‘It is therefore in advanced economies’ interest to help poorer countries reduce the mounting risk of little economic fires everywhere. …For starters, a pre-emptive multilateral debt-restructuring and relief initiative is needed to provide essential space for overly indebted countries and overstretched creditors to achieve orderly outcomes on a case-by-case basis. …Reinvigorating emergency commodity buffers and financing facilities is critical in order to reduce the risk of food riots and famines. …Finally, rich-country governments will need to provide more official development assistance to support individual countries’ reform efforts.’ – An excerpt from a recent Project Syndicate (PS) published article ‘Beware a global economy with little fires everywhere’ by Mohamed A. El-Erian
First, it was a serious lack of vaccine equality, whereby rich, advanced countries hoarded vaccines in general, and therefore, while these countries inoculated large parts of their populations rather quickly, the developing countries lacked far behind, especially most of African continent.
This inoculation divide meant that while the global north in general saw a quick return to economic recovery, the global south is still struggling in this regard, not to mention the role of large stimulus injections into this recovery, that, unlike the rich countries, the developing countries were unable to provide due to limited fiscal space; not to mention that the enhanced SDR allocation ($650 billion) last August by IMF also went mostly to rich, advanced countries.
Recently, the World Bank reportedly indicated that it will provide $12 billion to low-income countries to offset the impact of global commodity supply shock, and which has been accentuated by the war in Ukraine by Russia.
A recent Guardian article ‘World Bank pledges $12bn to support low-income countries hit by shortages’ pointed out in this regard: ‘The World Bank plans to spend $12bn (£9.6bn) to support low-income countries hit by shortages of food and fertilisers that have pushed prices higher since the Russian invasion of Ukraine.’ Moreover, with regard to the food crisis at hand, the same article quoted UN Food Programme head, David Beasley as follows: ‘“If people can’t feed their children and their families, then the politics unsettles.
If we’re not there with a safety net programme, then the political extremists or whatever the case may be, will exploit that,” he said, adding: “Next thing you know, you’ve got riots, famine, destabilisation and then mass migration by necessity.”’
Yet, all the above – along with no meaningful provision of debt moratorium/relief, in addition to IMF also continuing with charging surcharges on its loans, even during the pandemic and onslaught of high inflation — is nowhere near what the developing countries need in terms of financing, and which according to UNCTAD stood at $2-$3 trillion that needed to be provided by December last year, and given we are already almost five months into the next year, significant additional financing needs would have already risen.
Yet, there is a lot of silence with regard to progress on financing of developing countries — a bill in the US to mitigate the impact of Covid pandemic on developing countries, with a proposed envelope of around $3 trillion could only be passed in the House of Representatives there, till now — while on the other hand, reportedly more than needed stimulus injection in advanced countries has meant decades high inflation — both demand pull and cost-push — and a rather aggressive monetary policy tightening response has already created leakages of foreign portfolio investment from developing countries, creating all the more debt default worries, given little debt relief, high import costs (especially with regard to oil and food), and little provision of financing till now.
In addition, while no significant financial support, both direct and in terms of debt relief, has come from rich, advanced countries, and multilateral institutions, the IMF has continued to push for austerity/pro-cyclical policies with programme countries during most of the duration of the pandemic, when the opposite in the shape of better allocation of enhanced SDRs and allowance of counter-cyclical policies was needed; which also means that lack of direct support, would likely lead to more and more developing countries approaching the IMF with more countries facing difficulties to manage inflation that these pro-cyclical policies (especially in terms of significantly reducing provision of oil subsidies) will most likely exacerbate by feeding in cost push inflation, and even any short-term macroeconomic stability would be at the cost of a large growth sacrifice.
And sadly, on top of all this, these wrong policies, especially given the stagflationary context of pandemic and supply shock, are being declared by the IMF, and mainstream media and policymakers as ‘hard’ or ‘tough’ policy decisions! This is ironic, given rich advanced countries went overboard with stimulus-oriented policies and were even supported by the IMF in this regard.
All of this calls for a strong need for economic diplomacy to be practiced by developing countries in general. For instance, in addition to Pakistan raising voice in their current programme review talks with IMF in Doha, the policymakers should raise their concern to allow them practising either counter-cycle policies, or pro-cyclical policies to a limited extent (which means, among other things, allowing for a significant level of oil subsidies), and the financing needs are mainly met through greater effort by IMF and rich, advanced countries in the shape of quick relocation of enhanced SDR allocation from last August.
Such quickness is needed given the domino effect of developing countries defaulting on external debt liabilities may have very well already started with Sri Lanka as the first in this regard, and many, including Pakistan, close to such situation.
There is a lot of urgency with regard to developing countries feeling the pinching closeness of default, not to mention rising political instability in many countries, including Pakistan, and this calls for economic diplomacy activism on the part of developing countries with rich advanced countries, multilateral institutions, and even with cartels such as OPEC+ group of countries, for not only unlocking decisions on much greater debt relief, enhanced SDR allocation and relocation, climate finance, and even major reforms in the Bretton Woods institutions to allow them to better understand the limits of usage of macroeconomic policy instruments by developing countries — which many of them, including Pakistan, have already reached for a number of months now — the correct context of using pro-cyclical polices, and not to use them during the pandemic and global commodity supply shock, the damage being caused by the neoliberal underpinnings of policy mindsets of the IMF, World Bank and WTO. In the case of WTO, for instance, inappropriate allowance of using intellectual property rights by pharmaceutical companies to limit knowledge-sharing and production of Covid vaccines even during the pandemic needs to stop going forward.
With regard to reforming the Bretton Woods, Kevin P. Gallagher, and Richard Kozul-Wright pointed out in their recently published book ‘The caser for a new Bretton Woods’ that a universal approach needs to be adopted in terms of participation, and indicated as follows: ‘According to the IMF managing director, Kristalina Georgieva, “we face a new Bretton Woods moment (Georgieva 2020).
The Financial Times (April 3, 2020) concurs: in its call for radical reforms to reverse the policy direction of the past four decades and establish a new social contract that works for all, the international dimension is embraced and the parallel with the Bretton Woods moment of 1944 acknowledged. …We need a Bretton Woods moment to align national goals and coalitions globally. Such a moment should not only be a Western one… but should form part of a global conversation…’
Hence, given both because developing countries have been hard-done by rich advanced countries and multilaterals in general during the pandemic, and also rightfully the spirit of globalization demands greater participation in needed reform of the global economic order away from Neoliberalism, one possible way to kick-start the economic diplomacy channel could be to make use of the platform of G-77, which is a coalition of currently 134 developing countries at the UN, and with the chairmanship currently held by Pakistan, where ‘The Group of 77 is the largest intergovernmental organization of developing countries in the United Nations, which provides the means for the countries of the South to articulate and promote their collective economic interests and enhance their joint negotiating capacity on all major international economic issues within the United Nations system, and promote South-South cooperation for development.’
Therefore, given the precarious nature of economic crisis, which are fast deteriorating, it is indeed over-due that a meaningful session of G-77 is immediately convened for facilitating developing countries directly and with positive consequences for the global economy. Here, the main issues include: debt moratorium/relief, greater allocation of SDRs by US through enhancing the envelope of SDRs allowed by the IMF beyond the $650 billion mark, as per the Bill lying in the US Senate, quick and meaningful relocation of already allocated SDRs from last August, from developed to developing countries through the use of specially created window by IMF in the shape of Resilience and Sustainability Trust (SRT), provision of pledged $100 billion annually as climate finance by rich, advanced countries to developing countries, bringing home to IMF in a much meaningful way the limited space developing countries have with regard to policy usage to make fiscal space, and the inappropriateness of over-board austerity/pro-cyclical policies, and to overall reform the Bretton Woods away from neoliberal underpinnings.
G-77 should hold a meeting with G-7 group of rich, advanced countries for a meaningful discussion towards many of these goals, along with holding meeting with G-20 group countries for wider engagement.
Here, the G-77 group should also try to persuade G-7 countries for a soft stance on increasing interest rates, since inflation in even developed countries has significant contribution by imported inflation and cost-push component, and given this understanding will help developing countries, firstly, in not being out-competed, and very quickly in terms of holding large levels of foreign portfolio investment — for instance, already in Pakistan FPI has been leaving the country in quite a significant manner – and secondly in reining-in the level of interest payments on their external debt; which in many developing countries is getting difficult to manage in terms of repayments.
In this regard, G-77 group should separately formulate an agenda for direct talks with the IMF, World Bank, and WTO, on the issues highlighted above, among possibly others. The G-77 should also hold meeting with OPEC+ group of countries and indicate to them the urgent need of raising oil supplies to at least pre-pandemic level so as to allow developing countries, especially those which are net importers of oil, to better manage their import bills and overall debt levels.
Overall, the G-77 should highlight that the global economy as a whole is likely to end up facing serious stagflationary consequences with serious consequences for the developing country. It is, therefore, exceedingly important that issues being raised by G-77 should be addressed at the earliest possible, which requires a truly global effort; especially given the world has to lay much stronger non-neoliberal political and economic basis and beyond, which was missing when the pandemic hit, for better dealing with likely next pandemics, and overall the existential threat of fast unfolding climate change crisis.
Particularly, with regard to one of the main goals of revising the Bretton Woods regime, the same book pointed out: ‘A more stable international monetary and financial system with adequate liquidity provision and new mechanisms for handling sovereign debt problems would lessen the need for emerging-market and developing countries to accumulate massive foreign exchange reserves and would help lengthen investment horizons. …A much higher degree of coordination is required for the kind of big investment push we see as essential to moving towards real resilience. We suggest that a Global Marshall Plan can provide that push, but with room for stronger regional economic arrangements.’
Copyright Business Recorder, 2022