Tag: Financial Crisis

What Developing Countries Need to Do — Global Issues

  • Opinion by Daud Khan (rome)
  • Inter Press Service

ROME, Jun 03 (IPS) – Developing countries are facing a combination of crises that are unprecedented in recent times. Over the last three years they have had to face the COVID-19 crisis, the food crisis, the energy crisis, the climate change crisis, the debt crisis and, on top of all this, a global recession. The crises have overlapped, and each has added to the problems created by the previous ones.

Daud KhanMuch of the “fault” for these crises lies with the big countries – their desire for geo-political domination, the continued emission of GHGs, the tight money policy of recent months.

There are strong calls for increased aid flows and debt relief, as well as special funds for the countries most affected by high prices, debt burdens or climate change. These actions, much of which will be funded by the developed countries, are needed and necessary to avoid widespread suffering, political turbulence and increased migratory flows.

But these short term actions will not solve underlying problems. There is a need for new thinking; for paradigm shifts; and for new directions by developing countries. So what needs to be done?

Most importantly and most urgently, there needs to be a reform of food systems. Food systems have already shown incredible resilience by coping with COVID related lockdowns, and with the large reverse migrations that took place from urban to rural areas as people lost jobs and incomes. But new directions are needed for food systems to take on the current challenges. Actions are needed in four areas.

    • First – developing countries need to reduce their dependence on rice, maize and wheat, three crops which account for half of all calories consumed. For many counties agro-climatic conditions are not suitable for these crops and there is a high reliance on imports. This import reliance has been exacerbated by rapid urbanization that has raised the demand for easily-prepared, convenience food. But there are hundreds, if not thousands of indigenous products – cereals, oilseeds and crops and livestock products that have been ignored by policy makers, researchers and Government extension services. This needs to change.
    • Second – food production systems must make increased use of Green Technologies, technologies that are much less reliant on purchased inputs in particular pesticides and chemical fertilizers. Such improved techniques, many of which have been already tried and tested, include integrated pest management, improved crop rotation and multi-cropping, greater use of nitrogen-fixing crops, zero-tillage and mulching. These techniques that make much more intelligent use of the complex interaction between soil, plants, plant residues and livestock waste.
    • Third – value chains need to be shortened with monopolies and restrictive practices by traders and middlemen reduced. Progress was made in this regard during the COVID crisis, mainly through greater use of ICT, but this needs to be followed through much more strongly.
    • Finally, social safety nets need to be strengthened. Governments cannot cushion the entire population from price increases but does have a responsibility to ensure that children and vulnerable groups are cushioned.

Next in terms of urgency is the energy crisis. A large part of the import bill of many developing countries comprises oil and gas. Reducing this dependence is now more urgent than ever. There are two complementary actions needed:

    • First – there has to be a major drive towards increasing production of renewable energy – particularly solar energy. With falling prices of panels, solar energy is now the cheapest form of energy and most developing countries have plenty of space and sunshine.
    • Second – solar or wind energy needs to be complemented with other forms of energy that can meet base needs. The most suitable for doing this is through greater use of nuclear energy which, with today’s fourth generation technology, is much safer and less polluting than it used to be. Given high investments costs, as well as the difficulties in setting up suitable regulatory, oversight and contingency systems, smaller countries may need to work jointly to create such nuclear power facilities.

The debt crisis has created a large and growing risk of defaults with the poorest being the most vulnerable. Already in 2019, almost half of low-income and least developed countries (LDCs) were assessed as being at high risk of external debt distress or already in debt distress. Since then, the external debts of developing country have continued to rise and are eating up a growing proportion of export earnings. And this was before the present interest rate hike. Most debt was taken when real interest rate (corrected for perceived risk) were close to zero.

    • In addition to ongoing discussions on debt forgiveness, there has to be a discussion between creditors and debtors on repayments especially on interest payments. The burden of the unexpected rise in interest rate needs to be a shared burden.

Finally, developing countries need to find ways to cushion themselves against the recessionary effects of slowing growth world trade. In the current system, global trade flows are dominated by USA, China and Europe.

    • In order to break their dependence on these large economies, developing countries need to work to create regional and bilateral trade agreements. Such trade agreements may not be easy. However, the crisis has created conditions where out-of-the-box thinking is essential and cultural and political barriers to regional trade – such as those which limit trade between India and Pakistan – need to be overcome.

Daud Khan works as consultant and advisor for various Governments and international agencies. He has degrees in Economics from the LSE and Oxford – where he was a Rhodes Scholar; and a degree in Environmental Management from the Imperial College of Science and Technology. He lives partly in Italy and partly in Pakistan.

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What Should Developed Countries Do? — Global Issues

  • Opinion by Daud Khan (rome)
  • Inter Press Service

ROME, Jun 01 (IPS) – Developing countries – in Africa, in Asia, in Latin America and in the Middle East – are facing a combination of crises that are unprecedented in recent times. Over the last three years they have had to face the COVID-19 crisis, the food crisis, the energy crisis, the climate change crisis, the debt crisis and, on top of all this, a global recession. The crises have overlapped, and each has added to the problems created by the previous ones.

Daud KhanFirst among the crises relates to food – the most basic of human needs. Even before the events in Ukraine there were shortages and uncertainties. International food prices rose by 40% over their level of 2020 – with increases of almost 90% in the price of vegetable oil – pushing up domestic food prices in both importing and exporting countries, and driving millions towards food insecurity. And then came the Ukraine crisis; and price of cereals and cooking oils spiked yet again – up 20% for cereal and 30% for vegetable oils.

And it is not just an issue of prices. Supplies are hard to come by. In April 2022 Ukraine exported only 1 million tons of grain as opposed to a normal export volume of 5 million tons and Indonesia banned exports of palm oil. On top of this came climate change. Low rainfall and drought-like conditions have also affected production in several major wheat exporting countries such as France and the USA. Scorching temperatures across northern India and Pakistan have reduced wheat output by 20% and in response, India has now banned exports of wheat.

The second crisis relates to the price of energy. Energy prices before the Ukraine crisis has risen 75% in twelve months and another 25% since then. This has raised costs of transport, manufacturing and services. Prices of natural gas, which drives the prices of urea fertilizer, rose by over 140% and this will impact plantings, yields and output of food crops in coming years. The prices of phosphate fertilizers have also risen – by over 200% the last year – with about a third of the increase coming since January 2022, mainly as a result of disruption of supplies.

The next punch in the belly for developing countries came from interest rates increases. Developing country debt has boomed in over the past decades years, fueled by the easy availability of savings and real interest rates of virtually zero. With rising inflation, the US Federal Reserve Board has hiked up interest rates. This has not only increased interest payments but also the value of the US$ in which much developing country debt is denominated. This is making debt servicing vastly more expensive and balance of payments problems are looming large for many countries. Higher debt servicing is also putting pressure on Government budgets and is resulting in large cuts in development and social spending.

And we are not finished yet. Global GDP and trade are slowing down. This reflects the recessionary cocktail of high energy prices, supply bottlenecks, rising interest rates and political uncertainties around the globe, as well as COVID-related lockdowns in China.

This perfect storm is mostly the result of the policies of the big economies – the ongoing US/Russia/China rivalry; rapid globalization followed by the strict COVID-related lockdowns; and easy monetary policies which first pumped in huge sums of money into the economies and are now raising interest rates to rein in inflation. Climate change has much to do with large and continued emission of GHGs, the bulk of which comes from the big economies, including China. And now, speculative capital, mostly originating in the developed world, is further aggravating the situation in food, fuel and other commodity markets.

But the interlinked nature of the globalized world implies that in relative terms the financial and human burden of these actions falls heaviest on developing countries. After all it is one thing for food and energy prices to rise, or for GDP growth to slow in rich countries such as the USA, Europe and Australia, or even in China. In these countries living standards are high, infrastructure and services are well developed, and often well designed social safety nets are in place. It is quite different in developing countries, where large numbers continue to live with poverty and hunger; where basic services such as education, health and clean drinking water are scarce; and those facing old age, illness or loss of earnings can only rely on the goodwill of friends or family.

There is, quite rightly, much concern about the situation. Several high level meetings have been convened, including by the UN, and there are strong calls for increased aid flows and debt relief, as well as for the creation of special funds for the countries most affected by high prices, debt burdens or climate change. These actions are needed and necessary to avoid widespread suffering, political turbulence and increased migratory flows. And the developed countries will likely bear most of the financial burden of these measures.

But many of the measures, even if implemented, are short term palliatives and will not solve underlying problems. Moreover, developing countries cannot continue to rely indefinitely on goodwill and charity. The risk of doing this became very clear during the COVID crisis where little of the vaccines available and none of the vaccine production technology were shared.

However, times of crisis also create opportunities. There is a need for new thinking and for paradigm shifts in developing countries but also for Governments to undertake reforms that they have been postponing for years, if not decades, due to fears that such reforms would hurt vested interests and national elites. It is now time to act bravely.

Part two of this article will discuss some of the concrete measure that developing countries could take to address the various crises.

Daud Khan works as consultant and advisor for various Governments and international agencies. He has degrees in Economics from the LSE and Oxford – where he was a Rhodes Scholar; and a degree in Environmental Management from the Imperial College of Science and Technology. He lives partly in Italy and partly in Pakistan.

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Davos Fails on Financial Transparency

  • Opinion by Matti Kohonen (london)
  • Inter Press Service

LONDON, May 31 (IPS) – At this year’s World Economic Forum (WEF) at Davos which ended last week, the attention of the world’s financial and economic elite was captured by the war in Ukraine whose president Volodimir Zelensky used his address to call to “complete withdrawal of foreign businesses from the Russian market”, despite 380 of the largest multinational companies still operating in Russia.

Many companies still present in Russia were sitting in the audience while Zelensky spoke including HSBC that still maintains operations for existing clients, and Credit Suisse that is scaling them back without signalling that it would pull out of Russia due to the invasion. This is especially troubling given the leaked data in Suisse Secrets about how Credit Suisse oiled the wheels of many oligarchs prior to the Russian Invasion in Ukraine.

The banks at Davos are likely to hold assets of many of the over 6,163 sanctioned Russian individuals and entities despite anti-money laundering efforts to trace these funds hidden behind shell companies. This money in turn is often held in accounts in banks participating at the annual Davos meetings and their assets may never even be revealed due to the lack of stricter banking and financial transparency laws.

Ironically, even talking about these secretive accounts, and the leaks related to these is a criminal offence in Davos under draconian Swiss banking secrecy laws, so raising the issue could get you arrested and fined. Credit Suisse only committed itself to “stop new business in Russia while meaningfully cutting exposure by 56%.” The imbalance is striking, and none of the panels at Davos addressed this uncomfortable issue.

Alarmingly, this signals a business-as-usual approach by many of the top companies represented in Davos, not only failing to tackle Russian oligarchs but more broadly ignoring the issue of offshore funds held by powerful individuals and politicians from the global South.

Revealingly, the event only had 52 participants on the official list from Africa, out of a total of over 1,500 disclosed participants. Winnie Byanyima, director of UN AIDS, was one of them. She called out vaccine inequality and asked delegates to “stop pushing Africa to the back of the queue in terms of vaccine access” and called the patent protection laws a form of institutional racism in times of a global pandemic like COVID-19.

The debt crisis should also have been on the Davos agenda, as on the eve of the opening of Davos on 19 May we saw Sri Lanka descend into a balance of payment and debt crisis as their 30-day grace period to make debt payments to its creditors expired. The dues are mainly due to private creditors who form the largest single creditor group to Sri Lanka, many of whom again such as JP Morgan and Goldman Sachs were sitting in the audience at Davos, unwilling to commit to debt restructuring of private creditor debt.

Some of these issues were picked up by the annual Global Risk Report, where the key global risks that are identified in the next two years include extreme weather and livelihood crisis, followed by risk of not tackling climate change. Debt ranks as the 8th greatest risk, not something picked up by many of the respondents to the annual survey – of whom 63% were male, and 41% were from the business sector, largely overall represented by Europeans with 44% of all respondents drawn from the region, with only 6% from South Asia.

Why then the media focus on a Davos meeting that fail to deliver anything meaningful? It is a symbol of our age, and a place where the corporate elite get together and offer their view of the world – and where a few critics get to express their opinion about how it is failing to deliver each year. Given the mounting crises we are currently facing, and the role of responsible big business should take, this is plainly not enough.

Matti Kohonen is the director of the Financial Transparency Coalition and previously worked at Christian Aid as the Principal Advisor on the Private Sector, working to ensure that the private sector is a responsible and accountable actor in global development.

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Sanctions Now Weapons of Mass Starvation — Global Issues

Source: 2022 Global Report on Food Crises; 2022: projected
  • Opinion by Jomo Kwame Sundaram, Anis Chowdhury (sydney and kuala lumpur)
  • Inter Press Service

SYDNEY and KUALA LUMPUR, May 31 (IPS) – US and allied economic sanctions against Russia for its illegal invasion of Ukraine have not achieved their declared objectives. Instead, they are worsening economic stagnation and inflation worldwide. Worse, they are exacerbating hunger, especially in Africa.

Sanctions cut both ways
Unless approved by the UN Security Council (UNSC), sanctions are not authorized by international law. With Russia’s veto in the UNSC, unilateral sanctions by the US and its allies have surged following the Ukraine invasion.

During 1950-2016, ‘comprehensive’ trade sanctions have cut bilateral trade between sanctioning countries and their victims by 77% on average. The US has imposed more sanctions regimes, and for longer periods, than any other country.

Unilateral imposition of sanctions has accelerated over the past 15 years. During 1990-2005, the US imposed about a third of sanctions regimes around the world, with the European Union (EU) also significant.

The US has increased using sanctions since 2016, imposing them on more than 1,000 entities or individuals yearly, on average, from 2016 to 2020 – nearly 80% more than in 2008-2015. The one-term Trump administration raised the US share of all new sanctions to almost half from a third before.

During January-May 2022, 75 countries implemented 19,268 restrictive trade measures. Such measures on food and fertilizers (85%) greatly exceed those on raw materials and fuels (15%). Unsurprisingly, the world now faces less supplies and higher prices for fuel and food.

Monetary authorities have been raising interest rates to curb inflation, but such efforts do not address the main causes of higher prices now. Worse, they are likely to deepen and prolong stagnation, increasing the likelihood of ‘stagflation’.

Sanctions were supposed to bring Russia to its knees. But less than three months after the rouble plunged, its exchange rate is back to pre-war levels, rising from the ‘rouble rubble’ promised by Western economic warmongers. With enough public support, the Russian regime is in no hurry to submit to sanctions.

Sanctions pushing up food prices
War and sanctions are now the main drivers of increased food insecurity. Russia and Ukraine produce almost a third of world wheat exports, nearly 20% of corn (maize) exports and close to 80% of sunflower seed products, including oil. Related Black Sea shipping blockades have helped keep Russian exports down.

All these have driven up world prices for grain and oilseeds, raising food costs for all. As of 19 May, the Agricultural Price Index was up 42% from January 2021, with wheat prices 91% higher and corn up 55%.

The World Bank’s April 2022 Commodity Markets Outlook notes the war has changed world production, trade and consumption. It expects prices to be historically high, at least through 2024, worsening food insecurity and inflation.

Western bans on Russian oil have sharply increased energy prices. Both Russia and its ally, Belarus – also hit by economic sanctions – are major suppliers of agricultural fertilizers – including 38% of potassic fertilizers, 17% of compound fertilizers, and 15% of nitrogenous fertilizers.

Fertilizer prices surged in March, up nearly 20% from two months before, and almost three times higher than in March 2021! Less supplies at higher prices will set back agricultural production for years.

With food agriculture less sustainable, e.g., due to global warming, sanctions are further reducing output and incomes, besides raising food prices in the short and longer term.

Sanctions hurt poor most
Even when supposedly targeted, sanctions are blunt instruments, often generating unintended consequences, sometimes contrary to those intended. Hence, sanctions typically fail to achieve their stated objectives.

Many poor and food insecure countries are major wheat importers from Russia and Ukraine. The duo provided 90% of Somalia’s imports, 80% of the Democratic Republic of Congo’s, and about 40% of both Yemen’s and Ethiopia’s.

It appears the financial blockade on Russia has hurt its smaller and more vulnerable Central Asian neighbours more: 4.5 million from Uzbekistan, 2.4 million from Tajikistan, and almost a million from Kyrgyzstan work in Russia. Difficulties sending remittances cause much hardship to their families at home.

Although not their declared intent, US measures during 1982–2011 hurt the poor more. Poverty levels in sanctioned countries have been 3.8 percentage points higher than in similar countries.

Sanctions also hurt children and other disadvantaged groups much more. Research in 69 countries found sanctions lowered infant weight and increased the likelihood of death before age three. Unsurprisingly, economic sanctions violate the UN Convention on the Rights of Children.

A study of 98 less developed and newly industrialized countries found life expectancy in affected countries reduced by about 3.5 months for every additional year under UNSC sanctions. Thus, an average five-year episode of UNSC approved sanctions reduced life expectancy by 1.2–1.4 years.

World hunger rising
As polemical recriminations between Russia and the US-led coalition intensify over rising food and fuel prices, the world is racing to an “apocalyptic” human “catastrophe”. Higher prices, prolonged shortages and recessions may trigger political upheavals, or worse.

The UN Secretary-General has emphasized, “We need to ensure a steady flow in food and energies through open markets by lifting all unnecessary export restrictions, directing surpluses and reserves to those in need and keeping a lead on food prices to curb market volatility”.

Despite declining World Bank poverty numbers, the number of undernourished has risen from 643 million in 2013 to 768 million in 2020. Up to 811 million people are chronically hungry, while those facing ‘acute food insecurity’ have more than doubled since 2019 from 135 million to 276 million.

With the onset of the Covid-19 pandemic, OXFAM warned, the “hunger virus” could prove even more deadly. The pandemic has since pushed tens of millions into food insecurity.

In 2021, before the Ukraine war, 193 million people in 53 countries were deemed to be facing ‘food crisis or worse’. With the war and sanctions, 83 million – or 43% – more are expected to be victims by the end of 2022.

Source: 2022 Global Report on Food Crises; 2022: projected

Economic sanctions are the modern equivalent of ancient sieges, trying to starve populations into submission. The devastating impacts of sieges on access to food, health and other basic services are well-known.

Sieges are illegal under international humanitarian law. The UNSC has unanimously adopted resolutions demanding the immediate lifting of sieges, e.g., its 2014 Resolution 2139 against civilian populations in Syria.

But veto-wielding permanent Council members are responsible for invading Ukraine and unilaterally imposing sanctions. Hence, the UNSC will typically not act on the impact of sanctions on billions of innocent civilians. No one seems likely to protect them against sanctions, today’s weapons of mass starvation.

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Xenophobia-hit Zimbabweans Saving Countrys Dead Economy — Global Issues

Workers pictured at a home in Zimbabwe’s Mwenezi rural district, where 44-year-old Davison Chihambakwe, based in neighbouring South Africa, has helped upgrade and modernise some of the houses belonging to his family. He uses the money he sends after fleeing this country’s economic hardships 15 years ago. Credit: Jeffrey Moyo/IPS
  • by Jeffrey Moyo (harare)
  • Inter Press Service

Harare, May 31 (IPS) – Two decades ago, Trynos Mahamba left Zimbabwe for the United Kingdom, but back home, he has changed the lives of his relatives.

Since the day after he left, Mahamba (53) has been sending money home while Zimbabwe’s economy faltered amidst violent land seizures from commercial white farmers during Zimbabwe’s land reform programme.

In neighbouring South Africa, 44-year-old Davison Chihambakwe, who left this country in 2007, claims he has built a giant construction empire, and, with it, he said, has also made a difference back home.

Even in neighbouring Botswana, 39-year-old Langton Mawere, who left Zimbabwe in 2008 at the height of its economic crisis, has ‘made it’ back home. He has set up a property business by sending money for developments managed by others on his behalf.

Speaking from the United Kingdom, Mahamba says he sends money to his aged parents living in the Zimbabwean capital Harare. The money reaches them through WorldRemit – a money transfer company.

“I have made sure that without failure, I send about 2000 Pounds (sterling) to my ailing parents who are now in their eighties because they need monthly medical check-ups and food as well,” Mahamba told IPS.

From South Africa, Chihambakwe says his family also benefits.

“None of my close relatives or family members are suffering back home because I make sure I send them money to meet their daily needs.”

He sends the money through another international money transfer company Western Union, to his relatives like 32-year-old Denis Sundire, based in Harare.

Sundire says that his SA-based cousin has supported him since college.

“Davison (Chihambakwe) supported me since my college days, and even to this day, as I struggle to get a job, he still sends me money for my upkeep. That’s why he is becoming more and more successful. He is so kind,” Sundire told IPS.

Zimbabwe battles 90 percent unemployment, according to the Zimbabwe Congress of Trade Unions (ZCTU), although the government has downplayed that to 11 percent, claiming people are working in the informal sector.

Mahamba, Chihambakwe and Mawere all said they fled this Southern African country searching for greener pastures as economic hardships visited this country.

As a result, hundreds of Zimbabwean economic migrants who fled this country have over the years become the panacea to the African nation’s worsening financial woes.

Zimbabwe’s economic migrants like Mahamba, Chihambakwe and Mawere are breathing life into the country’s faltering economy through the remittances they send back home.

Chihambakwe boasts of modernising his rural village in Masvingo province in the Mwenezi district. He claimed he has helped some of his poor villagers build modern houses, doing away with the thatched huts.

For many like Chihambakwe, helping his village and loved ones from his South African base has also increased diaspora remittances into Zimbabwe’s economy.

According to the Ministry of Finance, remittances from outside the country were said to have reached US$1,4 billion in 2021, up from US$1 billion a year before.

Yet even as Zimbabwe’s economic migrants in countries like South Africa make strides, they frequently face xenophobic sentiments and, at times, attacks.

Many South Africans heap blame on migrant Zimbabweans for seizing local jobs and rising crime.

In South Africa, the Quarterly Labour Force Survey (QLFS) results for the fourth quarter of last year showed the official unemployment rate reaching over 35 percent, the highest rate since 2008, when the QLFS began.

Recently, a video of South Africa’s Home Affairs Minister Aaron Motsoaledi launching a scathing attack on illegal foreign nationals went viral.

He (Motsoaledi) made the remarks on foreign nationals at an ANC regional conference in the Eastern Cape in South Africa.

Referring to migrants that he said have flooded South Africa, Motsoaledi said, “something is going wrong in our continent, and SA is on the receiving end.

“When people do wrong things in their countries, they run here.”

“We are the only country that accepts rascals. Even the UN is angry with us that SA has a tendency, because of something called democracy, to accept all the rascals of the world,” the South African Minister was quoted saying.

As Zimbabwean migrants breathe life into their country’s struggling economy via remittances, with xenophobia climbing to new heights in South Africa, a gardener, 43-year-old Elvis Nyathi from Zimbabwe, was this year stoned by a mob in the neighbouring country before being burnt to death ostensibly for being a foreigner.

Recently writing in the Mail & Guardian, South Africa’s Fredson Guilengue working for the Rosa Luxemburg Stiftung (RLS) regional office in Johannesburg, said “the issue of xenophobic attacks against foreign nationals has once again reached disturbing levels in South Africa.

The tensions are also exacerbated by an anti-migrant campaign dubbed Operation Dudula, headed by 36-year-old Nhlanhla ‘Lux’ Dlamini.

Dlamini was arrested and now faces housebreaking, theft, and malicious damage to property charges after Dudula members descended on a suspected “drug house” in Soweto in March.

However, even within the ruling ANC, there have been mixed messages about the operation, with some indicating support, although SA President Cyril Ramaphosa distanced his government from the Dudula machinations.

“The concerns that we have is that we have got a vigilante force-like organisation taking illegal actions against people who they are targeting, and these things often get out of hand, they always mutate into wanton violence against other people”, Ramaphosa said.

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Fighting Inflation Excuse for Class Warfare — Global Issues

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

SYDNEY and KUALA LUMPUR, May 24 (IPS) – A class war is being waged in the name of fighting inflation. All too many central bankers are raising interest rates at the expense of working people’s families, supposedly to check price increases.

Forced to cope with rising credit costs, people are spending less, thus slowing the economy. But it does not have to be so. There are much less onerous alternative approaches to tackle inflation and other contemporary economic ills.

Short-term pain for long-term gain?
Central bankers are agreed inflation is now their biggest challenge, but also admit having no control over factors underlying the current inflationary surge. Many are increasingly alarmed by a possible “double-whammy” of inflation and recession.

Nonetheless, they defend raising interest rates as necessary “preemptive strikes”. These supposedly prevent “second-round effects” of workers demanding more wages to cope with rising living costs, triggering “wage-price spirals”.

In central bank jargon, such “forward-looking” measures convey clear messages “anchoring inflationary expectations”, thus enhancing central bank “credibility” in fighting inflation.

They insist the resulting job and output losses are only short-term – temporary sacrifices for long-term prosperity. Remember: central bankers are never punished for causing recessions, no matter how deep, protracted or painful.

But raising interest rates only makes recessions worse, especially when not caused by surging demand. The latest inflationary surge is clearly due to supply disruptions because of the pandemic, war and sanctions.

Raising interest rates only reduces spending and economic activity without mitigating ‘imported’ inflation, e.g., rising food and fuel prices. Recessions will further disrupt supplies, aggravating inflation and worsening stagflation.

Wage-price spirals?
Some central bankers claim recent instances of wage increases signal “de-anchored” inflationary expectations, and threaten ‘wage-price spirals’. But this paranoia ignores changed industrial relations and pandemic effects on workers.

With real wages stagnant for decades, the ‘wage-price spiral’ threat is grossly exaggerated. Over recent decades, most workers have lost bargaining power with deregulation, outsourcing, globalization and labour-saving technologies. Hence, labour shares of national income have declined in most countries since the 1980s.

Labour market recovery, even tightening in some sectors, obscures adverse overall pandemic impacts on workers. Meanwhile, millions of workers have gone into informal self-employment – now celebrated as ‘gig work’ – increasing their vulnerability.

Pandemic infections, deaths, mental health, education and other impacts, including migrant worker restrictions, have all hurt many. Contagion has especially hurt vulnerable workers, including youth, migrants and women.

Workers’ share of national income, 1970-2015

Ideological central bankers
Economic policies by supposedly independent and knowledgeable technocrats are presumed to be better. But such naïve faith ignores ostensibly academic, ideological beliefs.

Typically biased, albeit in unstated ways, policy choices inevitably support some interests over – even against – others. Thus, for example, an anti-inflation policy emphasis favours financial asset owners.

Politicians like the notion of central bank independence. It enables them to conveniently blame central banks for inflation and other ills – even “sleeping at the wheel” – and for unpopular policy responses.

Of course, central bankers deny their own role and responsibility, instead blaming other economic policies, especially fiscal measures. But politicians blaming central bankers after empowering them is simply shirking responsibility.

In the rich West, governments long bent on fiscal austerity left the heavy lifting for recovery after the 2008-2009 global financial crisis (GFC) to central bankers. Their ‘unconventional monetary policies’ involved keeping policy interest rates very low, enabling corporate shenanigans and zombie business longevity.

This enabled unprecedented increases in most debt, including private credit for speculation and sustaining ‘zombie’ businesses. Hence, recent monetary tightening – including raising interest rates – will trigger more insolvencies and recessions.

German social market economy
Inflation and policy responses inevitably involve social conflicts over economic distribution. In Germany’s ‘free collective bargaining’, trade unions and business associations engage in collective bargaining without state interference, fostering cooperative relations between workers and employers.

The German Collective Bargaining Act does not oblige ‘social partners’ to enter into negotiations. The timing and frequency of such negotiations are also left to them. Such flexible arrangements are said to have helped SMEs.

Although Germany’s ‘social market economy’ has no national tripartite social dialogue institution, labour unions, business associations and government did not hesitate to democratically debate crisis measures and policy responses to stabilize the economy and safeguard employment, e.g., during the GFC.

Dialogue down under
A similar ‘social dialogue’ approach was developed by Australian Labor Prime Minister Bob Hawke from 1983. This contrasted with the more confrontational approaches pursued in Margaret Thatcher’s UK and Ronald Reagan’s USA – where punishing interest rates inflicted long recessions.

Although Hawke had been a successful trade union leader, he began by convening a national summit of workers, businesses and other stakeholders. The resulting Prices and Incomes Accord between the government and unions moderated wage demands in return for ‘social wage’ improvements.

This consisted of better public health provisioning, pension and unemployment benefit improvements, tax cuts and ‘superannuation’ – involving required employees’ income shares and matching employer contributions to a workers’ retirement fund.

Although business groups were not formally party to the Accord, Hawke brought big businesses into other new initiatives such as the Economic Planning Advisory Council. This consensual approach helped reduce both unemployment and inflation.

Such consultations have also enabled difficult reforms – including floating exchange rates and reducing import tariffs. They also contributed to the developed world’s longest uninterrupted economic growth streak – without a recession for nearly three decades, ending in 2020 with the pandemic.

Social partnerships
A variety of such approaches exist. For example, Norway’s kombiniert oppgjior, from 1976, involved not only industrial wages, but also taxes, salaries, pensions, food prices, child support payments, farm support prices, and more.

‘Social partnerships’ have also been important in Austria and Sweden. A series of political understandings – or ‘bargains’ – between successive governments and major interest groups enabled national wage agreements from 1952 until the mid-1970s.

Consensual approaches undoubtedly underpinned post-Second World War reconstruction and progress, of the so-called Keynesian ‘Golden Age’. But it is also claimed they have created rigidities inimical to further progress, especially with rapid technological change.

Economic liberalization in response has involved deregulation to achieve more market flexibilities. But this approach has also produced more economic insecurity, inequalities and crises, besides stagnating productivity.

Such changes have also undermined democratic states, and enabled more authoritarian, even ethno-populist regimes. Meanwhile, rising inequalities and more frequent recessions have strained social trust, jeopardizing security and progress.

Policymakers should consult all major stakeholders to develop appropriate policies involving fair burden sharing. The real need then is to design alternative policy tools through social dialogue and complementary arrangements to address economic challenges in more equitably cooperative ways.

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A Sliver of Hope for Lebanon? — Global Issues

The economic and political crisis in Lebanon has left most households short on food. Now, the outbreak of war in Ukraine threatens to send food prices skyrocketing and push basic foods out of reach. Lebanon imports more than 50% of its wheat from Ukraine. Credit: UN World Food Programme (WFP)
  • Opinion by Rasha Al Saba (london)
  • Inter Press Service
  • The writer is Head of the Middle East and North Africa (MENA) Department at Minority Rights Group International, UK.

LONDON, May 23 (IPS) – In the midst of what has been an incredibly turbulent period for Lebanon, the conclusion of elections last week ought to be hailed as a chance to focus on the future. This, the first election since the mass uprisings in 2019 against what was seen as a corrupt ruling elite, has shown some signs of the drive for change.

Lebanon’s consociational system – power sharing between the three large religious blocks – is effectively the compromise forged with the backing of the international community to establish peace in the country after a long and bitter civil war.

Despite widespread criticism this sectarian influence forged by the Taif Agreement in 1989, has remained firm, creating an elite ruling class, that in subsequent decades has consistently failed to tackle the major problems the country faces.

In the face of what is believed to be one of the worst economic depressions the world has seen in 150 years, an estimated 80 per cent of the population now live in poverty. The rising prices had already in 2019 led to the mass uprising, and the shortages have only got worse as rising fuel prices have put scarce food and medicines further out of reach of the population.

The devastation of the explosion at Beirut’s port in 2020, and the death toll and economic paralysis caused by the pandemic have only compounded issues.

While the headlines all focus on the waning influence of Hezbollah – and by proxy, of Iran, there are other aspects to the election worth highlighting.

Of course, the loss of the alliance between Hezbollah and the Aounist party is significant, mainly because it is hard to predict how the popular base that sits behind the armed Hezbollah will react. The Lebanese peace has been hard won, but the peace has not come with a growth in stability and prosperity.

As with the drivers of the revolution in Tunisia, it is the lack of opportunities and entrenched inequality that are at the forefront of the frustration of ordinary Lebanese. In this sense the increase in the number of seats claimed by independent and opposition candidates could potentially result in competing blocs, none of which enjoys an absolute majority.

Some of these candidates have derived their sustenance from the anti-elite protests of 2019. The victory of lawyer Firas Hamdan, an independent candidate who won in the south against Marwan Kheireddine, former minister and Chairman of the AM Bank, is demonstrative of this trend.

Hamdan was injured during the 2019 protests, and his victory may signal a weakening of the hold of the traditionalists who have benefitted from the political system themselves, while being unable to create a governance agenda that benefits the whole of the country.

Another change is the modest increase in the number of women in the new parliament, who now account for 8 out of 128 parliamentarians, versus 6 women in the old parliament. However, half of those who succeeded are independent candidates, which can empower the anti-elitist bloc in the parliament.

The anti-refugee sentiment of the Lebanese government has also been clear during the election when the Ministry of Interior imposed a ban on the movement of Palestinian and Syrian refugees.

Syrians have been featured in the election campaigns and agenda throughout the election. There are genuine fears among Syrian refugees that advances for the main parties in this election could result in the approval of laws that may pave the way for the repatriation of Syrian refugees to Syria.

If passed and implemented, such laws increase the risk of torture, detention and killings at the behest of the Syrian regime they previously escaped.

These elections took place in the midst of destitution and desperation that were once unimaginable. The surge of protest in 2019 against those conditions suggested that mass change was possible, but this was dampened by the arrival of the pandemic, which then took a significant toll on a population already rendered vulnerable.

Nearly three years later, this has translated into an election result that is mixed for Lebanon.

In a country of multiple minorities and historic diversities, the creation of a government that can transcend identities and take a countrywide approach to governance is imperative. The arrival of the new independent women candidates, campaigning and winning on a new platform offers a sliver of hope.

But if the ‘old politics’ of Christian versus Muslim, and a separate proxy competition of Iran versus Saudi Arabia continues to hold sway, the road ahead will be tough indeed.

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When Saviours Are the Problem — Global Issues

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

SYDNEY and KUALA LUMPUR, May 17 (IPS) – Central bank policies have often worsened economic crises instead of resolving them. By raising interest rates in response to inflation, they often exacerbate, rather than mitigate business cycles and inflation.

Neither gods nor maestros
US Federal Reserve Bank chair Jerome Powell has admitted: “Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.” He conceded, “What we can control is demand, we can’t really affect supply with our policies. And supply is a big part of the story here”.

Anis ChowdhuryHence, decisionmakers must consider more appropriate policy tools. Rejecting ‘one size fits all’ formulas, including simply raising interest rates, anti-inflationary measures should be designed as appropriate. Instead of squelching demand by raising interest rates, supply could be enhanced.

Thus, Milton Friedman – whom many central bankers still worship – blamed the 1930s’ Great Depression on the US Fed. Instead of providing liquidity support to businesses struggling with short-term cash-flow problems, it squeezed credit, crushing economic activity.

Similarly, 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”.

Adverse impacts of the 1970s’ oil price shocks were worsened by the reactions of monetary policymakers, which caused stagflation. That is, US Fed and other central bank interventions caused economic stagnation without mitigating inflation.

Likewise, the longest US recession after the Great Depression, during the 1980s, was due to interest rate hikes by Fed chair Paul Volcker. A recent New York Times op-ed 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”.

Monetary policy for supply shocks?
Food prices surged in 2011 due to weather-related events ruining harvests in major food producing nations, such as Australia and Russia. Meanwhile, fuel prices soared with political turmoil in the Middle East.

Jomo Kwame SundaramHowever, Boston Fed head Eric Rosengren argued, “tightening monetary policy solely in response to contractionary supply shocks would likely make the impact of the shocks worse for households and businesses”.

Referring to Boston Fed research, he noted commodity price changes did not affect the long-run inflation rate. Other research has also concluded that commodity price shocks are less likely to be inflationary.

This reduced inflationary impact has been attributed to ‘structural changes’ such as workers’ diminished bargaining power due to labour market deregulation, technological innovation and globalization.

Hence, central banks are no longer expected to respond strongly to food and fuel price increases. Policymakers should not respond aggressively to supply shocks – often symptomatic of broader macroeconomic developments.

Instead, central banks should identify the deeper causes of food and fuel price rises, only responding appropriately to them. Wrong policy responses can compound, rather than mitigate problems.

Appropriate innovations
A former Philippines central bank Governor Amando M. Tetangco, Jr noted it had not responded strongly to higher food and fuel prices in 2004. He stressed, “authorities should ignore changes in the price of things that they cannot control”.

Tetangco warned, “the required policy response is not… straightforward… Thus policy makers will need to make a choice between bringing down inflation and raising output growth”. He emphasized, “a real sector supply side response may be more appropriate in addressing the pressure on prices”.

Thus, instead of restricting credit indiscriminately, financing constraints on desired industries (e.g., renewable energy) should be eased. Enterprises deemed inefficient or undesirable – e.g., polluters or those engaged in speculation – should have less access to the limited financing available.

This requires designing macroeconomic policies to enable dynamic new investments, technologies and economic diversification. Instead of reacting with blunt interest rate policy tools, policymakers should know how fiscal and monetary policy tools interact and impact various economic activities.

Used well, these can unlock supply bottlenecks, promote desired investments and enhance productivity. As no one size fits all, each policy objective will need appropriate, customized, often innovative tools.

Lessons from China
China’s central bank, the People’s Bank of China (PBOC), developed “structural monetary policy” tools and new lending programmes to help victims of COVID-19. These ensured ample interbank liquidity, supported credit growth, and strengthened domestic supply chains.

Outstanding loans to small and micro businesses rose 25% to 20.8 trillion renminbi by March 2022 from a year before. By January, the interest rate for loans to over 48 million small and medium enterprises had dropped to 4.5%, the lowest level since 1978.

The PBOC has also provided banks with loan funds for promising, innovative and creditworthy companies, e.g., involved in renewable energy and digital technologies. It thus achieves three goals: fostering growth, maintaining debt at sustainable levels, and ‘green transformation’.

Defying global trends, China’s ‘factory-gate’ (or producer price) inflation fell to a one-year low in April 2022 as the PBOC eased supply chains and stabilized commodity prices. Although consumer prices have risen with COVID-19 lockdowns, the increases have remained relatively benign so far.

In short, the PBOC has coordinated monetary policy with both fiscal and industrial policies to boost confidence, promote desired investments and achieve stable growth. It maintains financial stability and policy independence by regulating capital flows, thus avoiding sudden outflows, and interest rate hikes in response.

Improving policy coordination
Central bankers monitor aggregate indicators, such as wages growth. However, before reacting to upward wage movements, the context needs to be considered. For example, wages may have stagnated, or the labour share of income may have declined over the long-term.

Moreover, wage increases may be needed for critical sectors facing shortages to attract workers with relevant skills. Wage growth itself may not be the problem. The issue may be weak long-term productivity growth due to deficient investments.

Input-output tables can provide information about sectoral bottlenecks and productivity, while flow-of-funds information reveals what sectors are financially constrained, and which are net savers or debtors.

Such information can helpfully guide design of appropriate, complementary fiscal and monetary policy tools. Undoubtedly, pursuing heterodox policies is challenging in the face of policy fetters imposed by current orthodoxies.

Central bank independence – with dogmatic mandates for inflation targeting and capital account liberalization – precludes better coordination, e.g., between fiscal and monetary authorities. It also undercuts the policy space needed to address both demand- and supply-side inflation.

Monetary authorities are under tremendous pressure to be seen to be responding to rising prices. But experience reminds us they can easily make things worse by acting inappropriately. The answer is not greater central bank independence, but rather, improved economic policy coordination.

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Finance Drives World to Stagflation — Global Issues

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

SYDNEY and KUALA LUMPUR, May 10 (IPS) – The world is being pressed by financial interests to raise interest rates, ostensibly to check inflation. After the US Federal Reserve started raising interest rates, more central banks have been doing likewise.

Considering inflation’s contemporary causes, such ‘follow the leader’ central bank mimicry cannot check it except by slowing economies. Worse, this has meant taking on huge new risks, seriously damaging world economic prospects in the medium and long-term.

Anis ChowdhuryInflation bogey dangerous
Much earlier, World Bank supported research had shown moderate inflation – in the range of 15–30% – was not harmful to growth, and could “be reduced only at a substantial cost to … growth”.

Nonetheless, “The ratio of fervent beliefs to tangible evidence seems unusually high on this topic”. Unsurprisingly, central banks are still trying to keep inflation below 2% – an arbitrary target “plucked out of the air”, due to a “chance remark” by New Zealand’s finance minister then.

Raising interest rates will derail recovery and worsen supply disruptions and shortages due to the pandemic, war and sanctions. European Central Bank (ECB) Executive Board member Fabio Panetta has noted the euro zone is “de facto stagnating” as economic growth has almost stopped.

As policymakers struggle with inflation, growth and wellbeing are being subjected to huge risks. As Panetta warns, “monetary tightening aimed at containing inflation would end up hampering growth that is already weakening”.

Interest rates rising globally
Among emerging markets and developing economies, South Africa’s central bank raised interest rates for the first time in three years in November 2021.

On 24 March 2022, the Bank of Mexico raised interest rates for the seventh consecutive time. On the same day, Brazil’s central bank raised interest rates to its highest level since 2017.

Jomo Kwame SundaramOn 4 May, the Reserve Bank of India raised interest rates – its first rate change in two years and first rate hike in nearly four. On 5 May, Chile’s central bank raised interest rates. Pressed by finance to curb inflation, more central bankers are tightening monetary policy.

Without evidence or reasoning, they insist higher interest rates will check inflation. Their recognized adverse effects for recovery and growth are dismissed as unavoidably necessary short-term costs for some unspecified long-term gains.

But despite facing higher inflationary expectations, tightening international monetary conditions, and Ukraine war uncertainties, the ECB and Bank of Japan have not joined the bandwagon, refusing to raise policy interest rates so far.

Interest rate – blunt tool
But central bankers’ dogmatic stances, knee-jerk responses and ‘follow the leader’ behaviour are not helpful. Even when inflation reaches dangerous levels, raising interest rates may still not be the right policy response for several reasons.

First, raising interest rates only addresses the symptoms – not the causes – of inflation. Inflation is often said to be a consequence of an economy ‘overheating’. But overheating can be due to many factors.

Higher interest rates may relieve overheating, by slowing economic activity. But a good doctor should first investigate and diagnose an ailment’s causes before prescribing appropriate treatment – which may or may not require medication.

It is widely accepted that the current inflationary surge is due to supply chain disruptions – exacerbated by war and sanctions – especially of essential goods such as food and fuel. If so, long-term solutions require increasing supplies, including by removing bottlenecks.

Higher interest rates reduce aggregate demand. But simply raising interest rates does not even address the specific causes of inflation, let alone rising prices due to supply disruptions of essential goods, such as food and fuel.

Interest rate – indiscriminate
Second, the interest rate affects all sectors, everyone. It does not even distinguish between sectors or industries needing to expand or be encouraged, and those that should be phased out, for being less productive or inefficient.

Also, raising interest rates too often, and to excessively high levels, can squeeze, or even kill productive and efficient businesses along with inefficient or less productive ones.

US bankruptcies had soared in the early 1980s after US Fed chair Volcker’s legendary interest rate spike. “Thousands of businesses that took out bank loans could fail”, warned a leading UK tax advisory firm recently.

Third, interest rates do not distinguish among households and businesses. Higher interest rates may discourage household expenditure, but also dampen all kinds of spending – for both consumption and investment.

Hence, overall demand may shrink – discouraging investment in new technology, plant, equipment and skills. Thus, higher interest rates adversely affect long-term productive capacities and technological progress of economies.

Debt, recessions and financial crises
Fourth, higher interest rates raise debt servicing costs for governments, businesses and households. With the exceptionally low interest rates previously available after the 2008-09 global financial crisis (GFC), debt burdens rose in most countries.

These undoubtedly encouraged risky, speculative behaviour as well as unproductive share buybacks, increased dividends, and mergers & acquisitions. Interest rate hikes have triggered many recessions and financial crises. Thus, raising interest rates now will likely trigger a new, albeit different era of stagflation.

The pandemic has pushed public debt to historic new highs. Forty-four per cent of low-income and least developed countries were at high risk of, or already in external debt distress in 2020.

Before the COVID-19 crisis, half the small island developing states surveyed already had solvency problems, i.e., were at high risk of, or already in debt distress. Thus, raising interest rates can trigger a global debt crisis.

Fifth, paradoxically, higher interest rates raise debt-servicing expenses, especially mortgage payments, for indebted households. Costs of living also rise if businesses pass higher interest costs on to consumers by raising prices.

Hence, the main beneficiaries of low inflation and higher interest rates are the holders of financial assets who fear the relative diminution of their value.

Developing countries vulnerable
Developing countries are particularly vulnerable. Higher interest rates in developed countries – particularly the US – trigger capital outflows from developing countries – causing exchange rate depreciations and inflationary pressures.

Higher interest rates and weaker exchange rates will aggravate already high debt service burdens – as happened in Latin America in the early 1980s after US Fed chair Volcker greatly increased US interest rates.

To discourage sudden capital outflows and prevent large currency depreciations, developing countries raise interest rates sharply. This may lead to economic collapse – as in Indonesia during the 1997-98 Asian financial crisis.

Although pandemic response measures – such as debt moratoria – provided some relief, business failures rose nearly 60% in 2020 from 2019. Middle- and low-income countries saw more business failures.

The World Bank’s Pulse Enterprise Survey – of 24 middle- and low-income countries – found 40% of businesses surveyed in January 2021 expected to be in arrears within six months.

This included more than 70% of firms in Nepal and the Philippines, and over 60% in Turkey and South Africa. Business failures of such scale can trigger banking crises as non-performing loans suddenly soar.

Instead of checking contemporary inflation, raising interest rates is likely to greatly damage recovery and medium-term growth prospects. Hence, it is imperative for developing countries to innovatively develop appropriate means to better address the economic dilemmas they face.

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