four banks. They are “tipped to rake in record $33 billion” in profits from rising interest rates when everyday Aussies and small businesses battle rising bankruptcies and job losses.

Anis Chowdhury is Adjunct Professor, School of Business, Western Sydney University. He held senior United Nations positions in the area of Economic and Social Affairs in New York and Bangkok.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2023) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Australia Leads Against Large Multinational Corporations Tax Dodging — Global Issues

  • Opinion by Anis Chowdhury, Kate Lappin (melbourne and sydney)
  • Inter Press Service

MELBOURNE and SYDNEY, Feb 06 (IPS) – Australia is set to become the first country or jurisdiction to require large multinational corporations (MNCs), with a global consolidated income of at least AU$1 billion, to publicly report country-by-country (CbC) tax information. The new Labor Government announced on 25 October, 2022 in its budget paper that MNC’s public CbC tax reporting will begin from 1 July, 2023. Australia’s public CbC reporting rules will apply to all companies headquartered in Australia and companies headquartered elsewhere with sufficient nexus in the country.

Kate Lappin

The announcement received very little media attention, perhaps overlooked as a technical amendment. Yet public CbC reporting could be a vital weapon in the fight against corporate tax avoidance in Australia and, more importantly, in low-income and highly indebted countries that lose even greater proportions of public revenue to tax havens.

All countries in the Organisation for Economic Cooperation and Development (OECD), including Australia and the US, have required large MNCs to privately report CbC tax data under Action 13 of the OECD/G20 project against Base Erosion and Profit Shifting (BEPS). In November 2022, the European Parliament approved a directive to mandate public CbC reporting for large MNCs within the bloc, with a range of limitations discussed below, from 22 June, 2024.

The Australian move comes a month before a new push at the United Nations to convene a global tax body to set international taxation standards, after years of faltering efforts among the world’s richest countries at the OECD.

Losing billions

The Paradise Papers and the Luxembourg Leaks of the International Consortium of Investigative Journalism (ICIJ) shed light on tax manoeuvres of more than 100 MNCs. Apple alone shifted profits around the world to accumulate US$252 billion offshore. A 2021 ICIJ study revealed that, in one year alone, MNCs shifted US$1 trillion offshore, depriving governments of hundreds of billions in revenue.

Anis Chowdhury

Corporate profit shifting, as the practice is called, to dodge tax, costs countries US$500 billion to US$650 billion in lost tax revenue annually, according to a report by a high-level United Nations panel, published in 2021.

Research by the Centre for International Corporate Tax Accountability and Research uncovered tax dodging by MNCs that bled money from public services and workers including in scandal ridden aged care homes in Australia. It exposed how Microsoft receives billions in outsourced government IT Contracts, while lodging over AU$2billion in profits via its Bermuda based subsidiaries where it pays little tax.

Almost 800 large corporations paid no tax in 2020-21, Australian Taxation Office report reveals. The country loses about AU$8 billion a year due to MNCs profit-shifting.

Poor countries bleed most

The 2021 ICIJ study finds African countries the most “vulnerable” to profit-shifting. In 2017, the Tax Justice Network found that low-income countries were the biggest victims of profit shifting.

In some countries such as Zambia and Argentina, losses exceeded 4% of GDP. In Pakistan the losses due to profit shifting were 40% of total tax revenues, and in Chad, the estimated losses were larger than all taxes collected (106.2% of total tax revenue)!

The State of Tax Justice 2021 finds that low-income countries collectively lose the equivalent of 48% of their public health budgets.

Low-income countries rely more heavily on corporate income tax for the revenue required to fund cash-starved public services, making corporate tax transparency vital in addressing global poverty and inequality.

Rich countries serving corporate interests

International taxation rules have been designed by rich nations, especially by their club, OECD. Tax justice activists, such as the African Tax Administration Forum allege that developing countries are “not at the table” at the OECD, but on the menu, with OECD rules designed to allow multinationals to continue to extract profits in the global south, without making fair contributions.

The OECD’s standards for MNCs tax reporting are riddled with loopholes. As Oxfam points out, the OECD rules do not allow people in low-countries to have access to information about MNCs’ profit made or tax paid in their countries and nor do most tax authorities in low-income countries.

Similarly, the European Union’s CbC reporting is seriously watered-down. Tax transparency is only required for the 27 EU member states and the 21 black-listed or grey-listed jurisdictions on their flawed list of tax havens. Oxfam points out this means secrecy is retained for more than 75% of the world’s nearly 200 countries. The EU also provide a “corporate-get-out-clause” for “commercially sensitive information” for 5 years; and limit reporting to companies with consolidated turnover above EUR 750 million, excluding 85 – 90% of MNCs.

Unions’ play a critical role

The Labour movement has taken on the fight to end corporate tax avoidance. Labour’s share in GDP has been declining since the early 1970s in advanced countries and since the early 1980s in developing countries. Some unions have recognised that corporate tax avoidance erodes the public services workers need and undermines collective bargaining, while increasing corporate power.

The global union federation, Public Services International (PSI), co-ordinated union action to in support of public CbC reporting amongst other tax reforms. PSI joined the technical committee that drafted new Global Reporting Initiative (GRI) Tax Standards and worked with union pension funds to back the standards, which are now widely regarded as the best benchmark for corporate tax accountability.

In Australia PSI and affiliates exposed corporate tax avoidance in aged care, labour hire companies and corporations receiving large government contracts and worked with unions to shape the Labor party’s policy platform.

The announcement reflects one of the recommendations PSI and the International Trade Union Congress made to the Australian Treasury in its submission on Multinational Tax integrity and enhanced tax transparency.

Can Australia lead?

Since being elected in May 2022, the new Australian government has sought to improve its international standing by setting stronger climate targets, increasing engagement with Pacific Island countries and rebuilding capacities of the Department of Foreign Affairs and Trade. If the government can make good on its promise to implement the GRI standards and require public CbC reporting, it will have significantly contributed to the global public good and set a precedent for the EU and other countries to follow.

In addition to setting new tax transparencies standards, the Albanese Government should support the push by African countries for a truly inclusive UN tax convention – which could slash the scope for tax abuse by MNCs and wealthy individuals. Together, these contributions would deliver more to low-income countries than Australia’s entire development aid budget.

Kate Lappin is the Asia Pacific Regional Secretary for Public Services International (PSI), the Global Union Federation representing more than 30 million workers who deliver public services in 154 countries and territories. Kate headed the Asia Pacific forum on Women, Law and Development (APWLD) for eight years and has worked across labour, feminist and human rights movements for more than 20 years.

Anis Chowdhury is Adjunct Professor, Western Sydney University. He served as Director of Macroeconomic Policy & Development and Statistics Divisions of UN-ESCAP (Bangkok) and Chief, Financing for Development Office of UN-DESA (New York).

IPS UN Bureau

© Inter Press Service (2023) — All Rights ReservedOriginal source: Inter Press Service

Check out our Latest News and Follow us at Facebook

Original Source

The Year of Debt Distress and Damaging Development Trade-Off — Global Issues

  • Opinion by Anis Chowdhury (sydney)
  • Inter Press Service

SYDNEY, Jan 27 (IPS) – As the year 2022 drew to an end, the United Nations Conference on Trade and Development (UNCTAD) warned, “Developing countries face ‘impossible trade-off’ on debt”, that spiralling debt in low and middle-income countries (LMICs) has compromised their chances of sustainable development.

Anis ChowdhuryIn early December, an opinion piece in The New York Times headlined, “Defaults Loom as Poor Countries Face an Economic Storm”. And the World Bank’s International Debt Report highlighted rising debt-related risks for all developing economies—low- as well as middle-income economies.

Debt on the rise
Debt build-up accelerated in the wake of the 2008-2009 global financial crisis (GFC). The World Bank’s, Global Waves of Debt reveals that total (public & private; domestic & external) debt in emerging market and developing economies (EMDEs) reached an all-time high of around 170% of GDP ($55 trillion) – more than double the 2010 figure – by 2018, before the onset of the COVID-19 pandemic.

Total debt in low-income countries (LICs), after a steep fall from the peak of around 120% of GDP in the mid-1990s to around 48% ($137 billion) in 2010, increased to 67% of GDP ($270 billion) in 2018.

Pandemic debt
The COVID-19 pandemic greatly lengthened the list of EMDEs in debt distress as rich nations and institutions dominated by them, e.g., the World Bank, failed to provide any meaningful debt reliefs or increase financial support to adequately respond to the health and economic crises.

The World Bank’s chief economist advised, “First fight the war , then figure out how to pay for it”. The IMF’s managing director counselled, “Please spend, spend as much as you can. But keep the receipts”.

The World Bank’s International Debt Statistics 2022 reveals that the external debt stock of LMICs in 2021 rose to $9.3 trillion (an increase of 7.8% compared to 2020) – more than double a decade ago in 2010. For many countries, the increase was by double digit percentages.

Riskier debt
Over the past decade, the composition of debt has changed significantly, with the share of external debt owed to private creditors increasing sharply. At the end of 2021, LMICs owed 61% of their public and publicly guaranteed external debt to private creditors—an increase of 15 percentage points from 2010.

The private creditors charge higher interest rates, and offer little or no scope for restructuring or refinancing at favourable terms, as they maximise profit. The private creditors also usually offer credits for shorter duration, while development financing needs are for longer-terms.

Failed aid promises
Development needs of developing countries have increased many-folds, especially for meeting internationally agreed development goals, such as the Millennium Development Goals (MDGs) and now Sustainable Development Goals (SDGs). The LMICs’ estimated aggregate investment needs are $1.5–$2.7 trillion per year—equivalent to 4.5–8.2% of annual GDP— between 2015 and 2030 to just meet infrastructure-related SDGs. But the rich nations spectacularly failed to honour their promises of finance made at the 2015 UN conference on financing for development (FfD) in Addis Ababa.

In fact, they failed all their past aid promises, e.g., to provide 0.7% of their gross national income (GNI) as aid, a promise made over half a century ago. While aid hardly reached half the promised percentage of GNI, it in fact declined from the peak of around 0.55% of GNI in the early 1960s to around 0.34% in recent years. Oxfam estimated 50 years of unkept promises meant rich nations owed $5.7 trillion to poor countries by 2020!

At their 2005 Gleneagles Summit, G7 leaders pledged to double their aid by 2010, earmarking $50 billion yearly for Africa. But actual aid delivery has been woefully short. G7 and other rich OECD countries also broke their 2009 pledge to give $100 billion annually in climate finance until 2020.

Promoting private finance
Meanwhile institutions dominated by rich nations – the World Bank and OECD, in particular – promoted private financing of development. The World Bank, the IMF and multilateral regional development banks, e.g. Asian Development Bank jointly released From billions to trillions, just before the 2015 FfD conference.

The document optimistically but misleadingly advised governments to “de-risk” development projects for enticing trillions of dollars of private capital in public private partnerships (PPPs). While de-risking effectively meant governments bearing financial risks, or socialise private investors’ loss, PPPs are found to have dubious impacts on SDGs, especially poverty reduction and enhancing equity.

Meanwhile the OECD donors advocated “blended finance” (BF) to use aid money to leverage, again trillions of dollars of private capital. But as The Economist noted, BF is struggling to grow, stuck since 2014 “at about $20 billion a year…far off the goal of $100 billion set by the UN in 2015”, despite suspected double counting. Like PPPs, BF has effectively transferred risk from the private to the public sector. On average, the public sector has borne 57% of the costs of BF investments, including 73% in LICs.

Collateral damage
In the wake of the GFC the rich countries followed so-called unconventional monetary policies that kept interest rates exceptionally low – in some cases at zero – for a decade. This saw capital flowing from rich countries to EMDEs in search for higher returns, as exceptionally low interest rates enticed EMDE governments and businesses.

The opportunity to borrow at low rates also made the EMDE governments lazy in their domestic revenue mobilisation efforts. Such policy complacency was rewarded by the donor community, especially the World Bank, through its now discredited Doing Business Report, encouraging a harmful race to the bottom tax competition among countries to cut corporate and other direct taxations. The World Bank and IMF also advised to remove or lower easier to collect indirect taxes, e.g., excise duties in exchange for regressive and difficult to implement goods & services or value-added tax in poorer countries.

Bleeding revenues
Meanwhile transnational corporations (TNCs) continue to avoid and evade paying taxes using creating accounting, aided by tax havens, mostly situated in rich nations’ territories. Developing countries lost approximately $7.8 trillion in illicit financial flows from 2004 to 2013, mostly through TNCs’ transfer mispricing, or the fraudulent mis-invoicing of trade in cross-border tax-related transactions.

African countries received $161.6 billion in 2015, primarily through loans, personal remittances and aid. But, $203 billion was extracted, mainly through TNCs repatriating profits and illegally moving money out of the continent.

International tax rules are designed by the rich nations. They continue to oppose developing countries’ demand for an inclusive international tax regime under the auspices of the UN.

Perfect storm
Global supply-demand mis-matches due to the pandemic, the Ukraine war and sanctions are a perfect recipe for a perfect storm. The advanced countries’ inflation fight is causing adverse spill-over on developing countries.

Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, depreciating their currencies, besides lowering export earnings. Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s.

In October 2022, a United Nations Development Programme (UNDP) report estimated that 54 countries, accounting for more than half of the world’s poorest people, needed immediate debt relief to avoid even more extreme poverty and give them a chance of dealing with climate change.

Rich nations fail again
As pandemic debt distress became obvious, the G20 countries devised the so-called Debt Service Suspension Initiative (DSSI) for 75 poorest countries, supposedly to provide some modest relief between May and December 2020. DSSI does not cancel debt, but only delays re-payments, to be paid fully later with the interest cost accumulating – thus effectively “kicks the can down the road”. As the private lenders refused to join the G20’s initiative, unsurprisingly only 3 countries expressed interest in DSSI. Moreover, the G20 initiative does not address debt problems facing MICs, many of which also face debt servicing, including repayment issues.

Although the IMF acted innovatively at the start of the pandemic debt distress with debt service cancellation for 25 eligible LICs (estimated at $213.5 million), the World Bank’s Chief refused to supplement, let alone complement the IMF’s debt service cancellation for the most vulnerable LICs. Nonetheless, the Bank’s President hypocritically advocates debt relief as “critical”. He wants to have the cake and eat it too; apparently wanting to increase lending, but without sacrificing the institution’s AAA credit rating.

China debt trap diplomacy?
Meanwhile the rich nations accuse China of “debt trap diplomacy” that China is deliberately pushing loans to poorer countries for geopolitical and economic advantages. Less than 20% of LICs external debt is owed to China as against more than 50% to the commercial lenders.

Most Chinese loans are concessional, and China has provided more debt relief than any other country, bilaterally negotiating around $10.8 billion of relief since the onset of the pandemic.

Unsurprisingly, independent studies debunked the Western accusation. And China has emerged as a major source of development finance for poorer countries. A recent IMF study concluded, “Beijing’s foreign assistance has had a positive impact on economic and social outcomes in recipient countries”.

Damaging trade-off
Rising debt servicing in the face of higher import costs, falling export revenues and declining remittances, are forcing developing countries to a damaging trade-off. They are forced to service external debt owed to rich nations and international financiers at the cost of development.

For many African nations, the increased cost of debt repayments is the equivalent of public health spending in the continent, according to the UNCTAD. But, “No country should be forced to choose between paying back debts or providing health care”.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2023) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

The Year of Inflation Exposes Dogma and Class Bias — Global Issues

  • Opinion by Anis Chowdhury (sydney)
  • Inter Press Service

SYDNEY, Jan 17 (IPS) – Inflation worries topped Ipsos’s What Worries the World survey in 2022 overtaking COVID concerns. The return of inflation caught major central banks, e.g., the US Federal Reserve (Fed), Bank of England, European Central Bank “off guard”. The persistence of inflation also surprised the International Monetary Fund (IMF). The return of inflation and its persistence exposed the poverty of the economics profession, unable to agree on its causes and required policy responses. It also exposed the profession’s anti-working class biases.

Anis Chowdhury

Inflation goof

Almost all major central banks as well as the IMF dismally failed to see the coming of inflation. In December 2020, the US Fed forecast that prices would rise by less than 2% in 2021 and 2022. It failed spectacularly when in December 2021, it estimated that inflation in 2022 would be just 2.6% even though prices were already rising by more than 5% a year.

The US Fed was not alone in failing to see inflation coming. The Governor of Australia’s central bank – the Reserve Bank of Australia (RBA) – was so confident of low inflation that he declared in March 2021 that the interest rate would remain at a historic low until at least 2024. Inflation in advanced economies during 2021 exceeded the average of forecasters’ expectations by around 5–8 percentage points. The IMF’s forecasts have badly and repeatedly undershot inflation.

There was a widespread view among most central bankers and leading economists that the price increases (or inflation) that began in mid-2021 were temporary, and price increases would slow or inflation would drift downwards in 2022. Some, of course, insisted otherwise, and wanted immediate anti-inflationary measures. Thus, policy confusion ruled.

Inflation phobia and dogma

Soon inflation phobia overtook and central banks were advised to act decisively with interest rate hikes even if it meant slowing the economy or a rise in unemployment. Exaggerated claims were made without evidence that not acting now would be more costly later.

References to rare episodes of hyperinflation were made to justify tough policy stances.

The dogmatic inflation hawks ignored the fact that, in most cases, inflation does not accelerate to become harmful hyperinflation, but remains moderate. They also ignored their own neo-classical macroeconomic model, which suggests small welfare loss from moderate inflation.

Notwithstanding the IMF’s Article IV preamble which provides that economic policies should aim to foster “orderly economic growth with reasonable price stability, with due regard to circumstances”, a one-size-fits-all policy of steep interest rate hikes became the only medicine to be applied to achieve a universal inflation target of 2%, a figure plucked from thin air. Yet, central bankers and mainstream economists boast their credibility!

Inflation excuse for class war

Inflation is primarily an expression and outcome of conflicting claims over the distribution of national output and income, e.g., firms’ profit mark-ups vis-à-vis workers’ wages. Thus, no sooner inflation spiked early in the year due to slow adjustment of COVID-induced supply shortages to pent-up demand, exacerbated by war and sanctions, leading central bankers and mainstream economists found an excuse to weaponise economic policies against the working class.

Stoking the fear of wage-price spirals, they advocate the use of an interest rate sledgehammer to create unemployment and, in turn, discipline labour. This is despite research within the IMF and the Reserve Bank of Australia which found no evidence of wage-price spirals since the 1980s due to declines in labour’s bargaining power. Thus, Bloomberg headlined, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”.

Research conducted by the IMF also found increases in firms’ or corporations’ market power, resulting in higher prices and profit margins. Yet, the IMF does not think such factors “are contributing in any sizeable way to the current inflationary environment”. Instead, it justifies such fattening of profits on the ground that “they provide flexible buffers between general wage and general price increases” and that it is only a catching-up “after taking a hit in 2020”!

But no such compassion is extended to the working people who have lost their lives and livelihoods. The calls for “front-loaded interest rate hikes simply got louder. The Bank for International Settlements (BIS) warned, “With the prospect of higher wages as workers look to make up for the purchasing power they lost, inflation could be high for long”.

Labour a clear loser

Labour is a clear loser. Labour’s income share in the GDP has been in decline since the early 1970s. Casualisation, off-shoring, anti-union legislation and technological progress have greatly reduced labour’s bargaining power, while privatisation and dilution of anti-monopoly legislation hugely strengthened corporate power and their collusive anti-competitive behaviour. Meanwhile, CEO compensation packages swelled to obnoxious levels, rising 940% since 1978 in the US as opposed to a 12% rise for workers during that period. Profiting from the pandemic, CEO pay increased by 16% in 2020 when workers suffered, and to a record level in 2021.

Leading central bankers and mainstream economists conveniently created a dogma around a 2% inflation target to justify their anti-labour stance. The 2% inflation target has become a global norm akin to the law of gravity, even though it has no theoretical or empirical basis. The law of gravity differs depending on altitude, but the 2% target is said to be universal regardless of circumstances!

Collateral damage

Meanwhile, the advanced countries’ inflation fight is causing adverse spillover into developing countries. Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, thereby depreciating their currencies and lowering their export earnings.

Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s. The rating agency S&P estimates that central bank rate rises could land global borrowers with US$8.6t in extra debt servicing costs in the coming years.

Instead of providing genuine debt-relief, the G20 kicked the can down the road. As wealthy nations failed the poor countries during the pandemic, the IMF is moving to debt-distressed countries with conditionality-laden one-size-fits-all austerity packages. Thus, a Foreign Policy op-ed asked, “The International Monetary Fund: Holy Grail or Poisoned Chalice?”

Meanwhile, the chiefs of the World Bank and the BIS urged “supply-side” policies professed to increase labour force participation and investment. These are code words for further labour market deregulation, privatisation and liberalisation.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2023) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Living Another Year Dangerously — Global Issues

  • Opinion by Anis Chowdhury (sydney)
  • Inter Press Service

SYDNEY, Jan 02 (IPS) – 2022 has been a year of great uncertainty when it seemed the world perilously reached the brink of self-destruction – be it human-induced climate change or military conflict. Welcoming 2022, we had enough reasons to be optimistic; but it was another ‘year of living dangerously’ – Tahun vivere pericoloso in the words of Soekarno, or an annus horribilis in the words of the late Queen Elizabeth.

Anis Chowdhury

No end to Covid-19

The joy of the COVID vaccine discovery quickly vanished as the ‘vaccine apartheid‘ blatantly prioritised lives in rich nations, especially of the wealthy, over the ‘wretched of the earth’, and corporate profit triumphed over people’s lives. Meanwhile, Dr Anthony Fauci’s sober warning of a more dangerous COVID variant emerging this winter may come to be true as China, the country of 1.4 billion, struggles to deal with the surge in cases since it has largely abandoned its unpopular ‘zero COVID’ policy.

New cold war turns into proxy war

Whereas the global pandemic required extraordinary global unity, unfortunately, a ‘new cold war’ quickly turned into a ‘hot war’, bringing the world to the verge of a devastating nuclear war for the first time since the 1962 Cuban missile crisis. Russia, finding itself cornered by an expanding NATO, decided most foolishly to invade Ukraine, believing it could overrun the country without any resistance. While the heroic Ukrainians continue to defend their motherland, Russia seems to have become bogged down in a proxy war with NATO.

If the proxy war with Russia was not enough, the US is recklessly provoking China towards another ‘hot war’, following Trump’s trade war. Clearly the monopoly capital of the US and its military-industrial complex are pushing the US to a ‘Thucydides Trap‘. More than 60 years ago, President Eisenhower, in his farewell address to the nation, warned about the military-industrial complex, a formidable union of defence contractors and the armed forces. Eisenhower, a retired five-star Army general, who led the allies on D-Day, saw the military-industrial complex as a threat to democratic government and global peace. Alas, his dire warning fell on deaf ears.

Western hypocrisy exposed

The Russian invasion of Ukraine exposed Western pretence. The Western mainstream media unashamedly declared the dislocation of Ukrainians intolerable because the victims are blue-eyed, blond-haired Europeans, not “uncivilized” third world inhabitants or “barbaric” Arabs. Western duplicity is nowhere as blatant as it is in the case of the Palestinian plight. To them, Russia’s occupation and annexation of parts of Ukraine is illegal; but Israel’s occupation and annexation of Palestinian land as well as gross human rights violations are justified on various professed grounds, e.g., right to protection from “terrorist acts”.

Leadership vacuum

The world now needs Eisenhower to resist the military-industrial complex; it needs Teddy Roosevelt to break monopoly capital’s stranglehold and to protect consumers, workers and the environment; it needs Franklin Roosevelt to promote multilateralism and social justice; it needs Kennedy to defuse crises. At the height of the ‘old cold war’, Kennedy ate humble pie by quietly removing the security threat to the USSR posed by offensive weapons (Jupiter MRBMs) deployed in Turkey, and publicly pledging that the US would never invade Cuba or attempt another Bay of Pigs operation. Eisenhower was magnanimous enough to bear the lion’s share of financing the USSR’s proposal for global efforts to eradicate smallpox – the leading cause of death and blindness then.

Alas, we see no such signs in a world of Trump, Biden, Johnson, Marcon and Scholz. Even ‘out of touch‘, billionaire Sunak does not inspire any hope, despite being the first coloured person of colonial descent to occupy the 10 Downing Street. Sunak will probably try to prove himself holier than the Pope, instead of promoting the interest of former colonies or descendants of colonial subjects or downtrodden.

No better leadership in the South

The South is also devoid of visionaries, such as Nkrumah or Nehru who promoted non-alignment and Southern unity. Nehru’s land is now overtaken by Modi’s Hindutva movement, openly promoting violence against minorities. Unsurprisingly, Modi was in sync with Trump; but he equally cosies up to Biden professing to promote democracy and human rights. Sadly, Mandela’s South Africa is mired in scandal after scandal.

Although many, including myself, eagerly looked forward to Lula’s victory in Brazil, neither his return to power nor the so-called ‘second pink tide’ in Latin America should make one overly joyous. The Left has demonstrated its propensity to fracture or implode easily, e.g., contributing to Correa’s defeat in Ecuador, or aiding the Right to strike back in Peru. In Colombia, Finance capital, mining giants and the elite have already ganged up on Petro’s vow to tackle inequality with tax and land reforms and his proposed ban on new oil and gas exploration. Chile’s Boric has faced setbacks including the rejection of a new constitution, forcing his concessions to the Centre-Right. Constitutional coup is a common strategy of the established vested interest.

Some inspirations down under

Down under, the Australians soundly defeated an increasingly autocratic and unaccountable conservative government in May. It was the government that implemented inhumane off-shore detention centres for people seeking to escape persecution and starvation in their own countries (about to be emulated by the UK Tory Govt.). It also was cruel enough to pursue vulnerable people on social security payments with a robotic program whilst cutting taxes for the wealthy and letting them evade tax. It was the government which created plumb jobs for the boys. It was the government which continued to deny climate science and refused to act.

Finally, the Australians got rid of it. Labor showed extraordinary discipline in opposition, and in government, it stood up to big business and vested interests. It has quickly moved to put in place the processes to:

  • set up an independent anti-corruption body with real teeth;
  • recognise the voice of First Nations people;
  • respect human rights of asylum seekers languishing in detention centres;
  • address environmental degradation & achieve 43% emissions reduction target by 2030;
  • restore labour rights, fair and decent wages;
  • review RBA’s performance to ensure monetary policy serves broader national interest, not the finance; and
  • balance geo-political alliances.

Its progressive agenda is quite long. Let me end here, wishing the Australian Labor Government success to inspire other nations – large and small, developed and developing; and with best wishes for you to be safe and remain healthy, even if not quite bright-eyed and bushy-tailed.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2023) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Developing Countries Need Monetary Financing — Global Issues

  • Opinion by Jomo Kwame Sundaram, Anis Chowdhury (sydney and dakar)
  • Inter Press Service

SYDNEY and DAKAR, Nov 01 (IPS) – Developing countries have long been told to avoid borrowing from central banks (CBs) to finance government spending. Many have even legislated against CB financing of fiscal expenditure.

Central bank fiscal financing
Such laws are supposedly needed to curb inflation – below 5%, if not 2% – to accelerate growth. These arrangements have also constrained a potential CB developmental role and government ability to respond better to crises.

Anis ChowdhuryImproved monetary-fiscal policy coordination is also needed to achieve desired structural transformation, especially in decarbonizing economies. But too many developing countries have tied their own hands with restrictive legislation.

A few have pragmatically suspended or otherwise circumvented such self-imposed prohibitions. This allowed them to borrow from CBs to finance pandemic relief and recovery packages.

Such recent changes have re-opened debates over the urgent need for counter-cyclical and developmental fiscal-monetary policy coordination.

Monetary financing rubbished
But financial interests claim this enables national CBs to finance government deficits, i.e., monetary financing (MF). MF is often blamed for enabling public debt, balance of payments deficits, and runaway inflation.

As William Easterly noted, “Fiscal deficits received much of the blame for the assorted economic ills that beset developing countries in the 1980s: over indebtedness and the debt crisis, high inflation, and poor investment performance and growth”.

Hence, calls for MF are typically met with scepticism, if not outright opposition. MF undermines central bank independence (CBI) – hence, the strict segregation of monetary from fiscal authorities – supposedly needed to prevent runaway inflation.

Jomo Kwame SundaramRecent International Monetary Fund (IMF) research insists MF “involves considerable risks”. But it acknowledges MF to cope with the pandemic did not jeopardize price stability. A Bank of International Settlements paper also found MF enabled developing countries to respond countercyclically to the pandemic.

Cases of MF leading to runaway inflation have been very exceptional, e.g., Bolivia in the 1980s or Zimbabwe in 2007-08. These were often associated with the breakdown of political and economic systems, as when the Soviet Union collapsed.

Bolivia suffered major external shocks. These included Volcker’s interest rate spikes in the early 1980s, much reduced access to international capital markets, and commodity price collapses. Political and economic conflicts in Bolivian society hardly helped.

Similarly, Zimbabwe’s hyperinflation was partly due to conflicts over land rights, worsened by government mismanagement of the economy and British-led Western efforts to undermine the Mugabe government.

Indian lessons
Former Reserve Bank of India Governor Y.V. Reddy noted fiscal-monetary coordination had “provided funds for development of industry, agriculture, housing, etc. through development financial institutions” besides enabling borrowing by state owned enterprises (SOEs) in the early decades.

For him, less satisfactory outcomes – e.g., continued “macro imbalances” and “automatic monetization of deficits” – were not due to “fiscal activism per se but the soft-budget constraint” of SOEs, and “persistent inadequate returns” on public investments.

Monetary policy is constrained by large and persistent fiscal deficits. For Reddy, “undoubtedly the nature of interaction between depends on country-specific situation”.

Reddy urged addressing monetary-fiscal policy coordination issues within a broad common macroeconomic framework. Several lessons can be drawn from Indian experience.

First, “there is no ideal level of fiscal deficit, and critical factors are: How is it financed and what is it used for?” There is no alternative to SOE efficiency and public investment project financial viability.

Second, “the management of public debt, in countries like India, plays a critical role in development of domestic financial markets and thus on conduct of monetary policy, especially for effective transmission”.

Third, “harmonious implementation of policies may require that one policy is not unduly burdening the other for too long”.

Lessons from China?Zhou Xiaochuan, then People’s Bank of China (PBoC) Governor, emphasized CBs’ multiple responsibilities – including financial sector development and stability – in transition and developing economies.

China’s CB head noted, “monetary policy will undoubtedly be affected by balance of international payments and capital flows”. Hence, “macro-prudential and financial regulation are sensitive mandates” for CBs.

PBoC objectives – long mandated by the Chinese government – include maintaining price stability, boosting economic growth, promoting employment, and addressing balance of payments problems.

Multiple objectives have required more coordination and joint efforts with other government agencies and regulators. Therefore, “the PBoC … works closely with other government agencies”.

Zhou acknowledged, “striking the right balance between multiple objectives and the effectiveness of monetary policy is tricky”. By maintaining close ties with the government, the PBoC has facilitated needed reforms.

He also emphasized the need for policy flexibility as appropriate. “If the central bank only emphasized keeping inflation low and did not tolerate price changes during price reforms, it could have blocked the overall reform and transition”.

During the pandemic, the PBoC developed “structural monetary” policy tools, targeted to help Covid-hit sectors. Structural tools helped keep inter-bank liquidity ample, and supportive of credit growth.

More importantly, its targeted monetary policy tools were increasingly aligned with the government’s long-term strategic goals. These include supporting desired investments, e.g., in renewable energy, while preventing asset price bubbles and ‘overheating’.

In other words, the PBoC coordinates monetary policy with fiscal and industrial policies to achieve desired stable growth, thus boosting market confidence. As a result, inflation in China has remained subdued.

Consumer price inflation has averaged only 2.3% over the past 20 years, according to The Economist. Unlike global trends, China’s consumer price inflation fell to 2.5% in August, and rose to only 2.8% in September, despite its ‘zero-Covid’ policy and measures such as lockdowns.

Needed reforms
Effective fiscal-monetary policy coordination needs appropriate arrangements. An IMF working paper showed, “neither legal independence of central bank nor a balanced budget clause or a rule-based monetary policy framework … are enough to ensure effective monetary and fiscal policy coordination”.

Appropriate institutional and operational arrangements will depend on country-specific circumstances, e.g., level of development and depth of the financial sector, as noted by both Reddy and Zhou.

When the financial sector is shallow and countries need dynamic structural transformation, setting up independent fiscal and monetary authorities is likely to hinder, not improve stability and sustainable development.

Understanding each other’s objectives and operational procedures is crucial for setting up effective coordination mechanisms – at both policy formulation and implementation levels. Such an approach should better achieve the coordination and complementarity needed to mutually reinforce fiscal and monetary policies.

Coherent macroeconomic policies must support needed structural transformation. Without effective coordination between macroeconomic policies and sectoral strategies, MF may worsen payments imbalances and inflation. Macro-prudential regulations should also avoid adverse MF impacts on exchange rates and capital flows.

Poorly accountable governments often take advantage of real, exaggerated and imagined crises to pursue macroeconomic policies for regime survival, and to benefit cronies and financial supporters.

Undoubtedly, much better governance, transparency and accountability are needed to minimize both immediate and longer-term harm due to ‘leakages’ and abuses associated with increased government borrowing and spending.

Citizens and their political representatives must develop more effective means for ‘disciplining’ policy making and implementation. This is needed to ensure public support to create fiscal space for responsible counter-cyclical and development spending.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2022) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Macroeconomic Policy Coordination More One-Sided, Ineffective — Global Issues

  • Opinion by Jomo Kwame Sundaram, Anis Chowdhury (sydney and kuala lumpur)
  • Inter Press Service

SYDNEY and KUALA LUMPUR, Oct 25 (IPS) – Widespread adverse reactions to the UK government’s recent ‘mini-budget’ forced new Prime Minister Liz Truss to resign. The episode highlighted problems of macroeconomic policy coordination and the interests involved.

Macro-policy coordination
But macroeconomic, specifically fiscal-monetary policy coordination almost became “taboo” as central bank independence (CBI) became the new orthodoxy. It has been accused of enabling CBs to finance government deficits. Critics claim inflation, even hyperinflation, becomes inevitable.

Anis ChowdhuryGovernment finance ministries and CBs are the two main macroeconomic policy protagonists. Poor ‘macro-policy’ coordination has generated problems, including contradictory policy responses. This has meant more macroeconomic and financial instability, worrying markets and investors.

Fiscal policy – notably variations in government tax and spending – mainly aims to influence long-term growth and distribution. CB monetary policy – e.g., variations in short-term interest rates and credit growth – claims to prioritize price and exchange rate stability.

By the early 1990s, the ‘Washington consensus’ implied the two macro-policy actors should work independently due to their different time horizons. After all, governments are subject to short-term political considerations inimical to monetary stability needed for long-term growth.

Claiming to be “technocratic”, CBs have increasingly set their own goals or targets. CBI has involved both ‘goal’ and ‘instrument’ independence, instead of ‘goal dependence’ with ‘instrument independence’.

CBI was ostensibly to avoid ‘fiscal dominance’ of monetary policy. Meanwhile, government fiscal policy became subordinated to CB inflation targets. For former Reserve Bank of Australia Deputy Governor Guy Debelle, monetary policy became “the only game in town for demand management”.

Debelle noted that except for rare and brief coordinated fiscal stimuli in early 2009, after the onset of the global financial crisis, “demand management continued to be the sole purview of central banks. Fiscal policy was not much in the mix”.

Jomo Kwame SundaramSub-optimal outcomes
But more than three decades of “divorce” between independent CBs and fiscal authorities have failed to deliver its promised benefits. Instead, monetary policy dominance has worsened financial instability.

Adam Posen found the costs of disinflation, or keeping inflation low, higher in OECD countries with CBI. Carl Walsh found likewise in the European Community.

For Guy Debelle and Stanley Fischer, CBs have sought to enhance their credibility by being tougher on inflation, even at the expense of output and employment losses.

Committed to arbitrary targets, independent CBs have sought credit for keeping inflation low. They deny other contributory factors, e.g., labour’s diminished bargaining power and globalization, particularly cheaper supplies.

John Taylor, author of the ‘Taylor rule’ CB mantra, concluded CB “performance was not associated with de jure central bank independence”. De jure CB independence has not prevented them from “deviating from policies that lead to both price and output stability”.

The de facto independent US Fed has also taken “actions that have led to high unemployment and/or high inflation”. As single-minded independent CBs pursued low inflation, they neglected their responsibility for financial stability.

CBs’ indiscriminate monetary expansion during the 2000s’ Great Moderation enabled asset price bubbles and dangerous speculation, culminating in the global financial crisis (GFC).

Since the GFC, “the financial sector has become dependent on easy liquidity… To compensate for quantitative easing (QE)-induced low return…, increased the risk profile of their other assets, taking on more leverage, and hedging interest rate risk with derivatives”.

Independent CBs also never acknowledge the adverse distributional consequences of their policies. This has been true of both conventional policies, involving interest rate adjustments, and unconventional ones, with bond buying, or QE. All have enabled speculation, credit provision and other financial investments.

They have also helped inefficient and uncompetitive ‘zombie’ enterprises survive. Instead of reversing declining long-term productivity growth, the slowdown since the GFC “has been steep and prolonged”.

Workers’ real wages have remained stagnant or even declined, lowering labour’s income share and widening income inequality. As crises hit and monetary policies were tightened, workers lost jobs and incomes. Workers are doubly hit as governments pursue fiscal austerity to keep inflation low.

Dire consequences
The pandemic has seen unprecedented fiscal and monetary responses. But there has been little coordination between fiscal and monetary authorities. Unsurprisingly, greater pandemic-induced fiscal deficits and monetary expansion have raised inflationary pressures, especially with supply disruptions.

This could have been avoided if policymakers had better coordinated fiscal and monetary measures to unlock key supply bottlenecks. War and economic sanctions have made the supply situation even more dire.

Government debt has been rising since the GFC, reaching record levels due to pandemic measures. CBs hiking interest rates to contain inflation have thus worsened public debt burdens, inviting austerity measures.

Thus, countries go through cycles of debt accumulation and output contraction. Supposed to contain inflation, they adversely impact livelihoods. Many more developing countries face debt crises, further setting back progress.

Needed reforms
Sixty years ago, Milton Friedman asserted, “money is too important to be left to the central bankers”. He elaborated, “One economic defect of an independent central bank … is that it almost invariably involves dispersal of responsibility… Another defect … is the extent to which policy is … made highly dependent on personalities… third … defect is that an independent central bank will almost invariably give undue emphasis to the point of view of bankers”.

Thus, government-sceptic Friedman recommended, “either to make the Federal Reserve a bureau in the Treasury under the secretary of the Treasury, or to put the Federal Reserve under direct congressional control.

“Either involves terminating the so-called independence of the system… either would establish a strong incentive for the Fed to produce a stabler monetary environment than we have had”.

Undoubtedly, this is an extreme solution. Friedman also suggested replacing CB discretion with monetary policy rules to resolve the problem of lack of coordination. But, as Alan Blinder has observed, such rules are “unlikely to score highly”.

Effective fiscal-monetary policy coordination requires appropriate supporting institutions and operating arrangements. As IMF research has shown, “neither legal independence of central bank nor a balanced budget clause or a rule-based monetary policy framework … are enough to ensure effective monetary and fiscal policy coordination”.

Although rules-based policies may enhance transparency and strengthen discipline, they cannot create “credibility”, which depends on policy content, not policy frameworks.

For Debelle, a combination of “goal dependence” and “instrument or operational independence” of CBs under strong democratic or parliamentary oversight may be appropriate for developed countries.

There is also a need to broaden membership of CB governing boards to avoid dominance by financial interests and to represent broader national interests.

But macro-policy coordination should involve more than merely an appropriate fiscal-monetary policy mix. A more coherent approach should also incorporate sectoral strategies, e.g., public investment in renewable energy, education & training, healthcare. Such policy coordination should enable sustainable development and reverse declining productivity growth.

As Buiter urges, it is up to governments “to make appropriate use of … fiscal space” created by fiscal-monetary coordination. Democratic checks and balances are needed to prevent “pork-barrelling” and other fiscal abuses and to protect fiscal decision-making from corruption.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2022) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Stop Worshiping Central Banks — Global Issues

  • Opinion by Jomo Kwame Sundaram, Anis Chowdhury (sydney and kuala lumpur)
  • Inter Press Service

SYDNEY and KUALA LUMPUR, Oct 18 (IPS) – Preoccupied with enhancing their own ‘credibility’ and reputations, central banks (CBs) are again driving the world economy into recession, financial turmoil and debt crises.

Wall Street ‘cred’

Most CB governors believe ‘credibility’ is desirable and must be achieved by fighting inflation at any cost. To justify their own more harmful policies, they warn inflation is ‘damaging’.

Anis Chowdhury

They argue CBs need ‘independence’ from governments to pursue ‘credible’ monetary policy. Inflation targeting to ‘anchor’ inflation expectations is supposed to generate desired ‘confidence’. But CBs have been responsible for many costly failures.

The US Fed deepened the 1930s’ Great Depression, the 1970s’ stagflation and the early 1980s’ contraction, besides contributing to the 2008-09 global financial crisis (GFC). Hence, CB notions of ‘credibility’ and ‘independence’ need to be reconsidered.

Milton Friedman – whom many central bankers revere – blamed the 1930s’ Great Depression on US Fed actions and inactions. Instead of providing liquidity support for businesses struggling with short-term cash-flow problems, it squeezed credit and economies.

But why did the Fed behave as it did? Some economic historians insist it was “to promote the interests of commercial banks, rather than economic recovery”.

Monetary policy before and during the Great Depression “was designed to cause the failure of non-member banks, which would enhance the long-run profits of the Fed’s member banks and enlarge the regulatory domain”.

Others concluded, “Federal Reserve errors seem largely attributable to the continued use of flawed policies” to defend the ‘gold standard’, and its poor understanding of monetary conditions.

Central banks contractionary

Worse, few lessons were learnt. Instead of protecting the gold standard, or being counter-cyclical, fighting inflation is the new CB preoccupation. Even worse, most CBs now commit to an arbitrarily-set inflation target of 2%, first promoted by the Reserve Bank of New Zealand over three decades ago.

Jomo Kwame Sundaram

Major CB interventions have caused both economic booms or bubbles and busts or contractions, often without mitigating inflation. Such “go-stop” monetary policy swings have caused asset price bubbles and financial fragility besides sudden contractions.

Ben Bernanke’s research team found the major damage from the 1970s’ oil price shocks was due to the “tightening of monetary policy” response. Other research attributed the 1970s’ stagflation largely to the Fed’s “go-stop” monetary policy, worsened by policymakers’ “misperceptions” and “faulty doctrine”.

Hence, “in substantial part the Great Stagflation of the 1970s could have been avoided, had the Fed not permitted major monetary expansions in the early 1970s”.

Labour pays

Likewise, Fed chair Paul Volcker sharply raised interest rates during 1979-81 “to a crushing level of nearly 20 per cent by the middle of 1981”.

This precipitated the “ensuing recession that started in July 1981 became the most severe downturn since the second world war”. US unemployment reached nearly 11% in late 1982, the highest since the Great Depression.

Volcker’s actions betrayed the Fed’s dual mandate to pursue both full employment and price stability. First in the Employment Act of 1946, it was re-codified in the 1978 ‘Humphrey-Hawkins’ Full Employment and Balanced Growth Act.

Eventually, the long-term unemployed “became invisible to both the labour market and to policymakers”. Many became deskilled as others fell victim to criminality, substance abuse, and mental illness, even suicide.

The overall health of Americans became “poorer for years as a result of the deep economic recession in 1981 and 1982”.

Sending Global South south

Volcker’s actions caused developing country debt crises, with decades lost in Latin America and Africa. A recent New York Times opinion-editorial warned, “The Powell pivot to tighter money in 2021 is the equivalent of Mr. Volcker’s 1981 move”, and “the 2020s economy could resemble the 1980s”.

Yet, invoking CB credibility, many with power and influence are urging the Fed to stick to its guns with Volcker’s “courage to take out the baseball bat to slam the economy and slay inflation”!

The World Bank warns of dire developing country debt crises following policy-induced recessions. Meanwhile, the International Monetary Fund has warned developing economies with dollar-denominated debt of imminent foreign exchange crises.

Stop-go new norm

Fed, Bank of England and European Central Bank policy approaches still justify “go-stop” monetary policy reversals. Resulting booms or bubbles and busts also feature in other recent crises, e.g., the GFC.

Following the 1997 East Asian financial crises, Mexican, Russian and post-US ‘dotcom bubble’ bust, the Fed eased monetary policy too much for too long during the ‘Great Moderation’.

CBs enabled credit expansion in the 2000s, culminating in the GFC. More worryingly, the “near-consensus view” is that independent CBs have failed to achieve – let alone protect – financial stability.

Easy credit and rising stock and housing markets have involved rapid credit and loan growth worsening asset price bubbles. Regulatory oversight became increasingly lax as investors ‘chased yield’. Leverage grew, using dodgy ‘derivative’ products, making proper risk assessment difficult.

Guy Debelle, once Deputy Governor of Australia’s CB, noted, “The goal of financial stability has generally been left vague”. Hence, CBs failed to see significant build-up of financial instability”. Soon after, the Lehman Brothers’ collapse precipitated the GFC.

QE magic from bubble to bust

Governments withdrew fiscal ‘stimuli’ too soon. So, major CBs aggressively pursued ‘unconventional monetary policies’, especially ‘quantitative easing’, to keep economies afloat.

Extraordinary monetary expansion provided vital liquidity, but poor coordination also fuelled asset price bubbles. Thus, unviable enterprises survived, undermining productivity growth.

With less investment in the real economy, supply capacity is falling behind still growing demand. Pandemic, war and sanctions have also disrupted supplies.

Raising interest rates, CBs now race to reverse earlier monetary expansion. Credit contractions are squeezing economies, hitting poorer countries especially hard.

Reviewing historical data, the author of the ‘Taylor rule’ – whom many CBs profess to follow – concluded, “The classic explanation of financial crises, going back hundreds of years, is that they are caused by excesses – frequently monetary excesses – which lead to a boom and an inevitable bust”.

Independence for what?

CB independence (CBI) advocates often claim low inflation during the Great Moderation was due to CB credibility. But inflation in most countries declined from the mid-1990s, with or without CBI.

The alleged causation has been much exaggerated, and is certainly not as strong as argued. Claiming CBI ensures low inflation also denies other relevant variables, e.g., labour market casualization and globalization.

Debelle observed, “How much can be attributable to central bank independence or the inflation target is difficult to disentangle … assessment mostly relies on assertion, rather than empirical proof”.

Milton Friedman argued crisis responses involve inherently political decisions, best not left to the unelected. A modern CB’s “responsibilities overlap with other government functions”. So, CBs must be subject to political authority while maintaining operational independence.

CBI fetishism has also allowed central bankers to ignore distributional consequences of monetary policies. This has often enabled financial asset owners, speculators and creditors. CBI has also meant neglecting development responsibilities.

Emphasizing CBI also implies “a very narrow view of central bank functions”. This has made economies more prone to financial instability and crisis. Clearly, CBI is no harmless ‘elixir’ ensuring low inflation.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2022) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Central Bank Myths Drag down World Economy — Global Issues

  • Opinion by Jomo Kwame Sundaram, Anis Chowdhury (sydney and kuala lumpur)
  • Inter Press Service

SYDNEY and KUALA LUMPUR, Oct 10 (IPS) – The dogmatic obsession with and focus on fighting inflation in rich countries are pushing the world economy into recession, with many dire consequences, especially for poorer countries. This phobia is due to myths shared by most central bankers.

Anis Chowdhury

Myth 1: Inflation chokes growth

The common narrative is that inflation hurts growth. Major central banks (CBs), the Bretton Woods institutions (BWIs) and the Bank of International Settlements (BIS) all insist inflation harms growth despite all evidence to the contrary. The myth is based on a few, very exceptional cases.

“Once-in-a-generation inflation in the US and Europe could choke off global growth, with a global recession possible in 2023”, claimed the World Economic Forum Chief Economist’s Outlook under the headline, “Inflation Will Lead Inexorably To Recession”.

The Atlantic recently warned, “Inflation Is Bad… raising the prospect of a period of economic stagnation or even a recession”. The Economist claims, “It hurts investment and makes most people poorer”.

Jomo Kwame Sundaram

Without evidence, the narrative claims causation runs from inflation to growth, with inevitable “adverse” consequences. But serious economists have found no conclusive supporting evidence.

World Bank chief economist Michael Bruno and William Easterly asked, “Is inflation harmful to growth?” With data from 31 countries for 1961-94, they concluded, “The ratio of fervent beliefs to tangible evidence seems unusually high on this topic, despite extensive previous research”.

OECD evidence for 1961-2021 – Figures 1a & 1b – updates Bruno & Easterly, again contradicting the ‘standard narrative’ of major CBs, BWIs, BIS and others. The inflation-growth relationship is strongly positive when 1974-75 – severe oil spike recession years – are excluded.

The relationship does not become negative even when 1974-75 are included. Also, the “Great Inflation” of 1965-82 did not harm growth. Hence, there is no empirical basis for setting a particular threshold, such as the now standard 2% inflation target – long acknowledged as “plucked from the air”!

Developing countries also have a positive inflation-growth relationship if extreme cases – e.g., inflation rates in excess of 20%, or ‘excessively’ impacted by commodity price volatilities, civil strife, war – are omitted (Figures 2a & 2b).

Figure 2a summarizes evidence for 82 developing countries during 1991-2021. Although slightly weakened, the positive relationship remained, even if the 1981-90 debt crises years are included (Figure 2b).

Myth 2: Inflation always accelerates

Another popular myth is that once inflation begins, it has an inherent tendency to accelerate. As inflation supposedly tends to speed up, not acting decisively to nip it in the bud is deemed dangerous. So, the IMF chief economist advises, “Don’t let inflation ‘genie’ out of the bottle”. Hence, inflation has to be ‘nipped in the bud’.

But, in fact, OECD inflation has never exceeded 16% in the past six decades, including the 1970s’ oil shock years. Inflation does not accelerate easily, even when labour has more bargaining power, or wages are indexed to consumer prices – as in some countries.

Bruno & Easterly only found a high likelihood of inflation accelerating when inflation exceeded 40%. Two MIT economists – Rüdiger Dornbusch and Stanley Fischer, later International Monetary Fund Deputy Managing Director – came to a similar conclusion, describing 15–30% inflation as “moderate”.

Dornbusch & Fischer also stressed, “Most episodes of moderate inflation were triggered by commodity price shocks and were brief; very few ended in higher inflation”. Importantly, they warned, “such inflations can be reduced only at a substantial … cost to growth”.

Myth 3: Hyperinflation threatens

Although extremely rare, avoiding hyperinflation has become the pretext for central bankers prioritizing inflation prevention. Hyperinflation – at rates over 50% for at least a month – is undoubtedly harmful for growth. But as IMF research shows, “Since 1947, hyperinflations in market economies have been rare”.

Many of the worst hyperinflation episodes in history were after World War Two and the Soviet demise. Bruno & Easterly also mention breakdowns of economic and political systems – as in Iran or Nicaragua, following revolutions overthrowing corrupt despotic regimes.

A White House staff blog noted, “The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off”.

Myth 4: Evidence-based policymaking

Central bankers love to claim their policymaking is evidence-based. They cite one another and famous economists to enhance the aura of CB “credibility”.

Unsurprisingly, the Reserve Bank of New Zealand promoted its arbitrary 2% inflation target mainly by endless repetition – not strong evidence or superior logic. They simply “devoted a huge amount of effort” to preaching the new mantra “to everybody who would listen – and some who were reluctant to listen”.

The narrative also suited those concerned about wage pressures. Fighting inflation has provided an excuse to further weaken workers’ working conditions and pay. Thus, labour’s share of income has been declining since the 1970s.

Greater central bank independence (from the executive) has enhanced the influence and power of financial interests – largely at the expense of the real economy. Output and employment growth weakened as a result, worsening the lot of the many, especially in the global South.

Fact: Central banks induce recessions

Inappropriate CB policies have often slowed economic growth without mitigating inflation. Hawkish CB responses to inflation can become self-fulfilling prophecies with high inflation seemingly associated with recessions or growth collapses.

Before becoming Fed chair, Ben Bernanke’s research team concluded, “an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy”.

Thus, central bank interventions have caused contractions without reducing inflation. The longest US recession after the Great Depression – in the early 1980s – was due to Fed chair Paul Volcker’s 1979-81 interest rate hikes.

A New York Times opinion-editorial recently warned, “The Powell pivot to tighter money in 2021 is the equivalent of Mr. Volcker’s 1981 move”, and “the 2020s economy could resemble the 1980s”.

Fearing an “extremely severe” world recession, Columbia University history professor Adam Tooze has summed up the current CBs’ interest rate hike frenzy as “the single most dramatic simultaneous tightening of monetary policy ever”!

Phobias, especially if based on unfounded beliefs, never offer good bases for sound policymaking.

IPS UN Bureau


Follow IPS News UN Bureau on Instagram

© Inter Press Service (2022) — All Rights ReservedOriginal source: Inter Press Service



Check out our Latest News and Follow us at Facebook

Original Source

Exit mobile version