The International Monetary Fund (IMF) in its recently-released flagship report ‘World Economic Outlook [WEO] update: inflation peaking amid low growth’ indicated that while the economic growth prospects globally had improved for 2023 – as compared to its October 2022 forecast, and mainly on the back of stronger growth from India and China – yet growth was lower than last year while inflation still remains at an elevated level.
The WEO pointed out in this regard: ’Global growth is projected to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023, then rise to 3.1 percent in 2024. The forecast for 2023 is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook (WEO) but below the historical (2000–19) average of 3.8 percent.
The rise in central bank rates to fight inflation and Russia’s war in Ukraine continue to weigh on economic activity. The rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery.
Global inflation is expected to fall from 8.8 percent in 2022 to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic (2017-19) levels of about 3.5 percent.’
In other words, the world overall finds itself in the grips of stagflation while recessionary headwinds also continue to blow at the back of overboard monetary policy tightening. Economics Nobel laureate Joseph E.
Stiglitz in his recent Project Syndicate (PS) published article ‘How not to fight inflation’ pointed out in this regard: ’There is overwhelming evidence that the main source of inflation was pandemic-related supply shocks and shifts in the pattern of demand, not excess aggregate demand, and certainly not any additional demand created by pandemic spending.
The risks of increasing interest rates are clear: a fragile global economy could be pushed into recession, precipitating more debt crises as many heavily indebted emerging and developing economies face the triple whammy of a strong dollar, lower export revenues, and higher interest rates.’
Yet, the United States Federal Reserve continued with its monetary tightening stance, most recently it increased policy rate by 0.25%. A recent Financial Times (FT) article ‘Federal Reserve shifts to quarter-point rate rise but warns of more to come’ pointed out in this regard: ‘The Federal Open Market Committee’s latest increase brings the federal funds rate to between 4.5 per cent and 4.75 per cent, the highest level since September 2007. The Fed added that while inflation had “eased somewhat”, it still remained “elevated”.’
The argument in favour of further tightening of monetary policy by US Fed brings into question the lack of focus on the supply-driven nature of inflation, and the in-built short- to medium-term lag with which the retarding impact of interest rate hike gets transmitted to the economy through the monetary channel.
As indicated above by WEO, already the squeeze on aggregate demand had brought down both inflation at the cost of an economic slowdown that is lower than the two decades average of 2000-2019.
Hence, it strongly appears that the likely gains of tightening will likely be thoroughly outpaced by the costs involved in terms of recessionary headwinds build-up in both the US itself, and also far more adverse consequences for macroeconomic fundamentals, including greater distress in terms of debt, imported inflation and overall balance of payments for developing countries.
Contrary to reduced economic growth and calls for greater practice of austerity, what in fact is needed is greater public- and private investments so as to make the global economy and supply-chains more resilient and optimally regulated for checking profiteering and equity related issues with regard to access particularly for developing countries.
Moreover, greater investments and fiscal space with countries, along with overall non-neoliberal shift away from market fundamentalism, is needed especially in terms of adequately tackling climate change crisis and to better deal with climate disasters, in addition to significantly improving public health sectors, especially in developing countries.
This is essential to deal with not just the still ongoing Covid pandemic but also monitor potential geographical hotspots of likely future pandemics and working on producing vaccines for such pandemics.
The importance and urgency of taking a non-austerity approach and to help developing countries through better debt moratorium/relief and financial support – both in terms of enhanced special drawing rights (SDRs) and also climate finance – for tackling climate change and preparing for pandemics, an April 28, 2022 ‘The Atlantic’ published article ‘We created the “Pandemicene”’ by Pulitzer Prize winning writer for ‘Explanatory Reporting’, Ed Young, pointed out: ‘Earth’s changing climate is forcing animals to relocate to new habitats, in a bid to track their preferred environmental conditions.
Species that have never coexisted will become neighbors, creating thousands of infectious meet-cutes in which viruses can spill over into unfamiliar hosts—and, eventually, into us. Many scientists have argued that climate change will make pandemics more likely, but a groundbreaking new analysis shows that this worrying future is already here, and will be difficult to address. …But pandemics are inherently unpredictable, and no amount of prevention will fully negate their risk.
The world must be ready to meet the viruses that slip through the net. That means fortifying public health and health-care systems, strengthening social safety nets, and addressing all the weaknesses of the pre-Covid normal that made the world so vulnerable to the current pandemic and will leave it susceptible to the next.’
While on one hand, climate change crisis and pandemics ask for non-austerity approach, and to tame inflation more from the channel of improving aggregate supply and its chains/networks, and for which the world should come together, especially the rich, advanced countries and multilaterals such as the IMF, World Bank, World Health Organization (WHO), and World Trade Organization (WTO) to help developing countries – a number of which are highly climate change crisis exposed, and for no significant fault of their own – to help them both deal with their debt distress, and also provide them with much greater financial support to support them in making needed investments, especially into creating climate- and public health sector resilience.
A strong policy revision is indeed overdue at the back of practice of vaccine injustice, and delayed and inadequate provision of IMF’s enhanced SDR allocations to developing countries. Unfortunately, contrary to moving towards this much desired and talked about ‘new normal’ during the hey days of the pandemic, rich, advanced countries and multilaterals overall, are brow-beating and through IMF programme conditionalities – like in the case of Pakistan in its current programme with the IMF – pushing countries into persisting with over-board monetary tightening, curtailing public expenditure to meet unwarranted primary surplus, and in not providing significant energy subsidies by putting unrealistic targeted subsidy demands, given a lack of governance and financial setup to successfully provide such targeted subsidies effectively.
Overall, while governments in developing countries in general, including Pakistan, should have shown better policy outcomes in terms of increasing tax base, yet lack of SDR-related support and climate finance meant that pandemic-battered countries like Pakistan, which suffered from vaccine injustice, and lack of debt relief and inadequate SDR provision, were and are being unfairly asked to adopt neoliberal, procyclical, and austerity-based policy.
In addition, in the particular case of Pakistan, when export enhancement, greater tax collection, more public health, education sector, climate change, and welfare related expenditures/investments needed greater debt relief, lesser monetary policy tightening, realistic primary deficit targets (and no push towards showing a surplus), and adequate level of enhanced SDR allocation and routinely SDR disbursement under the current IMF programme, in addition to appropriate level of provision of climate finance, especially avoiding delayed and meager financial response by international community even in the face of devastating floods, yet on the contrary IMF, other bilateral and multilateral development partners continue with unrealistic, and overboard procyclical, austerity policies.
What is worse, a plethora of ‘Chicago boys’-styled neoliberal mindset-oriented policymakers, and media people continue with justifying these unwarranted procyclical, austerity policies on one hand, and on the other, remain overly critical of government failures in policy reform, and far less critical, if at all, of the wrong policy stance (as indicated above) by the IMF and other development partners.
Hence, instead of calling these as ‘wrong’ policy choices, they are indicated as ‘tough’ policy choices. Sadly, no major political party, at least to the extent of this writer’s knowledge, shows much awareness or understanding of these economic realities.
Hence, the pandemic and the fast-unfolding climate change crisis, especially in terms of disasters like the phenomenal floods in Pakistan last year, have all indicated how much fragmented, inward looking global policy is towards meeting these challenges.
Moreover, this is in addition to the propagation of the neoliberal mantra by rich, advanced countries and multilateral institutions like IMF for many decades now of smaller governments and regulations that kept the public policy and important sectors like supply chains, health and education weak, when the pandemic hit, and as climate change continues to make charges with all the more frequency and intensity.
It is of course necessary that Pakistan resumes the programme with the IMF to avoid economic default-related stresses, yet even to the extent of IMF being a ‘stop gap’ arrangement – which although in the current extended fund facility (EFF) programme it is nonetheless not in any way, given the fact that in addition to addressing macroeconomic stabilisation concerns, the programme had to also cater for improving economic growth outcomes – for supporting the country in stabilisation process, the experience of IMF’s neoliberal, austerity-based programmes even in normal times — have virtually remained unable to provide any meaningful support in terms of sustainable macroeconomic and growth consequences; which in turn requires a non-neoliberal, non-austerity, counter-cyclical reform policy.
Having said that, the practice of the virtually the same IMF programme, even when global financial crisis of 2007/08, the particular non-performance of such austerity policies in the aftermath of the crisis in the eurozone, and further futility of such policies brought forth when the pandemic hit, and as it unfolded, on one hand, and on the other, lack of institutional, organization, and market reform adopted by government – current and many previously over many decades – will most likely not allow the country to come out of the current deep economic crisis.
Copyright Business Recorder, 2023
The writer holds a PhD in Economics from the University of Barcelona. He previously worked at the International Monetary Fund. He tweets @omerjaved7