A retarding economic growth outlook: IMF and ‘Chicago boys’ in a fix

‘The International Monetary Fund warned that its outlook for global economic growth over the next five years is the weakest in more than three decades, urging nations to avoid economic fragmentation caused by geopolitical tension and take steps to bolster productivity.

The emergency lender sees the world economy expanding about 3% over the next half decade as higher interest rates bite, Managing Director [MD] Kristalina Georgieva said in a speech in Washington Thursday. That’s the lowest medium-term growth forecast since 1990 and less than the five-year average of 3.8% from the past two decades.

For 2023, global gross domestic product will likely expand by less than 3%, she said. That’s in line with the fund’s January forecast of 2.9%.’ – An excerpt from an April 6, 2023 Bloomberg published article ‘IMF warns five-year growth outlook weakest since 1990’

Many countries of the world, it appears from International Monetary Fund’s (IMF) recently released World Economic Outlook (WEO) April 2023 report , barring China, and India, among some other countries, are either in stagflation with serious fears of recessionary outlook emerging in the short term even, or likely move into that zone in not so long a distant future.

The worrisome part is that the usual mantra of the IMF and ‘Chicago boys’-styled neoliberal, austerity policies – using policy rate to tackle inflation primarily – has not borne much fruit. It is time that sufficient importance is given to the supply-side determinacy of inflation, and rely less on procyclical, austerity policies.

More than retarding growth, high interest rates for over many months – such hawkish monetary policy stance continuing for around a year in many advanced economies, and even before than in a number of developing countries – have brewed a possible banking crisis, caused significant capital flight from developing countries, and raised already difficult external and domestic debt situation of a number of developing countries, including Pakistan.

A recent Europe and Central Asia economic update published by World Bank, titled ‘Weak growth, high inflation, and a cost-of-living crisis’ highlighted the difficult economic situation of Europe and Central Asia (ECA) as ‘Growth in economic activity in the emerging markets and developing economies of ECA slowed substantially in 2022 to 1.2 percent, as surging inflation, energy and value chain disruptions, and marked monetary tightening weighed on the economic expansion. …Excluding Russia and Ukraine, growth in ECA is projected to fall to 2.4 percent in 2023 from 4.7 percent in 2022, reflecting the impact of tighter financial conditions, persistent inflation, and subdued external demand.

Growth in 2023 may be weaker still if there is an escalation of the war in Ukraine, further increases in food and energy prices, an accelerated tightening of monetary policy globally or in the region, or a sudden reversal of capital flows into the region.’

As per the current WEO, Pakistan for instance – where ‘Chicago boys’- and IMF-styled neoliberal, procyclical, austerity based policy has pushed the country into serious stagflationary headwinds – real GDP growth, for instance, decreased from 6 percent in FY2021-22, to likely to be only a little above zero at 0.5 percent for FY2022-23 (a similar projection at 0.4 percent was also made recently by World Bank), while during the same time, average annual inflation is likely to substantially increase from around 12.1 percent in 2022 to 27.1 percent for 2023; where the March CPI inflation number released by country’s own bureau of statistics stood at 35.4 percent.

Moreover, the case of Pakistan appears to be similar to the overall global trend in terms of relationship between interest rate and inflation both moving in the same upward direction, given policy rate in Pakistan increased from 12 percent to 21 percent over the last 12 months.

It is high time, the IMF and ‘Chicago boys’-styled domestic policymakers understand that inflation is being significantly determined by supply-side determinants – both domestic, and perhaps even more so externally – and therefore, over-reliance on austerity policies will bring more economic misery than tame inflation.

Managing director of the IMF, Kristalina Georgieva, pointed out the difficult economic situation of developing countries, caused by external factors, and to such a significant extent that she even called them – and rightly so – as the ‘innocent bystanders’.

She made this remark in a recent interview with Bloomberg, in which she indicated: ‘What is holding growth back are three groups of factors. First, low productivity. …Second, it is [trade] fragmentation.

And the third point is that countries that we would expect to add to growth, frontier markets, low-income countries, are in particularly difficult place because they have been innocent bystanders, repetitive shocks, the Covid, Russia’s invasion, the fact that the world economy as a whole is less able to support the weakest members. Why, the peace dividend is gone.’

More than the ‘peace dividend’, the ‘innocent bystanders’ are suffering economically because of a lack of implementation of non-neoliberal, non-austerity, counter-cyclical policy at home both due to ‘Chicago boys’ and IMF’s inclination towards the opposite set of policies – neo-liberalism, austerity, and pro-cyclical.

Added is the serious lack of provision of adequate level of special drawing rights (SDRs) allocation by the IMF towards these innocent bystanders, not to mention a lack of meaningful allowance by this global lender to the programme countries, who firstly had little case for austerity policies since they hardly provided any deep stimulus during the pandemic, and also suffered a massive climate disaster last year in the shape of floods, inundating one-third of the area of the country along with serious loss to life and livelihood.

Moreover, very slow progress of multilateralism to come up with a debt restructuring framework for much-needed debt relief. How ironic, however, it is that the IMF still persists with its wrong ‘surcharge’ policy on late repayments of loans – put further burden on these ‘innocent bystanders’.

Lack of climate finance, including the suggestion under much talked about ‘The Bridgetown Initiative’ of climate-related SDRs provided to climate vulnerable developing countries on an annual basis has not been given much attention by the IMF up till now.

Measures such as these could have significantly given impetus to both lowering inflation, and fuelling growth meaningfully and sustainably, both in much greener and in a non-overboard debt-adding way for developing countries.

This strongly appears to be the way forward for the IMF and ‘Chicago boys’ to take to come out of the current bind, in which they are, whereby the usual austerity mantra is even more vociferously failing to achieve the targets of macroeconomic stability, and reaching resilient, inclusive, and greener economies, than from the time in the aftermath of Global Financial Crisis (GFC) of 2007-08.

Worse, it is fast brewing a debt and a banking crisis at the global level, and in the process leaving little fiscal space with developing countries in particular to take steps to roll back the otherwise fast-unfolding climate change crisis, and the related risks of a possible Pandemicene crisis.

During the heyday of the pandemic, and as climate change unfolded ever so quickly during the last few years in terms of intensity and frequency of climate disasters for instance, and its strong link to creating Covid pandemic, there was hope that the spirit of multilateralism will reinvigorate itself away from Neo-liberalism, and undue austerity, especially given austerity’s misgivings in terms of growth and inequality after GFC of 2007-08 for eurozone in particular, yes the same overall continue to be reflected from the pre-pandemic times.

A recent Economist published article ‘The IMF faces a nightmarish identity crisis’ for instance remained (rightfully) critical of the IMF as follows: ‘The trouble is that, amid what is already the largest debt crisis since the 1980s (judged by the share of world population affected), the IMF’s efforts have been variously hamstrung, hesitant or irrelevant. Despite its enormous firepower, its loan book has grown by only $51bn since Covid-19 began to spread.

The fund has managed to approve just $3.4bn, or 8.5% of the capital it raised for new lending facilities, to tackle everything from climate change to food shortages, and even this money is yet to leave its accounts. Poor countries have struggled through the pandemic, Russia’s invasion of Ukraine and rising interest rates mostly on their own.’

The role of World Bank has also come under criticism in terms of lack of better directed loans towards green projects.

A recent Foreign Policy (FP) published article ‘The World Bank must do more with less’ pointed out: ‘Well-meaning advocates such as Barbadian Prime Minister Mia Mottley want the World Bank to pursue an expansionist reform agenda. This means the bank would increase its existing lending to countries and widen the scope of its engagement to new areas, especially by investing in so-called “global public goods,” such as fighting climate change and proactively preventing pandemics. Mottley has proposed a large-scale reform of the global financial architecture known as the Bridgetown Initiative.

Among other measures, the initiative seeks to increase multilateral development banks’ concessional lending – loans with favorable terms – to$1 trillion.

The World Bank’s own evolution roadmap for reform also plans to increase lending in middle-income regions where other financiers are very active, such as Southeast Asia. Yet these sorts of expansionist reform proposals overestimate the bank’s capacity to take on new responsibilities on its own and using public finance. Banga himself acknowledges that “working alone, [the World Bank] will fall short of what is required.”’

Similarly, a lack of reform of World Trade Organization (WTO) – along with strong influence on its policy of its economically powerful member countries - away from its neoliberal policy inclinations, that have continued to add to now very strong deglobalization headwinds, especially given its quite indifferent attitude in terms of remaining weak and not being able to tear down the unwarranted walls of intellectual property rights that hurdled meaningful rollout of Covid vaccine, and in terms of lack of sharing of knowledge to improve the quality of vaccine.

Hence, in addition to the IMF, World Bank, policy needs to change at another important determinant for developing countries, or as the IMF MD indicated ‘innocent bystanders’ in terms of their growth prospects for instance, and the overall trade and growth prospects globally, and that is the WTO.

Neoliberal, overly austerity and pro-cyclical policy inclinations, and as also reflected in the ‘Chicago boys’-styled economic thinking, will need to be done away with both in multilateral institutions, and in domestic policy of individual countries.

Copyright Business Recorder, 2023