Economic and political instability

‘“Only a crisis — actual or perceived — produces real change. When the crisis occurs, the actions that are taken depend on the ideas that are lying around.” Friedman, one of history’s most extreme market economists was wrong about a whole lot, but he was right about that. In times of crisis, seemingly impossible ideas become possible, but whose ideas, sensible fair ones designed to keep as many people as possible safe, secure, and healthy, or predatory ideas designed to further enrich the already unimaginable wealthy, while leaving the most vulnerable most exposed.’ — An excerpt from a March 2020 video message by renowned economist, and author of ‘The shock doctrine: the rise of disaster capitalism’ Naomi Klein

Coronavirus pandemic came not only as a global health challenge but its recession-causing impact, and the needs its significantly raised in particular in terms of making public health expenditures and overall development expenditure/stimulus spending to recover economic growth, jobs, and support people in times of lockdowns and reduced economic activity, put a lot of economic pressure on governments, especially those of developing countries.

Russia’s invasion of Ukraine (the two countries together being a highly significant source of commodities like wheat, fertilisers, and steel) is adding to commodity supply shocks. These developments (global commodity supply shock and Russia-Ukraine war) contributed strongly to inflationary pressures not seen in decades in developed and developing countries, especially in developing countries due to the high level of imports — from oil, to machinery to cereals to fertilisers. All of these imports are adding significantly to the imported inflation component.

While the rich, advanced countries could provide vaccines quickly, and inject significantly high level of fiscal/stimulus injections into their economies and people, they were able to bounce back quickly both in terms of economic growth, but also in terms of poverty but not as much in terms of inequality, since neoliberal policy mindset in many of advanced countries directed these fiscal injections in ways that primarily benefited the already rich.

On the other hand, developing countries, especially those that are net importers of oil, have low foreign exchange reserves, usually facing balance of payments (BoP) crises, including having issues of debt sustainability, and in turn remain frequent users of International Monetary Fund (IMF) resources. It’s also a fact that a number of developing countries, which are checking a number of boxes above, in turn could not provide enough fiscal injections/stimulus spending. And what they did provide caused greater stress in terms of fiscal balances due to subsidies provided on high oil costs these countries faced in terms of majority of peoples’ capacity to bear. Secondly, high importing costs led to serious issues in terms of managing balance of payments (BoP) account.

In the absence of any adequate steps towards debt moratorium/restructure/relief of developing countries by multilateral agencies, lack of any significant provision of special drawing rights (SDRs) (a bill in the US Congress is still pending approval to allow the IMF to go beyond its (reportedly $650 billion) usual ceiling of SDRs allocation in the wake of the pandemic even after around two years of the pandemic) and a severe global commodity crisis and inflationary pressures has meant that developing countries are at the cusp of debt crises. Having said that a number of developing countries like Sri Lanka and Pakistan are already witnessing serious economic instability for a number of months now.

Economic instability has been strongly feeding political instability. In both these countries, for instance, incumbent governments came under severe stress in recent months and a lot appears similar and a repeat episode in terms of Global Financial Crisis of late 2000s leading to food riots in many developing countries, and which led to serious political instability in a number of countries, including becoming an important triggering factor for the Arab Spring in North Africa and the Middle East.

Hence, going back to what Naomi Klein pointed towards in the quote, unlike rich, advanced countries and multilateral institutions coming together, and correctly invoking the true spirit of globalization — sadly missing since the rise of this wave in the 1990s — by moving away from pro-cyclical policy stance for instance in IMF programmes, suspension of IMF surcharges, greater vaccine equality and at least suspending intellectual property rights (IPRs) wall on Covid vaccine production and knowledge-sharing, greater debt moratorium/relief, and allowing much enhanced allocation of SDRs, the opposite was seen.

On the contrary, it appears quite likely that rich, advanced countries used both their own economic policies in terms of bilateral relations with developing countries, and in terms of their influence in multilateral agencies, like the World Trade Organisation (WTO) and IMF to use coronavirus pandemic as a disaster opportunity to further their grip over developing countries by neither providing needed level of debt moratorium/relief, and suspension of IPRs, nor allowing much enhanced level of SDR allocation.

Hence, the high level of economic instability that many developing countries face currently, and which is breeding political instability in a number of these countries, is a result of delayed economic reforms over the years in these countries, following of neoliberal policies, and easily available IMF and other multilateral resources even for quick returning recipient countries, on one hand, and apparently the application of ‘shock doctrine’ by rich, advanced countries both directly and through multilateral agencies — for instance, rather than receiving enhanced SDR allocation, developing countries in general, and including Pakistan, facing balance of payments (BoP) and debt crises, not to mention the political instability pressures fast appearing, will now have to receive such support from pro-cyclical, neoliberal IMF programmes — to have greater control of their economic policies and perpetuate the economic reliance of developing countries on rich, advanced countries, on the other.

Moreover, such reliance by developing countries on rich, advanced countries will also give greater leeway to rich advanced countries to influence the foreign policies of these developing countries, especially in terms of the fast-brewing camp politics divide, in a likely emergence of US-China cold war world politics. It also appears quite likely that the doctrine of ‘shock doctrine’ has been used, whereby by allowing greater space to opposition parties to ride the wave of economic instability – which could have been avoided by taking a different route as indicated above, by rich, advanced countries in general – and to accentuate political instability to their advantage in terms of coming into power, against governments that have a neutral stance in not joining camp politics given the current cold war-like situation, but also more broadly to perhaps further the agenda of seeing governments that are more like-minded.

Given the fast-unfolding climate change crisis that poses an existential threat to humanity globally, and the high likelihood of more pandemics appearing, even in the near future due to years of neoliberal mindset of ‘profit-over-people’, which simultaneously fed into the climate crisis, requires moving towards a ‘new-normal’ policy, globally. Ultra-nationalism, neoliberal mindset will only hasten the march towards a global environmental, economic and political disaster, and requires moving away from likely ‘shock doctrine’, self-centered, and xenophobic policy stance that allows, for instance, perpetuation of extractive politico-economic institutional design in terms of incentive structures that favour the rich both in terms of domestic economic policy, and also in providing tax havens abroad, especially for money that is made through corruption. There is a need for a global effort to deal with these global natured challenges, since no one is safe unless everyone is. Lastly, it strongly appears that economic instability has significantly contributed to political instability, which in turn is feeding into creating even more economic instability, generating a vicious cycle, as is being seen, for instance, in the case of Pakistan and Sri Lanka.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2022