Tag: Anis Chowdhury

Ideology and Dogma Ensure Policy Disaster — Global Issues

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

SYDNEY and KUALA LUMPUR, Oct 04 (IPS) – Central banks (CBs) around the world – led by the US Fed, European Central Bank and Bank of England – are raising interest rates, ostensibly to check inflation. The ensuing race to the bottom is hastening world economic recession.

Going for broke

New UK Prime Minister Liz Truss has already revived ‘supply side economics’, long thought to have been fatally discredited. Her huge tax cuts are supposed to kick-start Britain’s stagnant economy in time for the next general election.

Anis Chowdhury

But studies of past tax cuts have not found any positive link between lower taxes and economic or employment growth. Oft-cited US examples of Reagan, Bush or Trump tax cuts have been shown to be little more than economic sophistry.

Reagan’s Council of Economic Advisers chairman, Harvard professor Martin Feldstein found most Reagan era growth due to expansionary monetary policy. Volcker’s interest rate hikes to fight inflation were reversed. This enabled the US economy to bounce back from its severe 1982 monetary policy inflicted recession.

George W Bush’s 2001 and 2003 tax cuts also failed to spur growth. Instead, deficits and debt ballooned. “The largest benefits from the Bush tax cuts flowed to high-income taxpayers”. Likewise, Trump tax cuts failed to lift the US economy, with billionaires now paying much less than workers.

After Boris Johnson stepped down, UK Conservative Party leadership contenders started by promising more tax cuts. But The Economist was “sceptical that such cuts will lift Britain’s growth rate”. Instead, it worried tax cuts would compound inflationary pressures, triggering ever tighter monetary policy.

The Economist concluded, “It is hard to spot a connection between the overall level of taxation and long-term prosperity”. Unsurprisingly, The Economist sees Truss’ “largest tax cuts in half a century” as “a reckless budget, fiscally and politically”.

Jomo Kwame Sundaram

While such tax cuts mainly benefit the very rich, the costs of such monetary and fiscal policies are borne by workers and other consumers. Workers are harshly punished by austerity measures, losing both jobs and incomes to interest rate hikes.

Tax cuts usually make things worse. Typically, these require cutting social protection and essential public services, ostensibly to balance the budget. So, already greater wealth and income inequalities will worsen.

Governments have to cut public investments due to ballooning budget deficits. Higher interest rates and public spending cuts will also derail efforts needed to transition to more sustainable, greener futures.

Class war

Policy fights over inflation have many dimensions, including class. Instead of helping people cope with rising living costs, increasing interest rates only makes things worse, hastening economic slowdowns. Thus, workers not only lose jobs and incomes, but also are forced to pay more for mortgages and other debts.

Unemployment, lower incomes, deteriorating health and other pains hurt workers. As workers want higher incomes to cope with rising living expenses, such austere policies are deemed necessary to prevent ‘wage-price spirals’.

As usual, workers are being blamed for the resurgence of inflation. But research by the International Monetary Fund (IMF) and others has found no evidence of such wage-price spirals in recent decades.

Experience and evidence suggest very low likelihood of such dialectics in current circumstances, although some nominal wages have risen. Since the 1980s, labour bargaining power and collective wage determination have declined.

Policymakers should address stagnant, even declining real wages in most economies in recent decades. These have hurt “low-paid workers much more than those at the top”. Even the Organization for Economic Cooperation and Development club of rich countries has “worryingly” noted these trends.

The IMF Deputy Managing Director has explained why wages do not have to be suppressed to avoid inflation. Letting nominal wages rise will mitigate rising inequality, plus declining labour income shares (Figure 1) and real wages.

Source: IMF, World Economic Outlook, April 2017

Profit margins had already risen, even before the Ukraine war and sanctions. US trends prompted the Bloomberg headline, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”. Aggregate profits of the largest UK non-financial companies in 2021 rose 34% over pre-pandemic levels.

Policymakers should therefore restrain profits, not wages. Recent price increases have been due to rising profits from mark-ups. Recent trends have made it “easier for firms to put their prices up” notes the Reserve Bank of Australia Governor.

Addressing inequality

The IMF Managing Director (MD) recently warned, “People will be on the streets if we don’t fight inflation”. But people are even more likely to protest if they lose jobs and incomes. Worse, the burden of fighting inflation has been put on them while the elite continues to enrich itself.

Raising interest rates is a blunt means to fight inflation. It worsens living costs and job losses, while tax cuts mainly benefit the rich. Instead, the rich should be taxed more to enhance revenue to increase public provisioning of essential services, such as transport, health and education.

The IMF MD noted raising taxes on the wealthy will help close the yawning gap between rich and poor without harming growth. Public provision of childcare and labour market programmes (e.g., retraining) will improve labour supply. Easing worker shortages can thus dampen price pressures.

The current situation requires addressing growing inequality. Redistributive fiscal measures – taxing high earners to fund expanded social protection and public provisioning – are time-tested means to address disparities.

Increasing top tax rates and tax system progressivity are also socially progressive, checking growing inequality. Meanwhile, as consumer prices spiral, rising profits and high executive remuneration have to be checked.

Supply-side policies

The World Bank and Bank of International Settlements heads have urged reducing the current focus on demand management to counter inflation. They both insist on addressing long-term supply bottlenecks, but do not offer much practical guidance.

Poorly coordinated ‘unconventional’ monetary policies since the 2008-09 global financial crisis have created property and stock market bubbles. These damage the real economy, worsen inequality and slow labour productivity growth, with the worst spill over effects in developing counties.

Addressing supply bottlenecks can involve tax incentives and credit policies. But discredited supply-side mantras – e.g., labour market deregulation – must be discarded. Related fiscal and monetary policies – e.g., tax cuts for the rich and inappropriate interest rate hikes – should also be abandoned.

Governments are losing chances to boost productivity, achieve low carbon transformation and cut inequalities. Instead, policymakers should pro-actively push desired economic changes by favouring less carbon-intensive and more dynamic investments.

This may also require checking CBs’ monetary policy independence to more effectively coordinate fiscal with monetary policies. But this should not undermine CBs’ ‘operational independence’ to foster “orderly economic growth with reasonable price stability”.

Governments must rise to the extraordinary challenges of our times with pragmatic, appropriate and progressive policy initiatives. To do this well, they must boldly reject the ideologies and dogmas responsible for our current predicament.

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Inflation Phobia Hastens Recessions, Debt Crises — Global Issues

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

SYDNEY and KUALA LUMPUR, Sep 27 (IPS) – Inflation phobia among central banks (CBs) is dragging economies into recession and debt crises. Their dogmatic beliefs prevent them from doing right. Instead, they take their cues from Washington: the US Fed, Treasury and Bretton Woods institutions (BWIs).

Costly recessions

Both BWIs – the International Monetary Fund (IMF) and World Bank – have recently raised the alarm about the likely dire consequences of the ensuing contractionary ‘race to the bottom’. But their dogmas stop them from being pragmatic. Hence, their policy analyses and advice come across as incoherent, even contradictory.

Anis Chowdhury

Ominously, the Bank has warned, “he global economy is now in its steepest slowdown following a post-recession recovery since 1970”. As “central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023”.

Warning “Increased interest rates will bite”, the IMF Managing Director has urged countries to “buckle up”, acknowledging anti-inflationary measures threaten recovery. “For hundreds of millions of people it will feel like a recession, even if the world economy avoids” two consecutive quarters of contracting output.

She also noted US Fed rate hikes have strengthened the dollar, raising import costs and making it costlier to service dollar-denominated debt. But reciting the mantra, she claims if inflation “gets under control, then we can see a foundation for growth and recovery”.

This contradicts all evidence that low inflation comes at the expense of robust growth. Per capita output growth and productivity growth both fell during three decades of low inflation. Also, low inflation has not prevented financial crises.

Even if growth recovers, recessions’ scars remain. For example, an IMF study found, “the Great Recession of 2007–09 has left gaping wounds”. Over 200 million people are unemployed worldwide, over 30 million more than in 2007.

A 2018 San Francisco Fed study assessed the Great Recession cost Americans about $70,000 each. The Harvard Business Review estimated, over 2008-10, it cost the US government “well over $2 trillion, more than twice the cost of the 17-year-long war in Afghanistan”.

Jomo Kwame Sundaram

Counting the costs

“The human and social costs are more far-reaching than the immediate temporary loss of income.” Such effects are typically much greater for the most vulnerable, e.g., the youth and long-term unemployed.

Studies have documented its harmful impacts on wellbeing, particularly mental health. Recessions in Europe and North America caused over 10,000 more suicides, greater drug abuse and other self-harming behaviour. Adverse socio-economic and health impacts are worse in developing countries with poor social protection.

Interest rate hikes during 1979-82 triggered debt crises in over 40 developing countries. The 1982 world recession “coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020”. A “decade of lost growth in many developing economies” followed.

But Bank research shows interest rate hikes “may not be sufficient to bring global inflation back down”. The Bank even warns major CBs’ anti-inflationary measures may trigger “a string of financial crises in emerging market and developing economies”, which “would do them lasting harm”.

Developing country governments’ external debt – increasingly commercial, costing more and repayable sooner – has ballooned since the 2008-09 global financial crisis. The pandemic has caused more debt to become unsustainable as rich countries oppose meaningful relief.

No policy consensus

The Bank correctly notes, “A slowdown … typically calls for countercyclical policy to support activity”. It acknowledges, “the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply”.

It also suggests, “policymakers could shift their focus from reducing consumption to boosting production…to generate additional investment and improve productivity and capital allocation…critical for growth and poverty reduction.”

However, it does not offer much policy guidance besides the usual irrelevant platitudes, e.g., CBs “must communicate policy decisions clearly while safeguarding their independence”.

It even blames “labor-market constraints”. For decades, the Bank promoted measures to promote labour market flexibility, ostensibly to increase participation rates, reduce prices, via wages, and re-employ displaced workers.

Such policies since the 1980s have accelerated declining productivity growth and real incomes for most. They have reduced labour’s share of national income, increasing inequality. To make matters worse, the Bank misleadingly attributes many policy-induced economic woes to high inflation.

In May, the IMF Deputy Managing Director argued wages did not have to be suppressed to avoid inflation. She called for CB vigilance and “forceful” actions against inflation, which “will remain significantly above central bank targets for a while”.

No more Washington Consensus

In June, a Fund policy note advised allowing “a full pass-through of higher international fuel prices to domestic users”. It advised recognizing the supply shock causes of contemporary inflation and protecting the most vulnerable.

But more alarmist Fund staff urge otherwise. In July, its ‘chief economist’ urged, “bringing back to central bank targets should be the top priority … Central banks that have started tightening should stay the course until inflation is tamed”.

Although he acknowledged, “ighter monetary policy will inevitably have real economic costs”, without any evidence, he insisted, “delaying it will only exacerbate the hardship”.

In August, the Bank of International Settlements (BIS) head urged shifting attention from managing demand to enabling supply. He warned central bankers had for too long assumed that supply adjusts automatically and smoothly to shifts in demand.

He warned, “Continuing to rely primarily on aggregate demand tools to boost growth in this environment could increase the danger, as higher and harder-to-control inflation could result”.

But the BIS ‘chief economist’ soon urged major economies to “forge ahead with forceful” interest rate hikes despite growing threats of recession. He did not seem to care that the rate hike gamble to fight inflation may not work and its costs could be astronomical.

Inflation fear mongering

Influential economists at the US Fed, Bank of England, Fund and BIS fear “second-round” effects of mainly supply-shock inflation due to “wage-price spirals”.

But Fund research acknowledged, “little empirical research …… the effects of oil price shocks on wages and factors affecting their strength”. It found very low likelihood of such ‘pass-through’ effects due to significant labour market changes, including drastic declines in unionization and collective bargaining.

It reported “almost zero pass-through for 1980-1999” and negligible effects during 2000-19, before concluding, “In a broad stroke, the pass-through has declined over time in Europe”. Similar findings have been reported by others.

Reserve Bank of Australia (RBA) research found “the current episode has many differences to the 1970s, when a wage-price spiral did emerge”. It concluded, “There are a number of factors that work against a wage-price spiral emerging, … implying that the overall risk in most advanced economies is probably quite low”.

Australian professor Ross Garnaut has suggested, “the spectre of a virulent wage-price spiral comes from our memories and not current conditions”. Sadly, despite all the evidence, including their own, the Fund and RBA still urge firm CB actions against inflation!

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High Costs, Moot Benefits — Global Issues

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

SYDNEY and KUALA LUMPUR, Sep 20 (IPS) – Policymakers have become obsessed with achieving low inflation. Many central banks adopt inflation targeting (IT) monetary policy (MP) frameworks in various ways. Some have mandates to keep inflation at 2% over the medium term. Many believe this ensures sustained long-term prosperity.

Anis ChowdhuryThe now universal 2% inflation target “was plucked out of the air”. This was acknowledged by Reserve Bank of New Zealand (RBNZ) Governor Don Brash who first adopted IT. The target was due to NZ Finance Minister Roger Douglas’ “chance remark” of achieving “genuine price stability, around 0, or 0 to 1 percent”.

IT discord
Heads of major central banks – such as the US Federal Reserve Bank (Fed), Bank of England (BoE) and German Bundesbank – committed to keep inflation at 2% soon after NZ. Although typically ‘medium-term’, IT’s high costs are portrayed as necessary, but brief. Worse, promised growth benefits have not materialized.

The Articles of Agreement of the International Monetary Fund (IMF) never endorsed any fixed inflation target. Article IV states, “each member shall: (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances”.

This makes clear much depends on conditions and circumstances. The sensible priority then would be to sustain prosperity with “reasonable price stability”, and not to commit to an arbitrary universal IT at any cost. Yet, many IMF officials promote the 2% target.

Jomo Kwame SundaramDuring the 2008-09 global financial crisis (GFC), the IMF Managing Director appealed for more imagination in designing monetary policy, appreciating “just how intricate the global economic and financial web had become”.

For him, “Monetary policy needs to look beyond its core focus on low and stable inflation” to promote balanced and equitable growth, while minimizing adverse spill-overs on developing economies.

An IMF chief economist even asserted low inflation and economic progress was a “divine coincidence”, and insisted a 2% inflation target was too low. After the GFC, an IMF working paper argued for a long-run inflation target of 4% for advanced countries.

A Bank of Canada working paper concluded, “the current state of economic research – both empirical and theoretical – provides little basis for believing in significant observable benefits of low inflation such as an increase in the growth rate of real GDP”.

IT benefits?
Any objective consideration of actual IT experiences would have led to its rejection long ago. IT is clearly inimical to growth and equity, let alone the Sustainable Development Goals (SDGs). Four central bank (CB) experiences offer valuable lessons about IT’s likely consequences.

The US Fed is, by far, the most important CB globally, while the BoE has been historically important. The Bundesbank has been the most inflation averse in the post-war period, while the RBNZ was the world’s IT pioneer.

NZ’s inflation during 1961-90 averaged 9%, more than the US’s 5.1% and the UK’s 8%. Yet, the mighty Fed and the venerable BoE sought to emulate the miniscule RBNZ! Germany’s well-known inflation-phobia is attributed to its inter-war ‘hyperinflation’ and its bloody aftermath. Inflation there averaged 3.4% over 1960-90, i.e., even before IT.

None achieved sustained economic prosperity despite reaching inflation targets of 2% or less. Average per capita GDP growth declined sharply in the US, UK and Germany, while rising negligibly in NZ (Table 1).

Long-term declines in their growth rates followed declining investments (Table 2). IT advocates claim high inflation causes uncertainty, thus reducing investments, but lower inflation has clearly done worse.

As the investment rate declined with IT, so did productivity growth in the UK, Germany and NZ (Table 3). While productivity growth has risen negligibly with IT in the US, it has trended down in all four economies (Figures 1-4). US hourly output grew at only 1.4% after 2004, “half its pace in the three decades after World War II”.

Most advanced economies have experienced productivity slowdowns since the 1970s. With the European Central Bank’s strict IT framework, the euro zone also saw marked slowdowns in productivity growth during 1999-2019.

Declining productivity growth often becomes the pretext for depressing real wages and working conditions, compelling workers to work more to compensate for lost earnings. Productivity and growth slowdowns are seen as “secular stagnation”.

All this has been blamed on inflation. But lowering inflation has not reversed this trend, which has actually accelerated since the GFC. Many explanations have been offered, but the reasons for this failure remain moot.

IT, low inflation, tax cuts and market reforms are supposed to improve economic performance. Weaker investment and economic growth, due to contractionary macroeconomic policies, slowed US productivity growth.

Similarly, The Economist observed, “Drooping demand crimped incentives to invest and innovate”. It ascribed declining UK productivity growth to cuts in innovation investments due to “austerity policies” and “severe reduction in credit”, inter alia.

Concluding “no doubt … the cost … was huge”, it estimated, “Britain’s GDP per person in 2019 would have been £6,700 ($8,380) higher than it turned out to be” had productivity growth not fallen further after the GFC.

There is growing acknowledgement that widespread “unconditional” CB commitment to 2% inflation targets – in the face of the current inflationary upsurge – is likely to worsen slowdowns. This is likely to compound debt crises in many developing countries.

The adverse socio-economic impacts of recessions are well documented. Policy-induced recessions – supposedly to curb inflation – will compound the effects of pandemic, war and sanctions.

Pragmatism, not dogma
Central bankers should not be dogmatic. Instead, pragmatic approaches are urgently needed to address the current inflationary surges. This is especially necessary when inflation worldwide is mainly due to supply shocks.

Western policymakers must consider the adverse spill-over impacts on developing countries, already on the brink of debt crises due to protracted slowdowns. Government debt – with more higher cost commercial borrowings – has been rising since the GFC, Western ‘quantitative easing’ and Covid-19.

Almost all central bankers know it is almost impossible to achieve 2% inflation in current circumstances. Yet, they insist not raising interest rates now will cause much economic damage later.

But such claims clearly have no theoretical or empirical bases. Hence, it is recklessly dogmatic to enforce a 2% target by falsely claiming inaction would be even more harmful.

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Africa Struggles with Neo-Colonialism — Global Issues

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

SYDNEY and KUALA LUMPUR, Sep 13 (IPS) – After a quarter century of economic stagnation, African economic recovery early in the 21st century was under great pressure even before the pandemic, due to new trade arrangements, falling commodity prices and severe environmental stress.

European scramble for AfricaAfrica’s borders were drawn up by European powers, especially following their ‘Scramble for Africa’ from 1881 ending by World War One. Various culturally, linguistically and religiously different ‘ethnic’ groups were forced together into colonies, to later become post-colonial ‘nations’.

Europeans came to Africa seeking slaves and minerals, later building colonial empires. The US attended the 1884 Berlin Congress, dividing Africa among European powers. Colony-less ‘latecomer’ Germany got Southwest Africa and Tanganyika, now Namibia and mainland Tanzania respectively.

Namibia’s Herero and Nama peoples revolted unsuccessfully against German occupation in 1904. General Lothar von Trotha then ordered “every Herero … shot”. Four-fifths of the Herero and half the Nama died!

Communities were surrounded, with many killed. Others were held, with many dying in concentration camps, or driven into the desert to die of starvation. In 1984, the UN Whitaker Report concluded the atrocities were among the worst 20th century genocides.

Asymmetric interdependence?
Europe’s post-Second World War recovery benefited immensely from their primary commodity exporting colonies. After the wartime devastation, European imperial powers relied on colonial currency arrangements for precious foreign exchange.

Imperial power also ensured captive colonial markets for uncompetitive post-war European manufactures. Recovery and competition brought down commodity prices, especially after the Korean War boom. For well over a century, such prices have declined against those for manufactures.

As decolonization became inevitable, French politicians promoted the notion of ‘Eurafrica’, mimicking the US Monroe Doctrine’s claim to Latin America. French elite discourse insisted African independence should be defined by (asymmetric) ‘interdependence’, not ‘sovereignty’.

Although Germany lost its few colonies in Africa after losing the First World War, the influential West German Die Welt wondered wistfully in 1960, “Is Africa getting away from Europe?”

From decolonization to Cold War
The US was the first nation to recognize Belgian King Leopold II’s personal claim to the Congo River basin in 1884. When Leopold’s brutal atrocities and exploitation of his private Congo Free State domain, killing millions, could no longer be denied, other European powers forced Belgium to directly colonize the country!

Since then, the US has shaped the Congo’s destiny. The US has been keenly interested in its massive mineral resources. Congolese uranium, the richest in the world, was used in the Hiroshima and Nagasaki nuclear bombs. But Washington would not allow Africans control of their own strategic materials.

Patrice Lumumba became the first elected prime minister of the Democratic Republic of the Congo (DRC). An advocate of pan-African economic independence, his wish for genuine independence and sovereign control of DRC resources threatened powerful interests.

Lumumba was brutally humiliated, tortured and murdered in January 1961. The shameful assassination involved both US and Belgian governments which collaborated with Lumumba’s Congolese rivals.

Struggling to stand up
Pan-Africanist leader Kwame Nkrumah wanted independent Ghana to chart an ‘anti-imperialist’ path, staying non-aligned in the Cold War. He wanted hydroelectric dams to power Ghana’s industrial progress, beginning by smelting its bauxite to develop an aluminium value chain.

The US, UK and World Bank agreed to finance the Akosombo Dam, on condition it provided cheap energy to a Kaiser Aluminium subsidiary to process alumina for export to Kaiser. This arrangement was only rescinded decades later, early this century.

Ghana made technical cooperation agreements with the Czechs and Soviets to build two other dams. But both were ended after Nkrumah was overthrown in a military coup abetted by Washington in February 1966. Thus, Nkrumah’s development ambitions for Ghana were killed.

A scaled-down Bui dam was finally built by Chinese contractors decades later. Nkrumah’s 1965 book, Neo-colonialism: The Last Stage of Imperialism, was probably the final straw in embarrassing the West.

Elsewhere, Tanzania’s Julius Nyerere’s Ujamaa ‘African socialism’ focused on developing villages and food security. Western antagonism ensured Ujamaa’s failure, while his efforts were harshly condemned to deter other Africans from trying to chart their own paths.

Meanwhile, Nyerere’s pro-Western contemporaries were supported by the West. Such countries, e.g., neighbouring Kenya and Uganda, received much more Western aid although their development records have not been much better.

A luta continua
At independence, Zambia had no universities, with only 0.5% completing primary education. The country’s copper mines were mostly in British hands. Most people survived on limited land for the villagers, without electricity and other amenities.

Hemmed in by Western-supported racist states, President Kenneth Kaunda – a devout Christian – sought foreign help to bypass hostile South Africa and Rhodesia (now Zimbabwe) to change the landlocked nation’s fate.

After the US and World Bank refused to help, he reached out to the Soviet bloc and China. China built a $500 million railway linking Zambia to the Indian Ocean through Tanzania.

Côte d’Ivoire has long been a major producer of cocoa and coffee. But three decades of misrule by its pro-Western founding father, Felix Houphouet-Boigny, ensured endemic poverty and stark inequalities, culminating in civil war.

In 2020, almost 40% of its people lived in ‘extreme poverty’. In 2019, the middle-income country’s human development index score was a low 0.538, which dropped to 0.346, when adjusted for inequality.

Both Kaunda and Houphouet-Boigny later abandoned their early, more neo-colonial policies. Zambia nationalized copper mines, hoping to improve living conditions, instead of enriching foreign investors.

Meanwhile, Ivorian cocoa was withheld to secure better prices. But both efforts failed, as copper and cocoa prices collapsed. Thus, both nations were severely punished for trying to better their fates.

Non-alignment best
During the first Cold War, Western hostility to African aspirations forced many to turn to the ‘socialist camp’ to build infrastructure and develop human resources. Washington then was as concerned with economic gain as countering ‘Reds’.

The Kennedy administration had increased foreign aid, urging allies to do likewise. But instead of supporting African aspirations, the West pursued its own economic interests while claiming to support post-colonial aspirations.

Increasing African government indebtedness over the 1970s forced many to accept structural adjustment programme policy conditions imposed by international financial institutions from the 1980s. Of course, developing countries following International Monetary Fund (IMF) and World Bank prescriptions became Western darlings.

Nyerere observed: “The IMF … makes conditions and says, ‘if you follow these examples, your economy will improve’. But where are the examples of economies booming in the Third World because they accepted the conditions of the IMF?”

Cold War considerations have also meant US interest in Africa has waxed and waned. Now, the West warns of imminent Chinese ‘take-overs’ and nefarious Russian designs. China seems more interested in financing and building infrastructure, while Putin promotes Russian exports.

Neglected by the US after the first Cold War until its 21st century African initiatives, including Africom, African nations have increasingly welcomed alternatives to the West, albeit somewhat warily.

Together, the world can help Africa progress. But if support for the long cruelly exploited continent remains hostage to new Cold War considerations, Africans will choose accordingly. Non-alignment is now the pan-African choice.

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1980s Redux? New context, Old Threats — Global Issues

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

SYDNEY and KUALA LUMPUR, Sep 06 (IPS) – As rich countries raise interest rates in double-edged efforts to address inflation, developing countries are struggling to cope with slowdowns, inflation, higher interest rates and other costs, plus growing debt distress.

Rich countries’ interest rate hikes have triggered capital outflows, currency depreciations and higher debt servicing costs. Developing country woes have been worsened by commodity price volatility, trade disruptions and less foreign exchange earnings.

Anis ChowdhuryRising debt risks Almost 60% of the poorest countries were already in, or at high risk of debt distress, even before the Ukraine crisis. Debt service burdens in middle-income countries have reached 30-year highs, as interest rates rise with food, fertilizer and fuel prices.

Developing countries’ external debt has risen since the 2008-09 global financial crisis (GFC) – from $2 trillion (tn) in 2000 to $3.4tn in 2007 and $9.6tn in 2019! External debt’s share of GDP fell from 33.1% in 2000 to 22.8% in 2008. But with sluggish growth since the GFC, it rose to 30% in 2019, before the pandemic.

The pandemic pushed up developing countries’ external debt to $10.6tn, or 33% of GDP in 2020, the highest level on record. The external debt/GDP ratio of developing countries other than China was 44% in 2020.

Borrowing from international capital markets accelerated after the GFC as interest rates fell. But commercial debt is generally of shorter duration, typically less than ten years. Private lenders also rarely offer restructuring or refinancing options.

Lenders in international capital markets charge developing countries much higher interest rates, ostensibly for greater risk. But changes in public-private debt composition and associated costs have made such debt riskier.

Private short-term debt’s share rose from 16% of total external debt in 2000 to 26% in 2020. Meanwhile, international capital markets’ share of public external debt rose from 43% to 62%. Also, much corporate debt, especially of state-owned enterprises, is government-guaranteed.

Meanwhile, unguaranteed private debt now exceeds public debt. Although private debt may not be government-guaranteed, states often have to take them on in case of default. Hence, such debt needs to be seen as potential contingent government liabilities.

Jomo Kwame SundaramSri Lankan international capital market borrowings grew from 2.5% of foreign debt in 2004 to 56.8% in 2019! Its dollar denominated debt share rose from 36% in 2012 to 65% in 2019, while China accounted for 10% of its external borrowings.

Private borrowings for less than ten years were 60% of Lankan debt in April 2021. The average interest rate on commercial loans in January 2022 was 6.6% – more than double the Chinese rate. In 2021, Lankan interest payments alone came to 95.4% of its declining government revenue!

Commercial debt – mostly Eurobonds – made up 30% of all African external borrowings with debt to China at 17%. Zambian commercial debt rose from 1.6% of foreign borrowings in 2010 to 30% in 2018; 57% of Ghana’s foreign debt payments went to private lenders, with Eurobonds getting 60% of Nigeria’s and over 40% of Kenya’s.

More commercial borrowing
Thus, external debt increasingly involved more speculative risk. Public bond finance, foreign debt’s most volatile component, rose relative to commercial bank loans and other private credit. Meanwhile, more stable and less onerous official credit has declined in significance.

Various factors have made things worse. First, most rich countries have failed to make their promised annual aid disbursements of 0.7% of their gross national income, made more than half a century ago.

Worse, actual disbursements have actually declined from 0.54% in 1961 to 0.33% in recent years. Only five nations have consistently met their 0.7% promise. In the five decades since promising, rich economies have failed to deliver $5.7tn in aid!

Second, the World Bank and donors have promoted private finance, urging ‘public-private partnerships’ and ‘blended finance’ in “From billions to trillions: converting billions of official assistance to trillions in total financing”.

Sustainable development outcomes of such private financing – especially in promoting poverty reduction, equity and health – have been mixed at best. But private finance has nonetheless imposed heavy burdens on government budgets.

Third, since the GFC, developed economies have resorted to unconventional monetary policies – ‘quantitative easing’, with very low or even negative real interest rates. With access to cheap funds, managers seeking higher returns invested lucratively in emerging markets before the recent turnaround.

Large investment funds and their collaborators, e.g., credit rating agencies, have profitably created new means to get developing countries to float more bonds to raise funds in international capital markets.

Making things worse
Policy advice from donors and multilateral development banks (MDBs), rating agencies’ biases and the lack of an orderly and fair sovereign debt restructuring mechanism have shaped commercial lending practices.

Favouring private market solutions, donors, MDBs and the IMF have discouraged pro-active development initiatives for over four decades. Hence, many developing countries remain primary producers with narrow export bases and volatile earnings.

They have urged debilitating reforms, e.g., arguing tax cuts are necessary to attract foreign direct investment (FDI). Meanwhile, corporate tax evasion and avoidance have worsened developing countries’ revenue losses. Thus, net revenue has fallen as such reforms fail to generate enough growth and revenue.

Credit rating agencies often assess developing countries unfavourably, raising their borrowing costs. Quick to downgrade emerging markets, they make it costlier to get financing, even if economic fundamentals are sound.

The absence of orderly and fair debt restructuring mechanisms has not helped. Commercial lenders charge higher interest rates, ostensibly for default risks. But then, they refuse to refinance, restructure or provide relief, regardless of the cause of default.

When will we learn?
Following the 1970s’ oil price hikes, western, especially US banks were swimming in liquidity as oil exporters’ dollar reserves swelled. These banks pushed debt, getting developing country governments to borrow at low real interest rates.

After the US Fed began raising interest rates from 1977 to fight inflation, other major central banks followed, raising countries’ debt service burdens. Ensuing economic slowdowns cut commodity exporters’ earnings.

In the past, the IMF and World Bank imposed ‘one-size-fits-all’ ‘stabilization’ and ‘structural adjustment’ measures, impairing development. Developing countries had to implement severe austerity measures, liberalization and privatization. As real incomes declined, progress was set back.

With the pandemic, developing countries have seen massive capital outflows, more than in 2008. Meanwhile, surging food, fertilizer and fuel prices are draining developing countries’ foreign exchange earnings and reserves.

As the US Fed raises interest rates, capital flight to Wall Street is depreciating other currencies, raising import costs and debt burdens. Thus, many countries need financial help.

Debt-distressed countries once again seek support from the Washington-based lenders of last resort. But without enough debt relief, a temporary liquidity crisis threatens to become a debt sustainability, and hence, a solvency crisis, as in the 1980s.

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How France Underdevelops Africa — Global Issues

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

SYDNEY and KUALA LUMPUR, Aug 30 (IPS) – Most sub-Saharan African French colonies got formal independence in the 1960s. But their economies have progressed little, leaving most people in poverty, and generally worse off than in other post-colonial African economies.

Decolonization?

Pre-Second World War colonial monetary arrangements were consolidated into the Colonies Françaises d’Afrique (CFA) franc zone set up on 26 December 1945. Decolonization became inevitable after France’s defeat at Dien Bien Phu in 1954 and withdrawal from Algeria less than a decade later.

Anis Chowdhury

France insisted decolonization must involve ‘interdependence’ – presumably asymmetric, instead of between equals – not true ‘sovereignty’. For colonies to get ‘independence’, France required membership of Communauté Française d’Afrique (still CFA) – created in 1958, replacing Colonies with Communauté.

CFA countries are now in two currency unions. Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo belong to UEMOA, the French acronym for the West African Economic and Monetary Union.

Its counterpart CEMAC is the Economic and Monetary Community of Central Africa, comprising Cameroon, the Central African Republic, the Republic of the Congo, Gabon, Equatorial Guinea and Chad.

Both UEMOA and CEMAC use the CFA franc (FCFA). Ex-Spanish colony, Equatorial Guinea, joined in 1985, one of two non-French colonies. In 1997, former Portuguese colony, Guinea-Bissau was the last to join.

Such requirements have ensured France’s continued exploitation. Eleven of the 14 former French West and Central African colonies remain least developed countries (LDCs), at the bottom of UNDP’s Human Development Index (HDI).

French African colonies

Guinea was the first to leave the CFA in 1960. Before fellow Guineans, President Sékou Touré told President Charles de Gaulle, “We prefer poverty in freedom to wealth in slavery”.

Guinea soon faced French destabilization efforts. Counterfeit banknotes were printed and circulated for use in Guinea – with predictable consequences. This massive fraud brought down the Guinean economy.

Jomo Kwame Sundaram

France withdrew more than 4,000 civil servants, judges, teachers, doctors and technicians, telling them to sabotage everything left behind: “un divorce sans pension alimentaire” – a divorce without alimony.

Ex-French espionage documentation service (SDECE) head Maurice Robert later acknowledged, “France launched a series of armed operations using local mercenaries, with the aim of developing a climate of insecurity and, if possible, overthrow Sékou Touré”.

In 1962, French Prime Minister Georges Pompidou warned African colonies considering leaving the franc zone: “Let us allow the experience of Sékou Touré to unfold. Many Africans are beginning to feel that Guinean politics are suicidal and contrary to the interests of the whole of Africa”.

Togo independence leader, President Sylvanus Olympio was assassinated in front of the US embassy on 13 January 1963. This happened a month after he established a central bank, issuing the Togolese franc as legal tender. Of course, Togo remained in the CFA.

Mali left the CFA in 1962, replacing the FCFA with the Malian franc. But a 1968 coup removed its first president, radical independence leader Modibo Keita. Unsurprisingly, Mali later re-joined the CFA in 1984.

Resource-rich

The eight UEMOA economies are all oil importers, exporting agricultural commodities, such as cotton and cocoa, besides gold. By contrast, the six CEMAC economies, except the Central African Republic, rely heavily on oil exports.

CFA apologists claim pegging the FCFA to the French franc, and later, the euro, has kept inflation low. But lower inflation has also meant “slower per capita growth and diminished poverty reduction” than in other African countries.

The CFA has “traded decreased inflation for fiscal restraint and limited macroeconomic options”. Unsurprisingly, CFA members’ growth rates have been lower, on average, than in non-CFA countries.

With one of Africa’s highest incomes, petroleum producer Equatorial Guinea is the only CFA country to have ‘graduated’ out of LDC status, in 2017, after only meeting the income ‘graduation’ criterion.

Its oil boom ensured growth averaging 23.4% annually during 2000–08. But growth has fallen sharply since, contracting by -5% yearly during 2013–21! Its 2019 HDI of 0.592 ranked 145 of 189 countries, below the 0.631 mean for middle-ranking countries.

Poor people

With over 70% of its population poor, and over 40% in ‘extreme poverty’, inequality is extremely high in Equatorial Guinea. The top 1% got over 17% of pre-tax national income in 2021, while the bottom half got 11.5%!

Four of ten 6–12 year old children in Equatorial Guinea were not in school in 2012, many more than in much poorer African countries. Half the children starting primary school did not finish, while less than a quarter went on to middle school.

CFA member Gabon, the fifth largest African oil producer, is an upper middle-income country. With petroleum making up 80% of exports, 45% of GDP, and 60% of fiscal revenue, Gabon is very vulnerable to oil price volatility.

One in three Gabonese lived in poverty, while one in ten were in extreme poverty in 2017. More than half its rural residents were poor, with poverty three times more there than in urban areas.

Côte d’Ivoire, a non-LDC CFA member, enjoyed high growth, peaking at 10.8% in 2013. With lower cocoa prices and Covid-19, growth fell to 2% in 2020. About 46% of Ivorians lived on less than 750 FCFA (about $1.30) daily, with its HDI ranked 162 of 189 in 2019.

CFA’s neo-colonial role

Clearly, the CFA “promotes inertia and underdevelopment among its member states”. Worse, it also limits credit available for fiscal policy initiatives, including promoting industrialization.

Credit-GDP ratios in CFA countries have been low at 10–25% – against over 60% in other Sub-Saharan African countries! Low credit-GDP ratios also suggest poor finance and banking facilities, not effectively funding investments.

By surrendering exchange rate and monetary policy, CFA members have less policy flexibility and space for development initiatives. They also cannot cope well with commodity price and other challenges.

The CFA’s institutional requirements – especially keeping 70% of their foreign exchange with the French Treasury – limit members’ ability to use their forex earnings for development.

More recent fiscal rules limiting government deficits and debt – for UEMOA from 2000 and CEMAC in 2002 – have also constrained policy space, particularly for public investment.

The CFA has also not promoted trade among members. After six decades, trade among CEMAC and UEMOA members averaged 4.7% and 12% of their total commerce respectively. Worse, pegged exchange rates have exacerbated balance of payments volatility.

Unrestricted transfers to France have enabled capital flight. The FCFA’s unlimited euro convertibility is supposed to reduce foreign investment risk in the CFA. However, foreign investment is lower than in other developing countries.

Total net capital outflows from CFA countries during 1970–2010 came to $83.5 billion – 117% of combined GDP! Capital flight from CFA economies was much more than from other African countries during 1970–2015.

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How NOT to Win Friends and Influence People — Global Issues

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

SYDNEY and KUALA LUMPUR, Aug 23 (IPS) – After four years of Trump’s ‘America first’ isolationism, US President Joe Biden announced “America is back”. His White House has since tried to find allies against China and Russia.

But it has not found many, especially in the Global South. His summit with Southeast Asian leaders was well attended, but promised little. Worse, his Summit of the Americas revealed fading US influence in its long-time backyard.

Anis ChowdhuryAfrica not aligned
The latest U.S. Strategy Towards Sub-Saharan Africa (SSA) was expected to do better on the continent of Trump’s “shithole countries”. But it delivered little more than rhetoric. As with its Indo-Pacific Economic Framework for Prosperity, it is seen as “a hamburger without the beef”.

Biden’s strategy explicitly seeks to “counter harmful activities” by China and Russia, and “to expose and highlight the risks of negative PRC and Russian activities in Africa”. But it offers no evidence of such threats.

It asserts China “sees the region as an important arena to challenge the rules-based international order, advance its own narrow commercial and geopolitical interests, undermine transparency and openness”.

Similarly, it insists “Russia views the region as a permissive environment for parastatals and private military companies, often fomenting instability for strategic and financial benefit.”

Presenting Biden’s SSA strategy in South Africa (SA), US Secretary of State Anthony Blinken claimed, “Our commitment to a stronger partnership with Africa is not about trying to outdo anyone else”. He emphasized, “our purpose is not to say you have to choose”.

While “glad” the US was not forcing Africa to choose, SA foreign minister Naledi Pandor reminded the Blinken mission no African country can be “bullied” or threatened thus: “either you choose this or else.” The host also reminded her guests of the plight of the Palestinian people and life under apartheid.

Jomo Kwame SundaramVisiting Rwanda just before Blinken’s announcement, US Ambassador to the United Nations Linda Thomas-Greenfield had threatened, “Africa could face consequences if they trade in U.S.-sanctioned commodities”.

Pandor described the US Congressional bill, ‘Countering Malign Russian Activities in Africa Act’ as “offensive legislation”. The bill, the 2021 Strategic Competition Act and the US Innovation and Competition Act have all been criticized by Africans, including governments, as “Cold War-esque”.

Calling for diplomacy, not war, Pandor urged, “African countries that wish to relate to China, let them do so, whatever the particular form of relationships would be.”

US credibility in doubt
Biden’s SSA strategy has four explicit objectives – foster openness and open societies, deliver democratic and security dividends, advance pandemic recovery and economic opportunity, and support conservation, climate adaptation, and a just energy transition.

The US strategy paper refers to the 2022 G7 Partnership for Global Infrastructure and Investment (PGII) promising $600bn. Confident the PGII will “advance U.S. national security”, the White House has pledged $200bn “to deliver game-changing projects to strengthen economies”.

After all, the 2005 G7 Gleneagles Summit promise – to double aid by 2010, with $50bn yearly for Africa – remains unfulfilled. Actual aid has been woefully short, with no transparent reporting or accountability.

Over half a century ago, rich nations promised 0.7% of their national income in development aid. The US has long ranked lowest among the G7, spending only 0.18% in 2021. Worse, US aid effectiveness is worst among the world’s 27 wealthiest nations.

Meanwhile, rich countries have fallen far short of their 2009 pledges to provide $100bn in climate finance annually until 2020 to help developing countries adapt to and mitigate global warming.

After his stillborn Build Back Better World initiative, many doubt how much Congress will approve, and what will be for SSA. Likewise, before mid-2021, the Biden administration promised support for pandemic containment.

But it did not support developing countries’ request to the World Trade Organization (WTO) for a temporary waiver of related patents. The June 2022 WTO compromise was nothing less than “shameful”.

Supplies of Covid pandemic needs from China and Russia have been decried as “vaccine diplomacy”. Sanctions against Russia have disrupted contracted delivery of 110 million doses of its vaccine. This jeopardizes UNICEF efforts to vaccinate many countries, including Zambia, Uganda, Somalia and Nigeria.

With 43.87 vaccine doses per 100 people – less than a third of the 157.71 world average, or under a quarter of the US mean of 183 doses per 100 people – Africa had the lowest Covid-19 vaccination rate, by far, in mid-August 2022.

The SSA strategy paper highlights US-Africa HIV-AIDS partnerships. But it is silent about Big Pharma getting a US sanctions threat against SA for producing generic HIV-AIDS drugs. The US only backed down after a worldwide backlash as Nelson Mandela stood firm.

West still exploiting Africa
Biden’s SSA strategy promises to “engage with African partners to expose and highlight the risks of negative PRC and Russian activities in Africa” in line with the US 2022 National Defense Strategy.

But it ignores why Africa remains underdeveloped and poor. After all, Africa has around 30% of the world’s known mineral reserves, and 60% of its arable land. Yet, 33 of its 54 nations are deemed least developed countries.

The New Colonialism report showed British companies control Africa’s key mineral resources, with 101 mostly UK companies listed on the London Stock Exchange having mining operations in 37 SSA countries.

Together, they controlled over a trillion dollars’ worth, while $192 billion is drained yearly from Africa via profit transfers and tax dodging by foreign companies.

France retains control of its former colonies’ monetary systems, requiring them to deposit foreign exchange reserves with the French Treasury. It has never hesitated to topple ‘unfriendly’ governments through coups and its military.

Recently, the US promised to continue providing intelligence, surveillance and reconnaissance support on Africa to France, using its advanced drone and satellite technology.

As ex-colonial powers continue to control and exploit SSA, policies imposed by donors, the International Monetary Fund and multilateral development banks have ensured its continuing underdevelopment and impoverishment.

Once a net food exporter, Africa has become a net food importer. With more pronounced Washington Consensus policies since the 1980s, food insecurity has worsened. SSA has also deindustrialized, making it more resource dependent and vulnerable to international commodity price volatility.

Forget the past?
Many Africans have suffered much due to colonialism, racism, apartheid and other oppressions. Pan-Africanism contributed much to the non-aligned movement during the old Cold War. Julius Nyerere famously declared in 1965, “We will not allow our friends to choose our enemies”.

Half a century later, Mandela reminded the West not to presume its “enemies should be our enemies”. Older Africans still remember the former Soviet Union and China for their support through past struggles, when most of the West remained on the wrong side of history.

Africans are correctly wary of the new “Greeks bearing gifts” and promises. While most do not want a new Cold War, many see China and Russia offering more tangible benefits. Unsurprisingly, 25 of Africa’s 54 states did not support the March 2022 UN General Assembly resolution condemning Russia’s invasion of Ukraine.

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From Tragedy to Farce — Global Issues

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

SYDNEY and KUALA LUMPUR, Aug 16 (IPS) – Half a century after the 1970s’ stagflation, economies are slowing, even contracting, as prices rise again. Thus, the World Bank warns, “Surging energy and food prices heighten the risk of a prolonged period of global stagflation reminiscent of the 1970s.”

In March, Reuters reported, “With surging oil prices, concerns about the hawkishness of the Federal Reserve and fears of Russian aggression in Eastern Europe, the mood on Wall Street feels like a return to the 1970s”.

Anis ChowdhuryStagflation in the 1970s
Worse, it seems few lessons have been learnt from the last stagflation episode. There is no agreed formal definition of stagflation, which refers to a combination of economic stagnation with high inflation, e.g., when unemployment and prices both rise.

When growth is weak and many are jobless, prices rarely rise, keeping inflation low. The converse is true when growth is strong. This inverse relationship between economic activity and inflation broke down with supply shocks, particularly oil and other primary commodity price surges during 1972-75.

Non-oil primary commodity prices on The Economist index more than doubled between mid-1972 and mid-1974. Prices of some commodities, e.g., sugar and urea fertilizer, rose more than five-fold!

As costlier energy pushed up production expenses, businesses raised prices and cut jobs. With higher food, fuel and other prices, rising costs, coupled with income losses, reduced aggregate demand, further slowing the economy.

Fed chokes economy to cut inflation
Years before becoming US Fed chair in 2006, a Ben Bernanke co-authored paper noted, “Looking more specifically at individual recessionary episodes associated with oil price shocks, we find that … oil shocks, per se, were not a major cause of these downturns”.

Jomo Kwame SundaramThey 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”. Their findings corroborated others, e.g., by James Tobin.

Following Milton Friedman and Anna Schwartz, other economists also found “in the postwar era there have been a series of episodes in which the Federal Reserve has in effect deliberately attempted to induce a recession to decrease inflation”.

The US Fed began raising interest rates from 1977, inducing an American economic recession in 1980. The economy briefly turned around when the Fed stopped raising interest rates. But this nascent recovery soon ended as Fed chair Paul Volcker raised interest rates even more sharply.

The federal funds target rate rose from around 10% to nearly 20%, triggering an “extraordinarily painful recession”. Unemployment rose to nearly 11% nationwide – the highest in the post-war era – and as high as 17% in some states, e.g., Michigan, leaving long-term scars.

Interest rate hikes reduced needed investments. Outside the US economy, these sharp and rapid interest rate hikes triggered debt crises in Poland, Latin America, sub-Saharan Africa, South Korea and elsewhere.

Earlier open economic policies meant “the increase in world interest rates, the increased debt burden of developing countries, the growth slowdown in the industrial world…contributed to the developing countries’ stagnation”.

Countries seeking International Monetary Fund (IMF) financial support had to agree to severe fiscal austerity, liberalization, deregulation and privatization policy conditionalities. With per capita incomes falling and poverty rising, Latin America and Africa “lost two decades”.

Stagflation reprise
The IMF chief economist recently reiterated, “Inflation is a major concern”. The Bank of International Settlements has warned, “We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched.”

Central bankers’ anti-inflationary efforts mainly involve raising interest rates. This approach slows economies, accelerating recessions, often triggering debt crises without quelling rising prices due to supply shocks.

Economic recoveries from the 2008-09 global financial crisis (GFC) remained tepid for a decade after initially bold fiscal responses were quickly abandoned. Meanwhile, ‘quantitative easing’, other unconventional monetary policies and the Covid-19 pandemic raised debt to unprecedented levels.

GFC trade protectionist responses, US and Japanese ‘reshoring’ of foreign investment in China, the pandemic, the Ukraine war and sanctions against Russia and its allies have reversed earlier trade liberalization.

Higher interest rates in the rich North have triggered capital flight, causing developing country currencies to depreciate, especially against the US dollar. The slowing world economy has reduced demand for many developing country exports, while most migrant worker remittances decline.

Interest rate hikes have worsened debt crises, particularly in the global South. The poorest countries have seen an $11bn surge in debt payments due while grappling with looming food crises. Thus, developing country vulnerabilities have been worsened by international trends over which they have little control.

Lessons not learned
Supply-side cost-push inflation is very different from the demand-pull variety. Without evidence, inflation ‘hawks’ insist that not acting urgently will be costlier later.

This may happen if surging demand is the main cause of inflation, especially if higher costs are easily passed on to consumers. However, episodes of dangerously accelerating inflation are very rare.

Acting too quickly against supply-shock inflation can be unwise. The 1970s’ energy crises sparked greater interest in energy efficiency. But higher interest rates in the 1980s deterred needed investments, even to reverse declining or stagnating productivity growth.

Raising interest rates also accelerated recessions. But similar commodity price rises before the 1970s’ and imminent stagflation episodes – involving energy and food respectively – obscure major differences.

For instance, ‘wage indexing’ – linking wage increases to price rises – enhanced the 1970s’ inflation spiral. But labour market deregulation since the 1980s has largely ended such indexation.

The IMF acknowledges globalization, ‘offshoring’ and labour-saving technical change have weakened unionization and workers’ bargaining power. With both elements of the 1970s’ wage-price spirals now insignificant, inflation is more likely to decline once supply bottlenecks ease.

But the wage-price spiral has also been replaced by a profit-price swirl. Reforms since the 1980s have also enhanced large corporations’ market power. Greater corporate discretion and reduced employees’ strength have thus increased profit shares, even during the pandemic.

In November 2021, Bloomberg observed the “fattest profits since 1950 debunks wage-inflation story of CEOs”. Meanwhile, the Guardian found “Companies’ profit growth has far outpaced workers’ wages”.

Corporations are taking advantage of the situation, passing on costs to customers. The net profits of the top 100 US corporations were “up by a median of 49%, and in one case by as much as 111,000%”!

Meanwhile, many more consumers struggle to meet their basic needs. Interest rate hikes have also hurt wage-earners, as falling labour shares of national income have been exacerbated by real wage stagnation, even contraction.

Hence, policymakers should ease supply bottlenecks and address imbalances to accelerate progress, not raise interest rates causing the converse. Thus, they should rein in corporate power, improve competition and protect the vulnerable.

Allowing international price rises to pass through, while protecting the vulnerable, can accelerate the transition to more sustainable consumption and production, including cleaner renewable energy.

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April Fool’s Inflation Medicine Threatens Progress — Global Issues

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

SYDNEY and KUALA LUMPUR, Aug 09 (IPS) – The world economy is on the brink of outright recession, according to the International Monetary Fund (IMF). The Ukraine war and sanctions have scuttled recovery from the COVID-19 pandemic.

Over 80 central banks have already raised interest rates so far this year. Except for the Bank of Japan governor, major central bankers have reacted to recent inflation by raising interest rates. Hence, stagflation is increasingly likely as rising interest rates slow the economy, but do not quell supply-side cost-push inflation.

Anis Chowdhury

IMF U-turn unexplained

The IMF chief economist recently advised, “Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers”.

While acknowledging the short-term costs of raising interest rates, he has never bothered to explain why inflation targets should be considered sacrosanct regardless of circumstances. Simply asserting inflation will be more costly if not checked now makes for poor evidence-based policy making.

After all, only a month earlier, on 7 June, the IMF advised, “Countries should allow international prices to pass through to domestic prices while protecting households that are most in need”.

The Fund recognized the major sources of current inflation are supply disruptions – first due to pandemic lockdowns disrupting supply chains, and then, delivery blockages of food, fuel and fertilizer due to war and sanctions.

US Fed infallible?

Without explaining why, US Federal Reserve Bank Chair Jerome Powell insists on emulating his hero, Paul Volcker, Fed chair during 1979-87. Volcker famously almost doubled the federal funds target rate to nearly 20%.

Thus, Volcker caused the longest US recession since the 1930s’ Great Depression, raising unemployment to nearly 11%, while “the effects of unemployment, on health and earnings of sacked workers, persisted for years”.

Asked at a US Senate hearing if the Fed was prepared to do whatever it takes to control inflation – even if it harms growth – Powell replied, “the answer to your question is yes”.

Jomo Kwame Sundaram

But major central banks have ‘over-reacted’ time and again, with disastrous consequences. Milton Friedman famously argued the US Fed exacerbated the 1930s’ Great Depression. Instead of providing liquidity to businesses struggling with short-term cash-flow problems, it squeezed credit, crushing economic activity.

Similarly, later Fed chair Ben Bernanke and his co-authors showed overzealous monetary tightening was mainly responsible for the 1970s’ stagflation. With prices still rising despite higher interest rates, stagflation now looms large.

North Atlantic trio

Most central bankers have long been obsessed with fighting inflation, insisting on bringing it down to 2%, despite harming economic progress. This formulaic response is prescribed, even when inflation is not mainly due to surging demand.

Powell recently observed, “supply is a big part of the story”, acknowledging the Ukraine war and China’s pandemic restrictions have pushed prices up.

While admitting higher interest rates may increase unemployment, Powell insists meeting the 2% target is “unconditional”. He asserted, “we have the tools and the resolve to get it down to 2%”, insisting “we’re going to do that”.

While recognizing “very big supply shocks” as the primary cause of inflation, Bank of England (BOE) Governor Andrew Bailey also vows to meet the 2% inflation target, allowing “no ifs or buts”.

While European Central Bank President Christine Lagarde does not expect to return “to that environment of low inflation”, admitting “inflation in the euro area today is being driven by a complex mix of factors”, she insists on raising “interest rates for as long as it takes to bring inflation back to our target”.

April Fools?

Much of the problem is due to the 2% inflation targeting dogma. As the then Governor of the Reserve Bank of New Zealand – the first central bank to adopt a 2% inflation target – later admitted, “The figure was plucked out of the air”.

Thus, a “chance remark” by the NZ Finance Minister – during “a television interview on April 1, 1988 that he was thinking of genuine price stability, ‘around 0, or 0 to 1 percent’” – has become monetary policy worldwide!

Powell also acknowledged, “Since the pandemic, we’ve been living in a world where the economy has been driven by very different forces”. He confessed, “I think we understand better how little we understand about inflation.”

Meanwhile, Powell acknowledges how changed globalization, demographics, productivity and technical progress no longer check price increases – as during the ‘Great Moderation’.

Bailey’s resolve to get inflation to 2% is even more shocking as he admits the BOE cannot stop inflation hitting 10%, as “there isn’t a lot we can do”.

Although it has no theoretical, analytical or empirical basis, many central bankers treat inflation targeting as universal best practice – in all circumstances! Thus, despite acknowledging supply-side disruptions and changed conditions, they still insist on the 2% inflation target!

Interest rate, blunt tool

Central bankers’ inflation targeting dogma will cause much damage. Even when inflation is rising, raising interest rates may not be the right policy tool for several reasons.

First, the interest rate only addresses the symptoms, not the causes of inflation – which can be many. Second, raising interest rates too often and too much can kill productive and efficient businesses along with those less so.

Third, by slowing the economy, higher interest rates discourage investment in new technology, skill-upgrading, plant and equipment, adversely affecting the economy’s long-term potential.

Fourth, higher interest rates will raise debt burdens for governments, businesses and households. Borrowings accelerated after the 2008-09 global financial crisis, and even more during the pandemic.

Monetary tightening also constrains fiscal policy. A slower economy implies less tax revenue and more social provisioning spending. Higher interest rates also raise living costs as households’ debt-servicing costs rise, especially for mortgages. Living costs also rise as businesses pass on higher interest rates to consumers.

Policy innovation

The recent inflationary surge is broadly acknowledged as due to supply shortages, mainly due to the new Cold War, pandemic, Ukraine war and sanctions.

Increasing interest rates may slow price increases by reducing demand, but does not address supply constraints, the main cause of inflation now. Anti-inflationary policy in the current circumstances should therefore change from suppressing domestic demand, with higher interest rates, to enhancing supplies.

Raising interest rates increases credit costs for all. Instead, financial constraints on desired industries to be promoted (e.g., renewable energy) should be eased. Meanwhile, credit for undesirable, inefficient, speculative and unproductive activities (e.g., real estate and share purchases) should be tightened.

This requires macroeconomic policies to support economic diversification, by promoting industrial investments and technological innovation. Each goal needs customized policy tools.

Instead of reacting to inflation by raising the interest rate – a blunt one-size-fits-all instrument indeed – policymakers should consider various causes of inflation and how they interact.

Each source of inflation needs appropriate policy tools, not one blunt instrument for all. But central bankers still consider raising interest rates the main, if not only policy against inflation – a universal hammer for every cause of inflation, all seen as nails.

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Africa Taken for Neo-Colonial Ride — Global Issues

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

SYDNEY and KUALA LUMPUR, Jul 26 (IPS) – Like so many others, Africans have long been misled. Alleged progress under imperialism has long been used to legitimize exploitation. Meanwhile, Western colonial powers have been replaced by neo-colonial governments and international institutions serving their interests.

‘Shithole’ pots of gold
US President Donald Trump’s “shitholes”, mainly in Africa, were and often still are ‘pots of gold’ for Western interests. From 1445 to 1870, Africa was the major source of slave labour, especially for Europe’s ‘New World’ in the Americas.

Anis ChowdhuryWalter Rodney’s How Europe Underdeveloped Africa noted “colonised Africans, like pre-colonial African chattel slaves, were pushed around into positions which suited European interests and which were damaging to the African continent and its peoples.”

The ‘scramble for Africa’ from the late nineteenth century saw European powers racing to secure raw materials monopolies through direct colonialism. Western powers all greatly benefited from Africa’s plunder and ruin.

European divide-and-conquer tactics typically also had pliant African collaborators. Colonial powers imposed taxes and forced labour to build infrastructure to enable raw material extraction.

Racist ideologies legitimized European imperialism in Africa as a “civilizing mission”. Oxford-trained, former Harvard history professor Niall Ferguson – an unabashed apologist for Western imperialism – insists colonialism laid the foundations for modern progress.

Richest, but poorest and hungriest!
A recent blog asks, “Why is the continent with 60% of the world’s arable land unable to feed itself? … And how did Africa go from a relatively self-sufficient food producer in the 1970s to an overly dependent food importer by 2022?”

Deeper analyses of such uncomfortable African realities seem to be ignored by analysts influenced by the global North, especially the Washington-based international financial institutions. UNCTAD’s 2022 Africa report is the latest to disappoint.

Jomo Kwame SundaramIt does not guide African governments on how to actually implement its long list of recommendations given their limited policy space, resources and capabilities. Worse, their proposals seem indistinguishable from an Africa-oriented version of the discredited neoliberal Washington Consensus.

With 30% of the world’s mineral resources and the most precious metal reserves on Earth, Africa has the richest concentration of natural resources – oil, copper, diamonds, bauxite, lithium, gold, tropical hardwood forests and fruits.

Yet, Africa remains the poorest continent, with the average per capita output of most countries worth less than $1,500 annually! Of 46 least developed countries, 33 are in Africa – more than half the continent’s 54 nations.

Africa remains the world’s least industrialized region, with only South Africa categorized as industrialized. Incredibly, Africa’s share of global manufacturing fell from about 3% in 1970 to less than 2% in 2013.

About 60% of the world’s arable land is in Africa. A net food exporter until the 1970s, the continent has become a net importer. Structural adjustment reform conditionalities – requiring trade liberalization – have cut tariff revenue, besides undermining import-substituting manufacturing and food security.

Sub-Saharan Africa accounts for 24% of the world’s hungry. Africa is the only continent where the number of undernourished people has increased over the past four decades. About 27.4% of Africa’s population was ‘severely food insecure’ in 2016.

In 2020, 281.6 million Africans were undernourished, 82 million more than in 2000! Another 46 million became hungry during the pandemic. Now, Ukraine sanctions on wheat and fertilizer exports most threaten Africa’s food security, in both the short and medium-term.

Structural adjustment
Many of Africa’s recent predicaments stem from structural adjustment programs (SAPs) much of Africa and Latin America have been subjected to from the 1980s. The Washington-based international financial institutions, the African Development Bank and all donors support the SAPs.

SAP advocates promised foreign direct investment and export growth would follow, ensuring growth and prosperity. Now, many admit neoliberalism was oversold, ensuring the 1980s and 1990s were ‘lost decades’, worsened by denial of its painfully obvious consequences.

Instead, ‘extraordinarily disadvantageous geography’, ‘high ethnic diversity’, the ‘natural resource curse’, ‘bad governance’, corrupt ‘rent-seeking’ and armed conflicts have been blamed. Meanwhile, however, colonial and neo-colonial abuse, exploitation and resource plunder have been denied.

While World Bank SAPs were officially abandoned in the late 1990s following growing criticism, replacements – such as Poverty Reduction Strategy Papers – have been like “old wine in new bottles”. Although purportedly ‘home-grown’, they typically purvey bespoke versions of SAPs.

With trade liberalization and greater specialization, many African countries are now more dependent on fewer export commodities. With more growth spurts during commodity booms, African economies have become even more vulnerable to external shocks.

Can the West be trusted?
Earlier, G7 countries reneged on their 2005 Gleneagles pledge – to give $25 billion more yearly to Africa to ‘Make Poverty History’ – within the five years they gave themselves. Since then, developed countries have delivered far less than the $100 billion of climate finance annually they had promised developing nations in 2009.

The Hamburg G20’s 2017 ‘Compact with Africa’ (CwA) promised to combat poverty and climate change effects. In fact, CwA has been used to promote the business interests of donor countries, particularly Germany.

Primarily managed by the World Bank and the International Monetary Fund, CwA has actually failed to deliver significant foreign investment, instead sowing confusion among participating countries.

Powerful Organization for Economic Cooperation and Development governments successfully blocked developing countries’ efforts at the 2015 Addis Ababa UN conference on financing for development for inclusive UN-led international tax cooperation and to stem illicit financial outflows.

Africa lost $1.2–1.4 trillion in illicit financial flows between 1980 and 2009 – about four times its external debt in 2013. This greatly surpasses total official development assistance received over the same period.

Africa must unite
Under Nelson Mandela’s leadership, Africa had led the fight for the ‘public health exception’ to international intellectual property law. Although Africa suffers most from ‘vaccine apartheid’, Western lobbyists blocked developing countries’ temporary waiver request to affordably meet pandemic needs.

African solidarity is vital to withstand pressures from powerful foreign governments and transnational corporations. African nations must also cooperate to build state capabilities to counter the neoliberal ‘good governance’ agenda.

Africa needs much more policy space and state capabilities, not economic liberalization and privatization. This is necessary to unlock critical development bottlenecks and overcome skill and technical limitations.

IPS UN Bureau


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



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